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Futures & Options

Nifty Future Premium Near The Highest Ever

What’s with the Nifty futures? With the Nifty closing at 5375, the futures were trading at 5441, a near 70 point premium.Measured as a fraction of the Nifty value, this is the highest premium we have seen since a freak day in 2008.

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The future premium means that you pay more for the future than for Nifty spot; so if someone can buy the Nifty basket in the same proportion as the Nifty, then he can short the appropriate quantity of Nifty futures and make the difference (in theory, but in practice it’s hard to exit at exactly that price on expiry day).

This kind of premium is reflective of the “carry” interest rate; that is, how much interest you would make by buying the Nifty future (needs just 10% margin) and putting the rest in a bank.

Now 1.23% till March 29 sounds like a very good deal – it equals nearly 15% a year! At an individual stock level you might find even better deals – the current price of ICICIBANK, for instance, is Rs. 910 while the future trades at Rs. 923 – nearly 1.5% higher, translating to an 18% per annum trade.

The Bank Nifty trades at a 150 point premium now, which is 1.50% of the BankNifty spot – another easy arbitrage.

What this means is – according to me – no one is going short. Since you can only short through futures positions, people who go short will automatically bridge gaps between the cash and the futures prices. But with the lack of arbitrageurs and the unwillingness of participants to trade the short side after a sharp 23% upmove, the Nifty premium has built up.

There will always be some premium justification because of STT. The tax adds up to 0.25% for a cash transaction (buy+sell) and 0.017% on the futures side, and along with other costs might add up to 0.30% for a trader; that’s around Rs. 15 premium that no one will bother to bridge due to transaction costs. But even with those costs, a trade makes Rs. 55 for a Nifty arb, with is about 1% for a month’s exposure (could be lesser if the premium comes down intra-month!).

Are there other explanations? There are no changes to the Nifty coming up, I think (the last change was in Oct 11, when COALINDIA came in). Looks juicy, but what am I missing?

  • Suneet says:

    Most guys are squeezed for funding, with MCX IPO, and HDFC stake sell. 1 month funding for FIIs is now over 100bps, and say add another 30 bps on round trip costs. So, arb will come for anything over 130bps only. But then, with ONGC auction now coming, People are still better off waiting for premium to go even higher.

  • Sachin says:

    Seems to be like Long-Term Capital Management hedge fund come alive again 🙂