Module 10 Trading Systems

Chapter 15

Calendar Spreads

235

15.1 – The classic approach

I had briefly introduced the concept of calendar spreads in Chapter 10 of the Futures Trading module. Traditionally calendar spreads are dealt with a price based approach. Here is a quick recap on how this is done –

  1. Calculate the fair value of current month contract
  2. Calculate the fair value of the mid-month contract
  3. Look for relative mispricing between the two contracts

Based on the mispricing, you either buy the current month contract and sell the mid-month contract or sell the current month contract and buy the mid-month contract. Here is an example of a Calendar Spread –

  1. Buy TCS Futures expiring 28th June 2018 @ 1846
  2. Sell TCS Futures expiring 28th July 2018 @ 1851

Here you buy and sell the futures of the same stock, but of contracts belonging to different expiries like showcased above.  The difference between prices of the two contracts is what is expected to made here. The risk is extremely low in calendar spreads so therefore the money you make on calendar spreads is also small. If you are trader like me, who is averse to risk, then this is something you may like.

This approach to performing a calendar spread is a decent one.

By the way, if you are not familiar with what I’m discussing, then I’d suggest you read Chapter 10 in the Futures Trading module to get a quick perspective on the classic calendar spreads approach.  I think it forms a crucial foundation on top of which you can build other variant/styles of calendar spreads.

So let’s get started straight away.

15.2 – Calendar spread logic

If you have read the chapters on pair trading, then understanding the calendar spread logic is quite straightforward. This simplified approach assumes that the current price of futures is a reflection of everything known in the market. The known set of information can extend from news on the stock, corporate action, discount/premium, fair value, and literally everything out there which is relevant to the stock.

Now, if the above assumption is valid, then probably we can use the price itself as a trigger to identify opportunities to set up a calendar spread trade. This kind of simplifies the whole approach. Calendar spreads are a low-risk strategy so therefore do not expect big bucks from this strategy. However, since you simultaneously buy-sell the same asset, you take out the directional risk involved in the trade, hence it does make sense to top up the leverage. Also, unlike pair trade, the calendar spread trades can be ultra-short term in nature, with most of the trades closing within the same day. Before I take up an example to explain this, I’ll quickly give you an overview of this is done.

Start with downloading the continuous futures closing prices of the stock for both near month and next month contracts.

Calculate the daily historic difference between the two contracts and generate a time series. Calculate the mean and standard deviation of the time series. Using the mean and standard deviation data we can estimate the range for the difference. A trading signal is triggered when the difference between the two contracts move to mean plus or minus 1 standard deviation and the trade is closed when the difference collapses to mean.

You get the point, don’t you ☺

15.3 – Calendar spread example

I’ve taken the example of SBIN to illustrate calendar spreads. I have download the continuous futures data from Zerodha Pi (Zerodha’s desktop trading application) for last 200 trading days. I have got the closing prices on excel sheet, and this is how it looks –

The next step is to calculate the difference between the two contracts. It is advisable to subtract the price of near month contract from the current month contract. This is because, all else equal, the futures price of Near month contract is always higher than the previous month contract owing to the ‘cost of carry’. Chapter 10 of futures module explains this in more detail.

The difference is calculated and the time series data is generated, as shown below –

I will now calculate the mean and standard deviation on this time series. The mean will give me an estimate on how much of the difference is acceptable on a ‘day to day’ basis and at the same time, the standard deviation will give me a sense of variation in this difference. Here is the snapshot.

You can calculate the mean and standard deviation on excel using the ‘=Average ()’ and ‘=stdev()’ functions respectively.

The mean of 1.227 tells me that, all else equal, the difference between the two contracts should be 1.227 or in that vicinity. This essentially means, there is no trade opportunity if the spread (or the difference) between the two contracts hovers around this value.

We now use the standard deviation value and the mean value to calculate the range of the spread –

  • Upper range = 1.227 + 0.4935 = 1.7205
  • Lower Range = 1.227 – 0.4935 = 0.7335

I had mentioned that the spread can hover around 1.227, but I had not quantified ‘vicinity’, which is quite important. The range calculation does just that, it helps us quantify the range within which (vicinity) the spread can vary on a daily basis.. Any value of the spread outside this range gives us an opportunity to set up a calendar spread.

If the spread has increased beyond the upper range of 1.7205, it means either the near month contract has increased in value or the current month contract has reduced in value.

The rule of thumb in any arbitrage is to always buy the asset in the cheaper market and sell the same asset in the expensive market, hence the trade here would be to buy the current month contract and sell the near month contract.

Likewise, if the spread has fallen below the lower range value i.e 0.7335, this means the current month has become expensive and near month has become cheaper. Hence, the trade here is to sell the current month and buy the near month contract.

With this logic in perspective, let’s evaluate the if SBIN has given us any opportunities over the last 200 trading days.

15.4 – Spotting opportunities

Keeping the above pointers in perspective, we can conclude the following –

  1. Sell the spread when the spread increases beyond 1.7205. Sell spread means, sell the near month contract and buy the current month contract
  2. Buy the spread when the spread shrinks below 0.7335. Buy spread means, buy the near month contract and sell the current month contract.

If you find it hard to figure out which contract to buy and which one to sell when a signal originates, then simply think in terms of the near month contract. Sell spread means sell the near month (therefore buy current month) and buy spread means buy the near-month (therefore sell the current month contract).

In the excel sheet, I now look for the historical opportunities. I will identify the sell spread opportunities first. To do this, I simply have to apply a filter, to filter out all values above 1.7205. I’ve done the same, here are the results –

As you can see, on 6 occasions, the spread increases beyond 1.7205 or the first standard deviation levels. On all these occasions, there was a trigger to sell, implying the spread would fall back to mean.

In fact, here is how the spread behaved –

Signal Date Sell spread value Trade closing date Buy spread value P&L
31-08-2017 2.45 1-09-2017 1.35 1.1
28-092017 2.6 29-09-2017 1.15 1.45
30-11-2017 2.35 01-12-2017 1.55 0.8
28-12-2012 3.8 29-12-2017 1.45 2.35
22-02-2018 2.5 23-03-2018 1.3 1.2
26-04-2018 1.85 27-04-2018 0.6 1.25

As you can notice, signals originate around month ends, probably due to expiry dynamics. Also, every trade has resulted in a profit (although small) and closed the very next day.

Let us see how the buy spread trades have performed. I have filtered for all values below 0.7335, and here are the results –

There are close to 28 trade here and not all of them are successful. Of course, the losses are as small as the profits, if not smaller. I’ll let you do the exact calculation, like the way I’ve shown for the short trades.

I hope this example gives you a general sense of how to carry out calendar spread. I’m sure you’d agree that this is far simpler and intuitive compared to the classic approach to calendar spreads.

I have summarized my thoughts on Calendar spreads here and this will also double up as the key takeaways for this chapter –

  1. The expected profits and losses are small in calendar spreads
  2. Directional risk is eliminated, hence you go can go full throttle on leverage
  3. All the short trades in SBIN were successful but longs were not – this implies that I would only look for short opportunities in SBI. In other words, you need to backtest the P&L profile of each futures contract and figure out which contract you can go long on and which contract you can go short on
  4. Since the P&L is small, ensure your trading costs are minimum, a discount broker like Zerodha is most suited for such trades J
  5. Trades usually close within a day or two
  6. Trades usually originate around expiry due to expiry dynamics

Think about this, if you can backtest this across the entire universe of equity and commodities futures contract, you will essentially have at least a signal or 2 every day!

I’d love to hear your thoughts, so please do post your queries.

Download the Excel Sheet

PS: I won’t be posting any new chapters for a while, but that does not mean I’m not working on new content, it is just that the delivery format will be different and way more exciting!

Stay tuned ☺

235 comments

  1. Balu Ashok Kumar says:

    Based on the mispricing, you either buy the current month contract and sell the mid-month contract or sell the current month contract and buy the mid-month contract. Here is an example of a Calendar Spread –

    Buy TCS Futures expiring 28th June 2018 @ 1846
    Sell TCS Futures expiring 28th June 2018 @ 1851 ( Pls correct this)

    • Karthik Rangappa says:

      Ah, silly typo, will fix it 🙂

      • Sagar Kumar says:

        Zerodha varsity is very helpful for people like me who are new to stock market, there are 10 module 9 have the option to download it as a pdf but the 10th module doesn’t have this option please provide this option for module then also it will be very helpful and people like me can read it offline also.
        Hope you will do this thanks in advance

  2. Thirumal Sharma says:

    First comment! You are a savior Karthik sir. Thanks a ton.

  3. Nidhi says:

    Thank you sir for a such simple and effective way.. this is where your style of teaching is so different..please look into teaching momentum investing in near future..this one topic i really want you to cover..hope you look into this soon
    thanks and you are doing very good to many in markets..God Bless…

    • Karthik Rangappa says:

      Momentum investing is a part of the plan, Nidhi. However, I will have to prioritise one something else for now 🙂

  4. manoj says:

    Team..how would you execute this trade. As in how would you buy/sell sbin current month contract on last day of expiry and then carry to next day. like in eg of sbin we are buying current month contract on 31st August which will close that same day..but technically above we are closing on 1st sept..

    • Karthik Rangappa says:

      The data source is the continuous data, Manoj which means the action is always in the Current and Near month contracts. If the contract has expired, then the trade naturally moves to the next month contract (which is now considered current).

      • Manoj says:

        Thanks Karthik

        So how many days are good for calculating mean. Also once you spot the difference between near month and current month which is above the mean and standard based on closing, should we initiate trade next morning. What if opening price of next day falls below or in range of our mean and std deviation

        • Karthik Rangappa says:

          Manoj, no point waiting here. You initiate the trade as and when you spot the opportunity. I’d suggest you take the last 200 days avg as look back period.

      • Aagam says:

        Sir so we need to rollover both the future contracts which will lead to additional charges??

  5. MD ABBAS ALI MULLICK says:

    Respected
    Sir please inform me details about REFERRAL benefits. My REFERRAL CANDIDATE trade hassle free but I can’t get any benefit. So please inform me details. On thing is your ZERODHA SUPPORT TEAM NOT SUPPORT PROPERLY to open new account. My business EXECUTIVES ROOPA, can’t co operate with my REFERRAL friends. She don’t pic up my FONE or not CALL ME BACK

  6. ramesh says:

    Thank you once again. Can you please send me pdf of this chapter so I can keep reading it when I m traveling.

    • Karthik Rangappa says:

      PDF will be available when the module is complete. This will take some time.
      Thank you.

      • Prashant says:

        can you also explain calendar spread with options?

        • Karthik Rangappa says:

          Its kind of complicated to trigger calendar spreads with options, Prashant. There are multiple factors that need to be considered and not just the direction (or the price) of the market.

  7. Deepu says:

    Thanks a ton Karthik for this chapter.

    Can we do calendar in options?
    What are the parameters to take care for calendar spread in options?

    Thanks
    Deepu

    • Karthik Rangappa says:

      Calendar spread in options is tricky, Deepu. Option premiums have other dynamics associated with it.

      • Deepu says:

        Thanks for the reply.

        There are more than 200 F&o stocks. How to analyze them and track them constantly?

        Is there any way to do better than manually one by one?

        Thanks
        Deepu

  8. Samved says:

    Hey Karthik,

    I am trying to check this on the nseindia.com and all short trade were generated on expiry date. It seems that there is some issue with the way the data is pulled. For ex on 26 April, you are showing spread between April expiry and June expiry while it should be in May and June expiry as April will not be available next day.
    On 26 April, this is from nseindia.com
    SBIN 26 APRIL 233.3
    SBIN 31 May 234.4
    SBIN 28 June 235.15
    The spread should be 235.15-234.4=.75 and not 235.15-233.3=1.85
    Am i missing something.

    • Karthik Rangappa says:

      Samved, since this is continuous data, you actually trade May as current month and June as near month.

      • Samved Sinho says:

        No then there would be no trade as spread is just 0.75.

        • Karthik Rangappa says:

          Samved, I need to check this. Btw, I’d suggest you check other futures contract as well. Not all contracts exhibit this behavior around expiry. Also, you can even try and reduce 1 SD to 0.75 or 0.5SD.

  9. Keshav says:

    Where else can we get the data other than pi?
    Thanks.

  10. Nitesh says:

    What is the range value which should be given in the standard deviation formula
    ( in the bracket of the formula) (?)

  11. Arun Kamath says:

    What about dividend data being factored in the price. Should we ignore such stocks?

  12. Nikil says:

    Hey Karthik,
    Please explain this part it is eating me.
    All the sell trades presented above are on expiry. On that day the contract will expire.
    Lets take 1 example from above 22-2-18
    according to what is presented above.
    current month- 272.45 [ Feb contract which got expired the same day] Closing price in feb contract.
    near month -274.95 [April contract] How is April near month if current month value is taken from Feb contract.
    Since the feb contract has expired one cannot take a long position there. So we need to initiate long in march contract but the closing price of march contract on 22-2-18 is 273.65 in which case there is no trade. All the trades above show the same problems.
    long spreads are not so clear. Only reliable trades are short spread ones. I have tried on some other stocks as well. Most of them trigger the trades near expiry So same problem.
    Please Explain.
    Thanks.

    • Karthik Rangappa says:

      Nikil, since this is on continuous data, the assumption here is that you always trade the current and near month. So yeah, the deal is to trade April and March contract assuming Fe has expired. Perhaps SBIN was a bad example to use here, maybe you can try extending this to other stocks and commodities.

      • Deepu says:

        Hi Karthik,

        So in this case of SBI the trade was not there as we were comparing Feb price with April price. Further we have to compare March and April price and if deviation is there then only trade will happen-correct ?

        Request you to please post some examples of the calendar trades to help us understand it.

        Thanks
        Deepu

        • Karthik Rangappa says:

          Deepu, I must have mentioned this in the chapter itself. It makes sense to track the difference on an intraday basis. I’ll try and post few examples.

  13. Akash Patel says:

    Nice chapter..
    When will zerodha provide spread charts? ☺️

    • Nikil says:

      Hey arun,
      Thank you for sharing the program here. Could you tell us how to use this program for getting the data out to excel.
      Have no knowledge about programming and stuff.
      Thank you.

  14. Swapnil says:

    Dear Karthik,
    Any stop loss in such type of trade?

    • Karthik Rangappa says:

      Hmm, hard to identify one, guess trades like these are relatively safe. YOu’ll have to your use judgement once the trade is initiated.

  15. Sumit says:

    Hi karthik,

    First, thanks for the above tutorial. I was analyzing the data for SBI till today & saw a signal to open a calendar spread trade on lower side but within few hrs the spread moves towards average & opportunity closed.
    I backtested it on closing prices & found that whenever there is a signal on closing price, it moves towards mean very next day. My q is
    1) Do we have to use only closing prices to track the spread or other prices within a day can also be used
    2) If you are doing such trades, how do you keep a track of trigger/signal for such trades within a day. Signal generates any time of the day & closes in next few hrs.

    Regards
    Sumit

  16. siva says:

    how to place spread order

  17. Vinay says:

    Sir can we expect Volatility based Delta hedging in the month of july

    • Karthik Rangappa says:

      Vinay, I will have to halt this because something else has come up. Will resume work in a month or two.

  18. Pritam says:

    Hello,
    Sir, I have been tracking many stocks for their spreads as explained by you. The only problem is that of the ask and bid spread which is making my trade impossible. The difference between the contract which is shown by the last traded price is diminished by the current ask and bid prices of both the contracts and it becomes difficult to execute the trade then. Suppose, I get a signal of +1 SD on the basis of LTP then when i look into the quote the best ask and bid prices are nowhere near +1 SD.
    Please suggest how to go about it. Thanks, in advance. 🙂

  19. Pratik says:

    Hi Karthik,

    As other users, I have also implemented the system in excel. In fact, I have also managed to get live data every 15 min by scrapping from NSE for all symbols for which FUT contracts are available. I see that there are various calls generated throughout the day as well with good returns and they close on the same day.

    As mentioned by other users, liquidity is a problem in executing such trades. Out of all 209 symbols (Index and Stocks) on which FUT are available, how to filter out the once having high liquidity on both Current and Near contract. As per my observations, Near month contract has very less activity. E.g. Observing JUL FUT contracts data in present month of JUL shows liquidity. The same started showing liquidity after 19th or 20th of JUN. Does that mean the near month contract starts getting attention in last 2 weeks of Current contract? Can you suggest a filter which can be applied to filter out the entries which has least probability of Calendar spread trade execution?

    Regards,

    Pratik

    • Karthik Rangappa says:

      Pratik, yes liquidity is an issue, but if the agenda is to trade a couple of lots, then I think it should be ok. But yes, generally speaking, the near month contract starts gaining liquidity from around the 2nd week (as we move closer to expiry). But then, if its for a couple of lots, I’m guessing it should not really be a problem.

  20. Nitesh says:

    Sir i have a trouble in calculating standard deviation can you help me in doing the calculation.

  21. Amer says:

    Sir how to get more than 200 data points in zerodha pi

  22. babu says:

    hi sir
    can we trade near month and far month contracts ?
    suppose in july, can we trade August and september contracts if we notice spread?

  23. Mahesh Bhatta says:

    Can I have PDF copy of this model?like other modules.
    For future reference.

  24. Pramod says:

    Karthik ji thank you for the wonderful material…

    Which is the upcoming module..

  25. hari says:

    Actually my above message got mistyped completely.

    Is the related project u mentioned app based if yes than plzz keep it desktop view based.
    And if Some sort of paid content u are planning than plzz plzz dont do that let all this knowledge based content be free. Already lots of paid content are available which serve no purpose they make things actually more complicated.

    You can shift to a Blog & put Ad on it this way you will earn too.

  26. Harish Naidu says:

    Hi Karthik Sir

    I have a Doubt Regarding the Margin Amount that will be blocked while executing the calendar spread strategy in Same Stock Future for Different Expiries (Carrying the Position Overnight) :

    Example:-In My case Stock Future is PTC

    1)Sold PTC AUG 2018 Month Contract
    2)Bought PTC SEP 2018 Month Contract

    I have checked the Margin Requirements in Zerodha Margin Calculator and found out that Margin comes to around:
    1)Sold PTC AUG 2018 Month Contract -Rs.89,340
    2)Bought PTC SEP 2018 Month Contract-Rs.89,220
    Total Margin Required Comes to Rs.1,78,560
    In Margin Calculator ,it shows Margin Benefit as Rs.1,59,913 in Green color
    And Under Combined margin requirements ,Total Margin is Rs.18,647

    So,My Doubt is Whether Margin Benefit will be Provided by Zerodha ,even if we hold Position Overnight or till expiry of the Contract i.e Will Rs.18,647 is Blocked as Margin for Holding Position Overnight or Will Rs..1,78,560 is Blocked as Margin for Holding Position Overnight.

    Hope you clarify in this Regard

    Harish

    • Karthik Rangappa says:

      Yes, Harish. The margin benefit is extended for overnight positions as well.

      • Harish Naidu says:

        Hi Sir

        Thank You for your Reply.
        So if have Balance in My Account to the Extent of Margin Blocked (i.e Actual Margin-Margin Benefit).Will i be able to do calendar Spread.If Answer is Yes,At the time of placing Order,Whether two orders have to be placed simultaneously or even if we place 2 orders separately (Buy One Month contract of PTC with one Expiry and Sell Another Month contract of PTC with Different Expiry ).Will we get the Margin Benefit.

        Hope you clarify

        Harish Naidu

        • Karthik Rangappa says:

          The margin benefit is extended only after you initiate both the positions. This means you will need full margins at the time of taking the first leg of the trade.

  27. sha navas says:

    Hi,
    I have two issues.
    First is when I try to close an open short position of an option and try to move to another strike, I am not allowed to do so. Orders don’t get executed. I have explained with an example below.

    At the start of the last week (20th Jul 2018), I had sold BANKNIFTY 26th Jul 26300 PE. On Tuesday, 24th I exited that position. Order got executed. Immediately I tried to sell 26400 PE of same series but order didn’t get executed. I tried repeatedly. I didn’t work. Then I tried selling 26500 PE of same series but to no avail. Then I tried 26600 PE of same series. It got executed.
    Why I am unable to close an open position and take up another one immediately. The reason I got for order rejection could not be comprehended by me.

    Second issue happened yesterday, 27-07-2018. As sson as market opened, I tried elling BANKNIFTY 2nd Aug 26800PE. I didn’t get this in the search filed available on KITE. I was getting CE options only, whereas I wanted to sell a PE option. I got BANKNIFTY AUG 26 PE option that has expiry in Aug 2018, without date mentioned. May be it was a PE option that expires on the last trading day of Aug. I tried executing the trade fro my laptop. Even on laptop I didn’t get BANKNIFTY 2nd Aug 26800 PE for selling.
    Because I could not execute the trade I wanted yesterday, I lost a profit of around Rs. 800. What would have been the loss if I trade in high volumes?
    Please don’t suggest making telephone calls on such occasions. I won’t be in a position to make calls.

  28. Harish Naidu says:

    Hi Sir

    Can there be a case where Same Stock Futures of Different Expiries Converge or atleast maintain Difference of 0.23%?

    Harish

    • Karthik Rangappa says:

      Are you talking about a constant difference? If yes, I quite doubt the difference can sustain.

      • Harish Naidu says:

        HI Sir

        I mean to say, Can there be a scenario where in everytime there exists minimum negligible Difference Between two same Stock Futures of Different Expiries.

        Harish

        • Karthik Rangappa says:

          Yes, and this is attributable to the cost of carry. The point is to initiate the position when the spread goes either below or above this spread, hoping for it to converge back to the minimum spread.

  29. Keshav says:

    Dear Sir, when can we expect the next chapter?

    • Karthik Rangappa says:

      Keshav, like I mentioned, we have stopped adding new content for a bit. Will resume in a months time. Thanks.

  30. Krishna Priya says:

    Greetings Zerodha team,

    Is it ok to provide excerpts of the varsity content (with full credits and links) on a personal blog for non-commercial purposes ?

    Please find the blog link below, I shall modify the post if you find it violating the norms of the Zerodha team efforts.

    http://tradeslearn.blogspot.com/2018/08/a-summary-of-notes-and-learnings-from.html

  31. Alok says:

    Hey Karthik,

    have been a regular varsity reader. Still in my early days of learning.
    Now, my question pertains with the Sentinel thing that you suggest someone up there.
    I can’t really make out how to build alert for a calendar spread the think over sentinel. I must admit though, I am a no-computer guy.

    Is sentinel has some other assistance desk than Trading Q & A.
    Please help me with this
    Alok

    • Karthik Rangappa says:

      Not really, Alok. I’ve been thinking of putting up few triggers on Trading QnA. Will try and do that sometime soon. Thanks.

  32. Alok says:

    *calendar spread thing over sentinel

    Please condone my typo.
    Alok

  33. Alok says:

    hey Karthik,

    Don’t you think “bid rate and ask rate” are the things to consider while getting in or out of a calendar spread.
    from what i can understand, it changes the entire outlook and things look really bleak for treading this.

    please pardon my ignorance, if i have botched up my own understanding, and do take a little pain in explaining me this.

    Thanks
    Alok

    • Karthik Rangappa says:

      Alok, yes, you are right. But for a retail trader, calculating this may be a problem, hence I hesitated a bit. But once you deep dive into this, you will realize.

      • Alok says:

        Please pardon me, I read your reply to question later.

        • Alok says:

          So you mean if we fathom further, we may stand a chance mastering it?
          Or did you mean, a retail trader can’t really succeed with calendar spread??

          Please excuse if this sounds puerile. But, I have few options to get answers to my silly questions.

          • Karthik Rangappa says:

            The only thing that matters with Calendar Spreads is the speed at which you can spot it and act on it. If you think you can spot this quick, then there is scope 🙂

  34. Priya says:

    Dear Karthik, I have looked around for the last one hour to find out how to download continous futures data as you have mentioned and havent yet figured out yet either through any youtube video or in qna. Please point me to where i can find steps to do the same. Also I have tried thrice to download Nifty 50 stocks data in link excel and it came out blank all 3 times. What am I doing wrong. !!

    • Priya, you should be able to download the data from Pi without any issues. Can you create a ticket on our Support Portal? Our Tech Support team will help you with account specific queries

      • Priya says:

        ya. I will do that. I followed the same steps and got it yesterday evening, But today I found the sheet blank again and attempt to update was unsuccessful. I will try one more time and then create a ticket. thx

  35. Alok says:

    To download continuous chart follow these steps.
    (1) save the stock you want on pi market watch.
    (2) right click the stock
    you will see all available options to click
    the last option must be continuous chart
    (3) click open the chart, and allow it some time to load
    (4) once you have the chart , again right click anywhere on the chart .
    (5) scroll down to “save chart” option.
    (6) once you bring the cursor on “save chart” you will see the option of “save chart data to excel”.
    (7) once you click the option allow some time to let the data get loaded on excel sheet. Here you have your continuous flow data on excel sheet.
    Sorry to be meddlesome. I thought my diligence may come to use for someone, while Karthik enjoys his sabbatical.

  36. Alok says:

    hey karthik

    don’t forget to come to my rescue.

  37. Priya says:

    Hi Karthik, Backtested the data for a few sets with interesting results. Some of them seem to have a SD much higher than Mean. Does that make it risky or throw more opportunities. Also in the near month, the bid ask spread seems to be on the higher side, which means there are no guarantees that our trade will get executed at LTP. so how exactly do we execute the trade, at limit or Mkt price ? First Near month that has less volume and then current month ? How has your exp with Calender spread been. Please enlighten us 🙂

    • Karthik Rangappa says:

      I’m not sure if I’m missing something here, Priya. Mean is usually very small and SD higher than mean is a common occurrence. By default, the higher the SD higher is the risk element. This does not mean more opportunities.

      Agreed with you on the bid ask bit on the near month, hence for this, its important to look at the trade with bid-ask in perspective and not really LTP.

      I used to use an algo to identify calender spreads, but that went bad, since then I;ve not really revived this.

      • Priya says:

        The bid ask part makes sense. I meant more opportunities b’cos the spread has a higher number of variations. The very thing that causes high SD also means more opportunities in my understanding. Curious about what went bad with your algo. Thanks a ton for all the education. I started with no knowledge of any technical analysis, thx to your great content my learning has come pretty far.

        • Karthik Rangappa says:

          Glad to know that Priya 🙂

          One thing lead to another and the algo went rogue. Never really bothered to revive it. But after writing this chapter, the interest has rekindled, maybe one of these days 🙂

  38. Sundeep says:

    Sir we’ve been waiting since weeks for next update and content from varsity. Could you please tell us what is it going to be? We’re curious.

  39. Satyan says:

    Hi Karthik ,
    Instead of Stock Future , can we apply this strategy on Index Future Nifty or BankNifty.

  40. HariOm says:

    Hi,

    Loved the content as well as the presentation.

    The 16th श्लोक of first chapter in मालविकाग्निमित्रं created by कालिदास says,

    श्लिष्टाम् क्रिया: कस्य चिदाम्यसंस्थाम्
    सक्रन्तिरन्यस्य विशेष्युक्ता
    घुरि प्रतिष्ठाः पायितव्य एव्
    तस्मैअयम् साधुः स् शिक्षकाणाम्

    अर्थात् : एक शिक्षक का ज्ञान गहन होता है, दूसरे में ज्ञान प्रदान करने कि अर्थात प्रशिक्षित करने कि क्षमता होती है. परन्तु जिसमें ये दोनो ही गुण् पाये जाते हैं वो शिक्षक सभी का सिरमौर होता है…

    One teacher has immense knowledge, another one has the ability to teach and train. But the one who has both these virtues is the king of all teachers…

    Keep doing the good work sir..

    One request Can you put this module as well in pdf downloadable fornat. Thanks in advance.

    • Karthik Rangappa says:

      Thanks for the very kind words, Hariom 😉

      This module will be made available in PDF when it’s completed. Planning to add some more content to this module, will do that sometime this year. Thanks.

  41. Vipul Kaji says:

    In the article you have mentioned and I quote “I have downloaded the continuous futures data from Zerodha Pi (Zerodha’s desktop trading application) for last 200 trading days”
    As Stock Future contracts are traded for only three months, hand 200 Trading days means approx. 40 weeks, meaning 9 months & 1 week how do you get Near [current] & Next [Near] month contract rates for the calculations?
    Pls if possible respond.
    Thanks

    • Karthik Rangappa says:

      There is an option to switch to continuous data, Vipul. I’d suggest you give a call to our support to figure this out. Thanks.

  42. Princia says:

    Recently i am seeing an influx of traders talking about market profile, order flow, etc. I wanted your expert opinion on the matter. Does Market Profile analysis give exact point of entry and exits? and supposedly they are always accurate? If that is the case then we need the stuff in zerodha kite and fast..

    We also know about TPO, VAL, VAH, POC etc..

  43. Princia says:

    Sir,
    Please write notes on order flow analysis. Does it helps us to identify the movement of market???

    Thank u

  44. Sudeep Poswal says:

    Hi Karthik,

    Thanks for such a nice content. I’ve been waiting for this since long. I have couple of questions:

    1- As you said, speed is the main factor to spot this opportunity, however being a retail trader, I have no expertise in writing a program for the same and nor do I know how that program is used with Pie or Kite.
    Appreciate if you could suggest some ways or some good company which can help me with that.

  45. Sudeep Poswal says:

    2- Are we going to spot more opportunities if we use this in commodity’s future or some other underlying instead of just equity?

  46. Sudeep Poswal says:

    Sorry there is one more question, if I carry the spread till expiry, is the difference between the two months future contracts would be close to zero bcoz once I checked on money control the difference was quite big in Nifty futures.

    • Karthik Rangappa says:

      The idea is to carry the spread till the spread reveres to mean or a level you have in mind as the target. No point keeping this to expiry.

  47. Vinod Kumar says:

    Thanks Karthick for the excellent module, request for a P&L demo / screenshot on trades with calendar spread.

  48. Sukumar A.K says:

    Hai…zerodha varsity is awesome…am working in a Pvt bank wr I am insisting my colleagues to read this…as it gives good insight on capital market investment…

    My request is also tap bond markers, currency and IRF as these are the monther of all capital markets

    • Karthik Rangappa says:

      Thanks for the kind words and also in helping with spreading the word. Yes, content on bonds is long due. Will try and do that soon 🙂

  49. Sundeep says:

    Sir I know you’ve a lot of experience in stock markets. Do you have a notebook to record all your experiences and lessons in a consise manner or how does it work? Just curious.

  50. Sundeep says:

    Most famous traders I know, only use only one or two methods that they master. What was your need to master a lot of complex strategies sir? Could you explain?

  51. chandu says:

    Hi sir,
    Your modules are a complete knowledge resource for stock market enthusiasts,no doubt.Recently i came across this LEARNAPP which provides video lectures on the same thing you teach for free.Is it worthy to enroll in that?(I came across this learn app through zerodha connect :p)

    • Karthik Rangappa says:

      Learnapp, is a great place to get started. The team is working really hard to put up high-quality video content. I’d suggest you enroll for a couple of free webinars to get a sense and then decide to enroll (or not).

  52. Kkshitij says:

    Sir, You have taken day wise data in the example. My query here is do we have to take tick by tick data (every sec) for 200 data points or end of the day data to calculate mean/SD and place trade next morning when we have trade opportunity. Please explain as if its tick by tick then we need to have live feed in excel to spot the right opportunity. Thanks in advance

    • Karthik Rangappa says:

      Well, tick data in this particular case would be nice, but I’m afraid excel kind of platform won’t be able to handle the load.

      • Kkshitij says:

        Thanks Sir, you explain in really nice way. Can you please recommend the right platform for this kind of trades. Also, what other systems/techniques are there for arbitrage.

        • Karthik Rangappa says:

          I’d suggest you look at Kite to execute these trades. The systems can get really complex, really depends on what you are looking for.

          • Kkshitij says:

            I am already using Kite. My question is by looking a live feed it’s difficult to calculate mean and SD for every second or manually. Is there a different way using Kite that I am missing ?
            I am looking for a trading setup which is less risky like arbitrage. Thanks

          • Karthik Rangappa says:

            Just by looking at the numbers, estimating mean and SD would be tough. However, there is a work around – you can always get an estimate by plugging in a range of possible range of outcomes. I’d suggest you run through earlier chapters to get a sense of how this can be done.

  53. durga says:

    Hi sir,first of all thank you for giving such type of easy modules to us, i am new comer sir,i am interested in trading in futures market, i read basics of stock market,technical analysis,fundamental analysis and futures trading modules in varsity, my question is what should i learn next ,i don’t know any one in the market field to take suggitions ,please replying me sir, thanks in advance.

    • Karthik Rangappa says:

      Durga, if you’ve read all these things, then I guess you should try and place few small trades in the market to put all the theory in practice 🙂

  54. Pradyut says:

    Hi Karthik sir,

    I would like to thank you & Zerodha team for creating Varsity and sharing these valuable knowledge with all of us. In old chapter of Options you mentioned about Delta Hedging as a trading system. Can we hope to see that in this module?

  55. Gautam Prakash says:

    Dear Zerodha Team,
    You have been doing great work and it has been great sticking around with you (not financially). It would be highly appreciated if you can create your youtube channel and make some videos regrading all the important topics. For the calendar spreads you could make a live trade and show the results and also for most of the other varsity topics.

    You could even elaborately explain regarding your various products and how to use them (like brokerage calculator, margin calculator etc) and I think it would be highly beneficial for rookie traders and also provide tons of info nonetheless for everyone.

    Action in this regard would be highly appreciated.

  56. Sundeep says:

    Sir there was a screener option in Stock Report of Thomson Reuters where you can chronologically view the list of stocks that have the highest ratings. Now I could not find the screener option. Please help me. Thanks.

    • Karthik Rangappa says:

      We are looking into that, Sundeep 🙂

      • Sundeep says:

        Sir please don’t it the wrong way but I’ve already subscribed for the service and it’ll be of no use it me if you don’t resolve the issue quickly. And secondly, when can we expect the next chapter on varsity? Thanks in advance.

        • Karthik Rangappa says:

          Sundeep, as I have mentioned in this chapter, have taken a break as we are focusing on another project. Will resume as soon as possible. Also, which service are you talking about?

          • Sundeep says:

            1. The other project is what I’m talking about sir. You said it’d be much more exciting, which piqued our interests.. :-). Could you give us a tentative date sir?
            2. I have subscribed for Thomson Reuters service and they used to provide screener service. But now its not available. Please guide me on this. Thank you.

          • Karthik Rangappa says:

            1) Hopefully another month 🙂
            2) I guess we will make this feature available soon.

  57. narsimha says:

    good,what r timings of mkts from oct 1 is it 9-12pm,and how to buy sell BONDS(10Y)IN ZERODHA

  58. Rakesh Aggarwal says:

    Sir, if we carry the spread till expiry how will it be adjusted. Will it be profitable.

  59. kiran says:

    Hello sir. I’ve been using calendar spreads for few days now. Everythings good but i find it difficult to execute at right price where either of the condition meet(converge or diverge). I know it should be quick and sometimes liquidity makes it difficult to execute, anyways you’re the only one who can suggest me a way if there is any. Thank you Karthik sir.

  60. Sundeep says:

    Sir I have been a big fan of your work since I find varsity and I should say that I have immensely made use of your material. I have been able to use your technical analysis and options trading strategies to a reasonable profit. I thank you for that. However one thing I noticed is that a lot of those simple technical indicators have stopped working I think mainly because it has become commonplace. I had long back suggested that you come up with a list of suggested reading after each module. Sir could you kindly please quickly tell me a list of 10 books that would go beyond varsity? Mainly about 1. Technical analysis 2. Quantitative Trading 3. Books to better understand options. Ps: I have printed out a few of varsity modules in their entirety and gave away to few of my colleagues. They have found it helpful too. Thanks for the good work.

    • Karthik Rangappa says:

      Sundeep, thank you so much for the kind words and a massive thank you for sharing varsity with your colleagues. This is very big of you. For TA, I’d suggest you read through level 1 and 2 books of CMT – https://cmtassociation.org/chartered-market-technician/ and for Quants, I’d suggest you read through various discussions in Willmot forums. Here are few good books as well – https://tradingqna.com/t/which-are-the-top-5-books-one-should-read-to-become-a-better-trader/200/8

      • Sundeep says:

        Sir I have to tell you that a few of my friends have started analyzing companies by themselves and getting started in investing, after I gave them the printed varsity material. I strongly think varsity should be available in print format- Just a humble suggestion. Now I have a question. Thanks to TA Module and FA Module, I have been able to make trades based on indicators as well as based on company and economic results. Like I said I am no longer comfortable with using the standard TA indicators. Now I am thinking about building a Trading System. I know that you strongly recommend Pairs Trading. But I don’t want to delve into that without learning it fully so I’ll stay away from it for now. What do you think I should build my Trading System around? The strategy- What would you suggest? Your input would be very much appreciated.

        • Karthik Rangappa says:

          Sundeep, thanks again. I don’t really recommend pair trading, remember, pair trading is just one of the many available trading systems. Then there is the momentum strategy, there is the magic formula (combination of both fundamental and TA), and a host of other strategies. I’d suggest you give the momentum strategy, to begin with, plenty of content available on that.

          • Sundeep says:

            Sir I have often read in various book that momentum strategies that are already available will be of no use in the market because too many people will be using it and so one has to improve upon it. Do you agree with that? If so, how do I improve upon a strategy sir? And which book would you recommend for momentum strategy?

          • Karthik Rangappa says:

            Yes, I do agree. However, this also depends on how you define momentum.

          • Sundeep says:

            Sir let me ask these questions again.
            1. You say momentum strategies are based on how we define them. I don’t know how to define them and just getting started. What resources or books would you recommend?
            2. If common momentum strategies don’t work then how do you improve upon them ? Your thoughts on these things will be appreciated.

            Thanks in advance.

          • Karthik Rangappa says:

            1) I intend to write a chapter on this, Sundeep which will include one basic way of defining momentum
            2) This is where your market intel comes into play, you can improvise on concepts and try and identify your edge. This is easier said than done, takes time and experience in the market.

          • Sundeep says:

            Sir let me ask these questions again.
            1. You say momentum strategies are based on how we define them. I don’t know how to define them and just getting started. What resources or books would you recommend?
            2. If common momentum strategies don’t work then how do you improve upon them ? Your thoughts on these things will be appreciated.

            Thanks in advance..

          • Sundeep says:

            Sir I will surely look forward to varsity chapters on momentum strategies. But in the mean time can you recommend me two books / resources on the same? It’d be much appreciated. As I said I’m developing a trading system and your inputs would make a lot of difference.

          • Karthik Rangappa says:

            I’m unable to think of any at this point, will get back shortly.

          • Sundeep says:

            I will surely look forward to varsity chapters on momentum strategies. But in the mean time can you recommend me two books / resources on the same? It’d be much appreciated. As I said I’m developing a trading system and your inputs would make a lot of difference.

  61. kiran vaswani says:

    Hello sir(again)😊. After a while of homework I found liquidity in few next futures contracts. Traded them, made less profits but was planned one. I would like to know, in what condition would the spread increase? Having a fear inside after taking trades that it might increase if I’m short and decrease if I’m long on positions. That eventually come back to mean in sometime. But what are the odds? Do I’ve to wait or should close with loss, as always guide sir.

  62. karthik says:

    Apart from amazing module information, discussion under the chapter does help us. I had few doubts and were cleared while going through comments.

    1. I wanna know out of all the strategies calendar spreads look pretty better and logical than simply using lagging indicators, is that true or i only feel it? and are they good for long term trading?
    2. I would like to know which were your most practiced strategies? I would love to try them.

    Thank you so much(words cannot describe the value for this free knowledge). Varsity is one stop.

    • Karthik Rangappa says:

      1) It is true, but the biggest challenge is spotting the opportunity and execution
      2) There are plenty of strategies like these – Pair trading, calendar spreads, delta hedging, MA based, TA based etc.

      Happy learning!

  63. @r says:

    Sir,
    When can we expect the remaining two strategy here?

  64. sourab says:

    Can I get the historical data for BOTH near month and next month futures from kite or Pi ? Like for example data for AXISBANK18JANFUT and AXISBANK18FEBFUT for January, 2018.
    If it is possible, then how?

  65. Tinshu says:

    Hello Sir,

    I have studied all the chapters from technical to options and future. I work in office. And try to trade in office hours. But somehow I always loss. I know the theory part but in practical part I loss.
    Please advise me.

    • Karthik Rangappa says:

      Tinishu, trading requires a lot of attention, maybe you are unable to concentrate on both work and trading. I’d sincerely suggest you invest in stocks for the longterm, get comfortable with holding stocks and then eventually move to trading.

  66. Tinshu says:

    Sir,
    I try to do intra day trading but incurred losses as I am not able to get the time for intra-day trading.
    Please can you suggest some strategy or way to trade for working professionals so that I can trade with the stop loss and target. Option strategy or something…

    Thanks

    • Karthik Rangappa says:

      Tinshu, you can explore positional trades (swing trades) or even option writing.

      • Tinshu says:

        Sir,
        Suppose I sell future of Tata motors for swing trade. Now should I also purchase call option for Tata motors for overnight position just to hedge it ? Any other suggestions.

        Thanks a lot.

        • Karthik Rangappa says:

          Yes, or you can buy the futures of TM, expiring next month as a hedge.

          • Tinshu says:

            Sir

            1)You suggested to buy next month future as hedge…I mean it will be just for overnight position, suppose I sell TM futures for positional trade and every day at 3.20 pm I should buy counter position next month future and in the morning I should square off that counter position so that I can mitigate myself for any bad news which comes after market closing. And every day I should also place stop loss for my swing trade ?
            2)But in general I think sir swing trade is little bit expensive one in case I losses 2 3 trades I have to increase my trading account balance to continue place swing trade…

            Thanks

          • Karthik Rangappa says:

            1) Well, if your idea is to mitigate overnight risk, you can do this. Else you can even carry forward an option position.
            2) Yes, but swing trades also tend to get very profitable if done right.

          • Tinshu says:

            Sir,
            What does it mean carry forward option position ?
            Thanks

          • Karthik Rangappa says:

            That means you carry forward the position overnight.

      • Tinshu says:

        Hi Sir,

        Is swing trading is also applicable for commodity or for commodity intraday trading is better ? If yes, then according to your experience which commodity is better suited for it ?

        Thanks

  67. Avijeet says:

    Hi, Karthik!

    Please make a pdf for the module 10 as well.

    Regards,
    A

  68. kARTHIKEYAN says:

    I would like to understand how to down load from the Zerodha pi the historical values of the scrip .. i could not get it right … thks

    • You can open the chart for any scrip. Once you’ve chosen the required timeframe, right click and you should find an option to Save Chart. You can choose Excel and the historical data will open in an Excel sheet.

  69. Kundan Bagchi says:

    If I want to trade on Spread how can i initiate?

    Like I want to buy 10 Lot of Nifty Nov at 10400 and sell 10 Lot of Nifty Dec at 10450.
    As per zerodha margin calculator it needs 1.6L as margin since position is hedged.

    But to initiate first any of the trade I need to have 7 Lac. so then How can i initiate the trade?

    Kundan Bagchi

  70. Pramod says:

    Hi Karthik,

    Thank you for the wonderful writing..

    Can we expect further modules

  71. Vyshak Iyengar says:

    Loved the modules! Just wanted to congratulate and thank you for the efforts!!

  72. Soumen says:

    Kind Attn Mr. Karthik Rangappa.

    Respected Sir, Is it possible to apply the same strategy with commodity “Futures Spread (Commodity Trading)” Like Gold, Copper, Silver etc, I think these are high liquidity compare to equity future, Want to apply the thumb rule in arbitrage Buy Chep & Sell expensive. Base on the availability of the best opportunity.

    If I am making sense for the above-stated Trading method is the risk factor will be the same like as lower as Equidity calendar spreads? Kindly suggest it’s ideal to do “Futures Spread (Commodity Trading)”.

    Waiting for your valuable suggestion and early response.

    Best Regards,

    Soumen Sen

  73. Soumen says:

    Sir,
    Sometimes I see arbitrage opportunity Current Month and Far month in Gold, as of Today around 12:05 PM I see around 150 Point different current month & Far month i.e. “GOLDM NOV FUT & GOLDM JAN FUT”, relatively high gap compare to “GOLDM NOV FUT & GOLDM DEC FUT” ( The gap was very narrow current month and mid-month around 55 Point ). ( but the gap was an ideal arbitrage between the current month and far month around 150 Point) Is it ideal to apply rule buy cheap i.e Buy Current month contract and sell more expensive Far month contract compare to mid-month contract. ? Please guide can we do an arbitrage/calendar spared between current month and fat month as well, or need to stick with the current month and mid-month only.

    • Karthik Rangappa says:

      You certainly can initiate the trade on current and far month contracts, no problem with it as such. It works the same way, buy the cheaper one and sell the expensive one. Make sure to close the spread when it converges to a meaningful level.

  74. Sundeep says:

    Good morning sir. I hate to pester you like this but you said you would get back to me on a couple of questions and you haven’t. I am just reproducing the same here.
    1. Book recommendation on Momentum strategies.
    2. Investment hacks- Profiting from special situations in the market.
    3. (Not a question, just curious) When is new stuff coming up on varsity sir? I am waiting for it since long time.

    • Karthik Rangappa says:

      1) Sundeep, unfortunately, I’m unable to source any reliable books on the Momentum strategy
      2) I’d suggest you look at Ganapathy Vidya Murthy’s book on par trading, the first half of the book deals with the special situation
      3) Working on another project related to Varsity, once that takes some shape, will get back to this 🙂

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