Module 4 Futures Trading

Chapter 10

The Futures Pricing

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M4-Ch10-title

10.1 – The Pricing Formula

If you were to take a conventional course on Futures trading, you would probably be introduced to the futures pricing formula right at the very beginning of the course. However we have deliberately opted to talk about it now, at a much later stage. The reason is simple – if you are trading futures based on technical analysis (I assume a vast majority of you are doing this) then you would not really need to know how the futures are priced, although a good working knowledge would help. However if you aspire to trade futures by employing quantitative strategies such as Calendar Spreads or Index Arbitrage then you certainly need to know this. In fact we will have a module dedicated to ‘Trading Strategies’ where we would discuss some of these strategies, hence the discussion in this chapter will lay down a foundation for the forthcoming modules.

If you recall, in some of the earlier chapters occasionally we discussed the ‘Futures Pricing Formula’ as the prime reason for the difference between the spot price and the futures price. Well, I guess it is time now to lift the veil and introduce the ‘Future Pricing Formula’.

We know the futures instrument derives its value from its respective underlying. We also know that the futures instrument moves in sync with its underlying. If the underlying price falls, so would the futures price and vice versa. However, the underlying price and the futures price differs and they are not really the same. To give you a perspective as I write this, Nifty Spot is at 8,845.5 whereas the corresponding current month contract is trading at 8,854.7, please refer to the snap shot below. This difference in price between the futures price and the spot price is called the “basis or spread”. In case of the Nifty example below, the spread is 9.2 points (8854.7 – 8845.5).

Image-1_Fut-Price

The difference in price is attributable to the ‘Spot – Future Parity’. The spot future parity the difference between the spot and futures price that arises due to variables such as interest rates, dividends, time to expiry etc. In a very loose sense it is simply is a mathematical expression to equate the underlying price and its corresponding futures price. This is also known as the futures pricing formula.

The futures pricing formula simply states –

Futures Price = Spot price *(1+ rf – d)

Where,

rf = Risk free rate

d – Dividend

Note, ‘rf’ is the risk free rate that you can earn for the entire year (365 days); considering the expiry is at 1, 2, and 3 months one may want to scale it proportionately for time periods other than the exact 365 days. Therefore a more generic formula would be –

Futures Price = Spot price * [1+ rf*(x/365) – d]

Where,

x = number of days to expiry.

One can take the RBI’s 91 day Treasury bill as a proxy for the short term risk free rate. You can find the same on the RBI’s home page, as shown in the snapshot below –

Image-2_RBI

As we can see from the image above, the current rate is 8.3528%. Keeping this in perspective let us work on a pricing example. Assume Infosys spot is trading at 2,280.5 with 7 more days to expiry, what should Infosys’s current month futures contract be priced at?

Futures Price = 2280.5 * [1+8.3528 %( 7/365)] – 0

Do note, Infosys is not expected to pay any dividend over the next 7 days, hence I have assumed dividend as 0. Solving the above equation, the future price turns out to be 2283. This is called the ‘Fair value’ of futures. However the actual futures price as you can see from the image below is 2284. The actual price at which the futures contract trades is called the ‘Market Price’.

Image-3_Infy

The difference between the fair value and market price mainly occurs due to market costs such as transaction charges, taxes, margins etc. However by and large the fair value reflects where the futures should be trading at a given risk free rate and number of days to expiry. Let us take this further, and figure out the futures price for mid month and far month contracts.

Mid month calculation

Number of days to expiry = 34 (as the contract expires on 26th March 2015)

Futures Price = 2280.5 * [1+8.3528 %( 34/365)] – 0

= 2299

Far month calculation

Number of days to expiry = 80 (as the contract expires on 30th April 2015)

Futures Price = 2280.5 * [1+8.3528 %( 80/365)] – 0

= 2322

From NSE website let us take a look at the actual market prices –

Snapshot of Infosys’s mid month contract

Image-4_Infy

 

Snapshot of Infosys’s mid month contract

Image-5_Infy

Clearly there is a difference between the calculated fair value and the market price. I would attribute this to the applicable costs. Besides, the market could be factoring in some financial yearend dividends as well. However the key point to note is as the number of days to expiry increases, the difference between the fair value and market value widens.

In fact this leads us to another important commonly used market terminology – the discount and the premium.

If the futures is trading higher than the spot, which mathematically speaking is the natural order of things, then the futures market is said to be at ‘premium’. While ‘Premium’ is a term used in the Equity derivatives markets, the commodity derivatives market prefer to refer to the same phenomenon as ‘Contango’. However, both contango and premium refer to the same fact – The Futures are trading higher than the Spot.

Here is a plot of Nifty spot and its corresponding futures for the January 2015 series. As you can see the Nifty futures is trading above the spot during the entire series.

Image-6_Spread

I specifically want to draw your attention to the following few points –

  1. At the start of the series (highlighted by a black arrow) the spread between the spot and futures is quite high. This is because the number of days to expiry is high hence the x/365 factor in the futures pricing formula is also high.
  2. The futures remained at premium to the spot throughout the series
  3. At the end of the series (highlighted by a blue arrow) the futures and the spot have converged. In fact this always happens. Irrespective of whether the future is at a premium or a discount, on the day of the expiry, the futures and spot will always converge.
  4. If you have a futures position and if you fail to square off the position by expiry, then the exchange will square off the position automatically and it will be settled at the spot price as both futures and spot converges on the day of the expiry

Not always does the futures trade richer than the spot. There could be instances – mainly owing to short term demand and supply imbalances where the futures would trade cheaper than its corresponding spot. This situation is when the futures is said to be trading at a discount to the spot. In the commodities world, the same situation is referred to as the “backwardation”.

10.2 – Practical Application

Before we conclude this chapter, let us put the futures pricing formula to some practical use. Like I had mentioned earlier, futures pricing formula comes very handy when you aspire to trade employing quantitative trading techniques. Please note, the following discussion is only a preview window into the world of trading strategies. We will discuss all these things plus more in greater detail when we take up the module on “Trading Strategies”. Consider this situation –

Wipro Spot = 653

Rf – 8.35%

x = 30

d = 0

Given this, the futures should be trading at –

Futures Price = 653*(1+8.35 %( 30/365)) – 0

= 658

Accommodate for market charges, the futures should be trading in and around 658. Now what if instead the futures contract is trading at a drastically different price? Let’s say 700? Clearly there is a trade here. The difference between the spot and futures should ideally be just 5 points, but due to market imbalances the difference has shot up to 47 points. This is a spread that we can capture by deploying a trade.

Here is how one can do this – since the future contract is trading above its fair value, we term the futures market price as expensive relative to its fair value. Alternatively we can say, the spot is trading cheaper with respect to the futures.

The thumb rule in any sort of ‘spread trade’ is to buy the cheaper asset and sell the expensive one. Hence going by this, we can sell Wipro Futures on one hand and simultaneously buy Wipro in the spot market. Let us plug in the numbers and see how this goes –

Buy Wipro in Spot @ 653

Sell Wipro in Futures @ 700

Now we know that on the expiry day, both the spot and the futures converge into one single price (refer to the Nifty graph posted above). Let us assume a few random values at which the futures and the spot converge – 675, 645, 715 and identify what happens to the trade –

Expiry Value Spot Trade P&L (Long) Futures Trade P&L (Short) Net P&L
675 675 – 653 = +22 700 – 675 = +25 +22 + 25 = +47
645 645 – 653 = -08 700 – 645 = +55 -08 + 55 = +47
715 715 – 653 = +62 700 – 715 = -15 +62 – 15 = +47

As you can notice, once you have executed the trade at the expected price you have essentially locked in the spread. So irrespective of where the market goes by expiry, the profits are guaranteed! Of course, it goes without saying that it makes sense to square off the positions just before the expiry of the futures contract. This would require you to sell Wipro in spot market and buy back Wipro in Futures market.

This kind of trade between the futures and the spot to extract and profit from the spread is also called the ‘Cash & Carry Arbitrage’.

10.3 – Calendar Spreads

The calendar spread is a simple extension of the cash & carry arbitrage. In a calendar spread, we attempt to extract and profit from the spread created between two futures contracts of the same underlying but with different expiries. Let us continue with the Wipro example and understand this better –

Wipro Spot is trading at = 653

Current month futures fair value (30 days to expiry) = 658

Actual market value of current month futures = 700

Mid month futures fair value (65 days to expiry) = 663

Actual market value of mid month futures = 665

From the above example, clearly the current month futures contract is trading way above its expected theoretical fair value. However the mid month contract is trading close to its actual fair value estimate. With these observations, I will make an assumption that the current month contract’s basis will eventually narrow down and the mid month contract will continue to trade close to its fair value.

Now with respect to the mid month contract, the current month contract appears to be expensive. Hence we sell the expensive contract and buy the relatively cheaper one. Therefore the trade set up would require me to buy the mid month futures contract @ 665 and sell the current month contract @ 700.

What do you think is the spread here? Well, the spread is the difference between the two future contracts i.e 700 – 665 = 35 points.

The trade set up to capture the spread goes like this –

Sell the current month futures @ 700

Buy the mid month futures @ 665

Do note – because you are buying and selling the same underlying futures of different expiries, the margins are greatly reduced as this is a hedged position.

Now after initiating the trade, one has to wait for the current month’s futures to expire.  Upon expiry, we know the current month futures and the spot will converge to a single price. Of course on a more practical note, it makes sense to unwind the trade just before the expiry.

Let us arbitrarily take a few scenarios as below and see how the P&L pans out –

Expiry Value Current month P&L (Short) Mid Month P&L (Long) Net P&L
660 700 – 660 = +40 660 – 665 = -5 +40 – 5 = +35
690 700 – 690 = +10 690 – 665 = +25 +10 + 25 = +35
725 700 – 725 = -25 725 – 665 = +60 -25 + 60 = +35

Of course, do recall the critical assumption we have made here is that i.e. the mid month contract will stick close to its fair value. From my trading experience this happens most of the times.

Most importantly please do bear in mind the discussion with respect to spreads in this chapter is just a sneak peek into the world of trading strategies. We will discuss these strategies in a separate module which would give you an in depth analysis on how one can professionally deploy these strategies.


Key takeaways from this chapter

  1. The futures pricing formula states that the Futures Price = Spot price *(1+Rf (x/365)) – d
  2. The difference between futures and spot is called the basis or simply the spread
  3. The futures price as estimated by the pricing formula is called the “Theoretical fair value”
  4. The price at which the futures trade in the market is called the ‘market value’
  5. The theoretical fair value of futures and market value by and large should be around the same value. However there could be slight variance mainly due to the associated costs
  6. If the futures is rich to spot then the futures is said to be at premium else it is said to be at a discount
  7. In commodity parlance Premium = Contango and Discount = Backwardation
  8. Cash and carry is a spread where one can buy in the spot and sell in the futures
  9. Calendar spread is an extension of a cash and carry where one buys a contract and simultaneously sells another contract (with a different expiry) but of the same underlying

501 comments

  1. amit pathak says:

    Hi karthik,
    Pls explain this : As the number of days to expiry increases, the difference between the fair value and market value widens.

    • Karthik Rangappa says:

      The x/365 factor, where x represents number of days increases when x is large. For example when there are 30 days to expiry, x/365 is 0.082, however when when x is 20, x/365 is 0.54. This makes the spread to increase.

      • amit pathak says:

        At times during the contract cycle commentators say premium in nifty futures has increased,inspite of the fact that time is diminishing with every passing day of the contract.Accordingly they analyse future prospects.Pls help me understand this.

        • Karthik Rangappa says:

          Besides time other factors also contribute. This is mainly due to the demand and supply in the contract.

          • amit pathak says:

            Hi Karthik,
            what impact volatility will have on premium of nifty futures ?

          • Karthik Rangappa says:

            Nice question. As far as I know volatility and futures premium are not directly related (at least in their mathematical equation). I guess this is because futures is a linear instrument where the only factor that affects its movement is “direction”. On the other hand options premium tends to shoot up when volatility increases. More on this topic when we take up options theory.

      • skburman26 says:

        Hello Karthik, a doubt.
        The price of stock future is always more than its underlying asset, the equity price.
        And the prices converge when the future is about to expire.
        So when a stock future is priced lower than its equity counterpart, what does it imply?

        • Karthik Rangappa says:

          It means the futures are trading at a discount to spot. Discount situation comes about when futures are heavily sold in the market. All else equal, futures are always at a premium to spot.

      • ARUN says:

        correction req :: when when x is 20, x/365 should be 0.054.

  2. NARSIMHA says:

    sir,is there any stategy r software to find profitable c spreads in futures,&should we close all positions at atime r can we take advantage of one fut according to mkt&should we wait till expiry,will it not be too long what if get profit of 2000/trade daily r swing should we square off r wait.in this way cant we make 25 trades/month clarify

    • Karthik Rangappa says:

      Based on our earlier interaction, I would suggest you stick to simple swing trade for now before you venture into calender spreads.

  3. NARSIMHA says:

    sir,evrytime when taking positions in calender spreads(2 futures)should we have to calculate fair value r is there any thumb rule to calculatein %terms for near&mid month explain

  4. Saurabh says:

    Hi Karthik,

    One question that comes to my mind is that how to find such trader? Can we automate a strategy on pi that automatically searches for scrips that have the C&C arbitrage or normal spread? Similarly, if we were to calculate the fair price for each and every scrip then the trade opportunity would be lost.

    Thoughts?

    • Karthik Rangappa says:

      There is a different quant angle to this Saurabh. I will share it shortly.

      • Naresh says:

        ARBITRAGE – Hi ! If futures for near month is available on discount, then can one buy 2 ATM puts and go long futures in order to benefit from the same spread ? Is it worth it knowing that the profitability may be low ! Thanks

        • Karthik Rangappa says:

          Sounds interesting, but honestly you need to back test this before diving in. Chances are that the discount may persist through the expiry week and spot may come down to futures on expiry.

  5. madhu nair says:

    hi karthik, can the last candle be traded as a bullish harami? do the indicators suggest a long trade?

    • Karthik Rangappa says:

      Just by candlestick perspective it does, in fact its perfect. However I would not get carried away with it, I would check for other checklist items and confirm if it matches.Good luck.

  6. NARSIMHA says:

    sir,when r we reding trading stategies,its late we r eagerly waiting

  7. Narasimha m says:

    Sir,done even i to like swing trade but couldn’t resist intraday&loosing small amount (5000) i don’t have patience to wait for 1/2 hours idont know how i can be a good trader is it my fault(inexperienced) or over assesability like Online. Pi. Boss of our mistakes or trying for unnecessary fr ex _today i stayed away from intraday(sensing volatility which I can’t sustain)when I opened pi ishoort BHEL at 274 &buying at 276 causing loss of money &confidence after hour BHEL was trading at 258 what is this nonsense & how to avoid give ideas

    • Karthik Rangappa says:

      You have to be really disciplined Narasimha. This is the core of all trading strategies, control you trading instincts and focus purely in swing trades (by applying the checklist) to begin with. This will really help.

    • Neeraj Kumar says:

      Narasimha, I was in same league before some time and lost more than 5L trading stocks and options. I was also amused about the issue on handling the loss. I was even talked to Kartik also and he advised me to be disciplined and not to take random trade. Also, stick to stop loss and target but I was not not able to stick with stop loss while watching MTM loss. I find the reason. It was the size of trade. When I started to take small size of trade I was less gripped in fear of loosing and if I take my trade on the basis of TA, I do not come out from my trade until stop loss do not hit. That’s it.
      It is a long journey to be good trader and cover all losses but today when I trade, I just look the current opportunity and without any external pressure of covering my losses, I am making small profits and gaining my confidence back. Thanks to Kartik.

  8. NARSIMHA says:

    sir,and when we apply candle graph there r lot of timeframe differences for ex-a pattern for 5,15,1hour,daily shows differently justify

  9. t rama says:

    Sir, What is Swing Trading.

  10. NARSIMHA says:

    sir,reply for bhel case,waiting

  11. NARSIMHA says:

    sir,cant it be better to tade OPTION STOCK(INBUILT STOP)RATHER STOCK FUTURES TO MY STYLE OF TRADING(ANXIETY OF CLOSING EARLIER&REPENTING)TILL NOW I WAS TADING ONLY INDEX OPTIOS&STO FUT ADVISE

    • Karthik Rangappa says:

      Sure, but please be aware that Options are not as linear as futures. There are many factors to Options trading. You need to be completely aware of these variables before you take a trade.

  12. Vidhyalakshmi says:

    Karthik, the TA analysis seems more predictable with Nifty futures (than stock futures) as far as the daily and hourly candles go, but totally unpredictable with the 5-mins candles. Is it a bad idea to carry out TA-based trades on 5-min candles? Is TA more suitable for swing trades rather than intraday trades?

    • Karthik Rangappa says:

      Tough to answer this 🙂 I know extremely good traders who use TA on 5 mins candles. But as a general rule of thumb higher the time frame, better is the quality of signal..and therefore the quality of analysis.

  13. Vidhyalakshmi says:

    I somehow seem to wipe out all the gains made through my swing trades with my intraday trades. I do hope you’ll include a few intraday strategies in your Trading Strategies module.

    • Karthik Rangappa says:

      I will try and do that. However if you are comfortable with swing trades, stick to it. Don’t venture into day trading till you have a good strategy.

  14. madhu nair says:

    Hi karthik, Banknifty as you know can be extremely volatile yet, very profitable for option trades. i normally look for momentum before entering a trade but, is there a way to place targets when the underlying is so volatile?

    • Karthik Rangappa says:

      Yes, infact you can use Volatility information to place stoploss. I will talk about it when I introduce volatility in options module.

  15. madhu.do says:

    Hi sir, i am eagerly waiting for option trading strategies…when it will be available sir…

  16. Vidhyalakshmi says:

    When the market closes for the day, if the bid quantity onscreen for a certain scrip/future is way higher than the ask quantity, is it safe to assume that the price will go up the next day?

    • Karthik Rangappa says:

      What you see is just the last minute supply demand situation. As you may know, the supply demand changes every minute….going by that if market would have been open for another 5 mins, this could have very well changed. So don’t allow this to mislead you.

  17. madhu nair says:

    Karthik, do you see a recognizable candle pattern at the support on which the price trended upward. i can only make out an inverted hammer. can such a pattern be relied upon? my support line seems to hold. the indicators , specially the RSI did concur by a sharp reversal from oversold zone. do let me know your views. thanks.

    • Karthik Rangappa says:

      Honestly, except for a double bottom around the support line (which btw is a good indicator of price reversal) there was no other indication of a reversal, especially from the candlestick perspective. Also, the inverted hammer also called the shooting star makes sense at the top end of the rally and not really at the bottom end.

  18. t rama says:

    Sir, Where can I see/look for BLOCK/BULK deals of the trading day. Thanks

  19. TSS KISHORE says:

    Sir, Which is the best site to Identify the sectors of the stock to which it is belongs and to compare.

  20. NARSIMHA says:

    sir,how should we understand,long either nifty fut,option r, lot of nifty stocks hoe r they corelated ex-if nifty opt sells will it effect nifty fut vice versa xpain

  21. t rama says:

    SIR,
    Awaiting for next chapters, thanks

    • Karthik Rangappa says:

      Finally We are done with Futures! Will be uploading the same by end of this week. Thanks for your patience.

  22. madhu nair says:

    Hi karthik, placing stop losses on volatile underlying is challenging. the swing takes out the stop loss and reverses to attain highs or it continues to fall brutally. wanted to know from you if there are thumb rules to follow. i have read your views on stop losses and agree that there cannot be one single strategy. but, would appreciate your thoughts on placing stop losses while trading volatile scripts or the banknifty.

    • Karthik Rangappa says:

      One of the best ways to place stoploss is in fact by measuring volatility. I have not spoken about this so far in Varsity, but will do so in Module 5, where I intend to talk about Volatility in great detail. I will share step by step guide to place stoploss as well. Request you to stay tuned till then 🙂

  23. TSS KISHORE says:

    Sir, While calculating Future price the no. days remaining are calender days or trading days. Thank You

  24. NARSIMHA says:

    sir,when trading openings they say when stock open&low same buy&open high same go&sell what is this &if its ok till what time&how to cash volatility(nowdays its too much)should we buy on dips r sell on rallies,i mean bull s r bears stategy which suits my style of trading (i think by now u might have idea of my trading)
    advice&will follow

  25. t rama says:

    Dear Sir, While going thro the queries on Z- connect, I come across Call and Put Strikes. Where to look for increase in OI for Call and Put strikes. For example 9000 CE writers added 40 lakh in OI.
    Thanks

  26. Chandan says:

    Can you pls do a module on taxation on shares trading pls… Its a complicated subject but i m sure u will explain it in similar simple terms like u have done till now. Ohhh ya eagerly waiting for the Options module to start. Cheers

    • Karthik Rangappa says:

      There is quite a few helpful articles on Taxation on Z-connect, suggest you check this – http://zerodha.com/z-connect/?s=taxation

      Options is starting from very soon!

      • Ganesh says:

        Karthik,

        Mid month P&L column values are not correct for Calender Spread. Expiry value won’t be the same for both current month and mind-month right? So Net P&L should be less than 35.

        • Karthik Rangappa says:

          Ganesh – As I have mentioned this is just a preview of calender spread. I have used this illustration to keep it simple and drive the point across. Besides, I have also assumed the mid month contract is trading close to its fair value. We will have a module dedicated to “Trading Strategies” where would get into the details of the trade.

          • Ganesh says:

            Do you have any expected time when we get Trading Stragies module gets ready, I think many have been waiting for this to comes up 🙂

          • Karthik Rangappa says:

            I understand, but we have to finish 2 module before that – Option Theory and Options Strategy….so cant really speculate on the timelines 🙂

  27. Narasimha says:

    Sir,what is eod please explain in depth

    • Karthik Rangappa says:

      EOD = End of Day. This is usually used with reference to data…if we are talking about EOD data, then it simply means we are looking at the day’s open, high, low, and close.

  28. Ganesh says:

    The Calendar Spread looks like it gives decent returns. However, as per your example taken, it is likely to give profits only. Do you see any time it might be giving losses as well. If so, can you explain what kind of scenario.
    I’m taking today’s market example:

    NIFTY SPOT AT 8712.05

    NIFTY15MARFUT CLOSED AT 8767.65
    NIFTY15APRFUT CLOSED AT 8832.15
    As this strategy is guaranteed profits irrespective of market direction, I took the positions at

    NIFTY15MARFUT for 8845.48 and NIFTY15APRFUT for 8912.48

    So I went LONG on MARFUT and SHORT on APRFUT.

    Can I assume I don’t get losses at either case. Can’t I?

    I tried to understand this strategy for the last two days, but I’m always end up with confusion and wondering how it goes at expiry. 🙂

    Can you explain this how much returns does it give at expiry with two scenarios what if Market ends above/below 8767.

    • Karthik Rangappa says:

      Ganesh, there is no strategy which is fool proof in markets, including calender spreads. For example instead of the spread (between current & mid month) converging if the spread diverges then clearly there would be a loss. Also, this is something you should note – at any given point there will always be a spread between the 2 contracts (this is called the normal spread)…an opportunity arises only when this normal spread deviates from its normalcy.

      • Ganesh says:

        Karthik, sorry I’m confused. Could you please explain a bit detailed. For calendr spread, the table shows profits irrespective of price’s direction. can you show one which gets losses in CS please. Please my example above.

        • Karthik Rangappa says:

          Ganesh – the loss can occur as a function of 2 things – spread behavior and solvency. Let me refer to the Wipro example to illustrate.

          Assume you have shorted current month @ 700, long mid month @ 665. At expiry the spot goes to 710, this means you lose 10 in current month and make 45 in mid month and net 35 is your profit. This based on the assumption that mid month behaves well wrt to the futures pricing formula. Imagine for some strange reason (maybe a dividend expectation) the mid month contract trades at a discount and remains at 660. In that case upon expiry you will lose 10 in current month and also lose 5 in mid month.

          Solvency is another issue…suppose after you short current month at 700, it goes to 800, and meanwhile the mid month goes marginally higher say to 700 then you are looking at a huge M2M loss, even though at expiry the trade may work in your favor during the time you hold the trade can go against you for a while, if you are not solvent during this period you will be forced to take a loss.

          The illustrations that I have put forward here could be a bit exaggerated, the ides is just illustrate the scenarios in which CS can result in a loss. Also, do note at any given point there will always be a spread between this month and next month contract…the money that you make by this spread will be equal to the costs you incur by initiating this trade. So you may want to consider this when you decide to take the trade.

          • Ganesh says:

            Karthik- What if I trade in NIFTY, do I need to bother about divedend. And let’s say I keep track of divendend calendar in a particular stock and initiate CS ONLY if there is reasonable profits are expected.
            I want to look into historical Futures data for Nifty. Is it available? I verified at NSE but it shows only one month contract but not two at the same time.

            I just want to understand some practical samples for CS.
            Can you suggest If I can get it anywhere.

          • Karthik Rangappa says:

            Yes, if you can build your strategy by taking care of such nitty gritties then obviously you will have a winner. Have you checked this link for historical data? – http://www.nseindia.com/products/content/derivatives/equities/historical_fo.htm

          • sat says:

            sir this is really nice explanation ..one question, when we do selling this month and buying mid month it will be hedged and margin blocked is low compare to 2 lots …so at any situation are there any chances that we lose more than margin blocked?

            and can we take arbitrage trade when this month future trading at discount(buying) and mid month trading at premium(selling)? pls answer

          • Karthik Rangappa says:

            Yes, there are chances of losing more money. When you set up a trade like this, you are essentially playing for a convergence of the spread…but if the spread increases then you will lose money.

  29. NARSIMHA says:

    t u sir,can we trade any option of all f&o or only high beta stocks bcoz of their trading intrest what is iv,how can we know we brought options @fair price so that we can wait,advice

    • Karthik Rangappa says:

      All of this and more will be answered for you in the options module, request you to please wait for a little more time. Thanks 🙂

  30. amit pathak says:

    Hi Karthik,
    Today on one of the blogs I read the following commentary on index: Nifty march future OI added 0.88 lakhs with decrease in cost of carry.Today NF premium has come down from 52 to 37 points suggesting short time bottom is in place and we can see a rally.Karthik what might be responsible for fall in premium and how it helps in projecting future market direction.

    • Karthik Rangappa says:

      A fall in premium as we progress in time is natural…I’ve explained this in the chapter as well. However I’m not sure how a fall in premium can be taken as an indication of a market bottom 🙂

  31. Kalai says:

    Dear sir, currently I am holding SBI apr-15 future contract,is it possible to sell the same in marc-15 future using spread order. Kindly clarify

    • Karthik Rangappa says:

      You can sell the April 2015 contract anytime you wish before the April expiry. You dont need to create a spread for this, unless you specifically want to sell March 2015 and by April 2015 and thereby creating a calender spread.

      • velappan periasamy says:

        Give me an example of calender spread of current month and mid month future of any stock futures.
        Current month future closes on spot price of the underlying. on expiry date. At what price the mid month future closes. on the same expiry date?

  32. velappan periasamy says:

    I bought current month nifty future 26MAR2015 for Rs 8570 and sold mid month future 30APR2015 for Rs 8644.
    what is the profit expected if I square off on 26MAR2015 ?.

  33. narendraraj0 says:

    sir please name any real time strategy builder software

  34. jaydivanji says:

    What’s the need to square off each side of the trade before expiry? Even if the prices converge, the profit will still remain the same, right? Please do clarify with a simple example.

    • Karthik Rangappa says:

      Yes, in fact its ok not to square off and let the contracts expiry. The exchange will ensure it gets settled for you.

      • manoj says:

        Good article . I have a similar scenario
        spot :388
        sell current month future : 390
        buy next month future : 375
        no of day to expiry 1 day
        The gap between bid and ask is 5 points so we cannot square off the next month future before the expiry .
        what will happen on current month expiry if we don’t square off .
        Is there any higher STT cost involved like options if exchange settled the price ?
        Exchange will settle only current month future. How the next month future will be settled .Please explain

        • Karthik Rangappa says:

          No STT implication on futures. Yes, the exchange will settle the current month contract for you upon expiry. However, the next month contract will continue to roll.

  35. Shainky says:

    Hi Karthik
    I want to know why nifty future as well as SBI future is even trading lower than it market price. For SBI it is less than 1% of market price.

    • Karthik Rangappa says:

      Well the futures tends to get into premium or discount every now and then. This is based on pure demand, supply, or the dividend situation on the market.

  36. Lijoo says:

    Dear Karthik,

    Can you send me the formula in excel to calculate the Fair Value of the Future. I have tried it in excel and showing error. My Cust. Id is DL 0071

  37. Lijoo says:

    This is the what I am getting when I do it in excel for Future Fair Value

  38. Lijoo says:

    Dear Karthik,
    I bought BNF june future at 18780 and sold BNF july at 18862. Is it a good strategy due to present situation in the market?. Can I keep it till expiry ?.

    • Karthik Rangappa says:

      Generally this is a good strategy but please do make sure you understand the behavior of the spread between the two contracts.

  39. Lijoo says:

    Futures Price = Spot price * [1+ rf*(x/365) – d]
    Can you do this formula in excel for me please.
    Regards,

  40. Manish says:

    Hands down the most concise and precise information about how futures pricing works. After reading through the module a couple of number of times i’ve learned a lot about Futures. Thanks a lot for your effort in putting up all these. One question which I have for quite a long time is that what are the reason for an Equity to get banned from Futures trading. I mean when i open the Equity futures margin calculator there are always some stocks which are banned for a certain period of time. What causes the bans ? Is it only the market wide position limit or maybe some other reason.

    • Karthik Rangappa says:

      Manish – thank you so much for the kind words.

      Derivatives contract gets banned mainly if the OI reaches close to 90% of marketwide position. This is the reason for the ban 90% of the time. The rest can be attributed to corporate actions.

  41. priya says:

    Hi Karthik,
    In the cash and carry and spreads example you have given, we have considered the market value of current month futures would drastically rise to 700,.
    two doubts
    1) does this usually happen ? how can we know in which stock this is happening out of so many stocks out there, I mean a way to find out?
    2) only if there is wide difference, we go for c&c/ spreads?
    thanks in advance:):) also you mentioned about world of trading strategies, could not find it, can you please point me to that. Eager to read more:):)

    • Karthik Rangappa says:

      700 points movement on Nifty may not be that easy…but I wont be surprised to see a movement of 300-400 points on the Index every month. When I say 300-400 this is what I mean – Nifty today is at 8400…during the month it can fall to 8200 and bounce back to 8300 – thus a movement of about 500 pts. More volatile the stocks, more is the movements per month.

      Higher the spread, higher is the chance for making a decent profit.

      We will take up trading stratergies as a module – but before we get there ppl should be clear with Options and futures…so we will certainly get there…but cant put a time line on it now.

  42. D ANAND says:

    Karthik,, How to calculate the Nifty Futures rollover price ? Could you please throw some light on it.?
    Somewhere I read it as ” Nifty August Future Open Interest Volume is at 1.65 core with liquidation of 0.36 Lakh, with decrease in CoC suggesting short positions got closed today.NF Rollover price came at 8503 and NF and close below it”

    • Karthik Rangappa says:

      Anand – there is only 1 futures pricing formula and its the same for across all expires. There is no separate pricing formula for rollovers.

  43. aehsan4004 says:

    in order to exercise calender spread trades ….. is it a “MUST FOLLOW THUMBRULE” that either 1 of the securities should trade at a “MARKET PRICE” which is highly different from its ACTUAL THEORITICAL “FAIR PRICE” .

    is it possible to exercise SPREAD TRADE when :-

    1) MARKET PRICE OF BOTH SECURITIES ARE IN THE “FAIR PRICE” ZONE ?

    2) MARKET PRICE OF BOTH SECURITIES ARE HIGHER/LOWER TO THEIR “FAIR PRICE” ?

    • Karthik Rangappa says:

      1) If contracts are at fair price, arbitrage opportunities dont show up.

      2) Possible in this case.

      • aehsan4004 says:

        thank you sir .

        1) how to use the spread trading with reference to only currency & commodity futures ?

        2) i still did not understand why the need to square off before market closes ? will we not get the spread-benefit when the positions are auto-squared-off ?

        3) is there any way to determine convergence point when we can expect both scripts to be at the same LTP ?

        4) is this phenomenon common in currency / commodity derivatives ?

        • Karthik Rangappa says:

          1) Spread trading with Currency and commodities is the same. Same technique, different instruments

          2) Can you please give a reference to your 2nd query?

          3) On expiry both spot and Futures converge

          4) Yup, opportunities do exist in commodities and currency segment.

  44. aehsan4004 says:

    hello sir,

    reference to second query :-
    PRACTICAL APPLICATION 10.2 :-

    wipro spot = 653 , future fair price = 658 , future actual market price = 700 …… future is expensive…… we sell expensive future and buy cheap spot .

    my question :-

    1) when we want to do it for example december fut & november fut of USDINR ? what should be the strategy ?

    2) since prices keep on changing shall we calculate the fair price using open-price / close-price / LTP ?

    3) is there any kind of ready fair price calculator , indicator to say which future is going expensive or cheap compared to fair price ?

    thank you

    • Karthik Rangappa says:

      1) Depends on the fair value of the instrument

      2) No fair value should be calculate based on Futures pricing formula

      3) Not that I know of, its better to build a small excel yourself rather than depend on other resources.

      • Bhujith says:

        Hi Karthik,

        Thanks for explaining the concepts in detail.I have a query.”Sell futures and buy spot”. This means whether we need to sell 1 lot in futures (maybe 250 stocks) and buy same 250 stocks in spot (cash) market?. Dont I have to spend much money in spot market as I dont have leverage and I have to pay full cash,whereas in futures I have the luxury of leveraging.It might be a silly question,but I am novice in futures.

        Also,could you please make video tutorials,so that concepts may be more clearly understood.

        • Karthik Rangappa says:

          Yes, its best done in the same proportion and yes the spot purchase requires a huge cash outlay, but there is nothing much you can do about it when it come to opportunities like these.

          Sorry, we really don’t have the bandwidth for video tutorials.

  45. aehsan4004 says:

    sir, i know the futures pricing formula .

    but value of SPOT price is what exactly ….. SPOT OPEN PRICE , SPOT CLOSE PRICE , SPOT LTP ?

  46. Vivek says:

    Hi Karthik
    What if the futures of a stock is trading at considerably lower price than the Spot price. Shall we buy it as at the expiry both the prices shall converge? The only demotivating factor being what if the spot price goes down to meet the futures price which can go down by the expiry.

  47. keshav says:

    Sir. Where to find Calender spread easily.. Pls suggest any mobile app or website..
    Thanks

  48. Anand says:

    In calender spreads selling at higher price of the current month future and buying mid month future at the lower price comparitively is always profitable ..Is vise versa true??????

  49. rakesh singh gusain says:

    hello kartik…
    nice module easy to understand…u have explained so easily. i m new to share mkt.. i have some doubt regarding future pricing of infosys that how u calculate the no.of days for mid month(34 days) and for far month(80 days)…

  50. sarath says:

    in calendar spread section buy current month and sell mid month , at the end of the expiry we make profit , here i have a doubt mid month price and current month price will same at the end of the current month expiry, please explain

    • Karthik Rangappa says:

      Not necessary that they have to be the same. The price of current month futures and spot will be the same, whereas the mid month futures will not be the same as current month futures.

  51. Karan Samal says:

    Nifty spot is trading at 7615. When I calculated the fair value for March series, it comes around 7736. However, it is currently trading at 7691. There is a diff of more than 40 points. is there a trade?

    • Karthik Rangappa says:

      Possible. However do note that this is a ‘routine’ premium discount value. Not sure if its worth taking the trade.

  52. Karan Samal says:

    To calculate Fair Value of Nifty Future using formula = Spot price * [1+ rf*(x/365) – d]. What wud b value of d in this case?

    • Karthik Rangappa says:

      Dividend yield of Nifty, roughly about 1.49 as of y’day.

      Check this – http://www.nseindia.com/products/content/equities/indices/historical_pepb.htm

      • Karan Samal says:

        Spot price * [1+ rf*(x/365) – d]. According to this formula, if I try to calculate fair value of Nifty Jan Future 7601 * [1+7.2274%*(80/365)] – 1.52 The result is 7716. As LTP is 7764, the difference is 48 points. What type of trade can be advisable? Should I Buy March Series and Sell Jan Series? Or Should I get into the conventional Calendar Spread Strategy by Buying Jan Series and Selling March Series?

        • Karthik Rangappa says:

          This spread is between fair price and market price. One of the ways to capture this is by being long and short on the same instrument…you could sell futures and buy the Nifty basket (maybe Niftybees).

  53. SUBHANKAR says:

    How to put calender spread order in pi?

    • Karthik Rangappa says:

      You can do it manually or utilize a the spread order window. Suggest you shoot an email to support at zerodha dot com for this. Thanks.

  54. SUBHANKAR says:

    1. How to put calender spread order in pi?
    2. In the future price formula ‘x’ is only no. of days or trading days ? Which is correct?
    3. What is the value of ‘d’ in the future price formula for usd/inr currency pair?

  55. SUBHANKAR says:

    What is the value of ‘d’ in the future price formula for usd/inr currency pair?

  56. Ali says:

    Hi Karthik, I have a question about Calendar Spreads. Can I apply Calendar Spreads Strategy as follows,

    CEAT Spot LTP @989.30
    CEAT Future March 16 @994.85
    CEAT Future April 16 @982.00
    I see that the current month contract is expensive in compared to mid month contract. There is a 12 points difference between both the contracts. Can I get a benefit from it?

    • Karthik Rangappa says:

      You can sell current month and buy future month contract with a hope they will converge at some point before March expiry.

  57. Ali says:

    Hi Karthik, thank you for your reply. I tried to apply this strategy on ceat but the future already converged and there was no difference between current and mid month contract. Both contracts price were same so I missed this opportunity. Hope to see this type of opportunity again. God bless you.

  58. keshav says:

    Does the nifty premium or discount indicates the direction of the market

  59. Rohin says:

    hey there hlp me in sorting this out
    in above eg, of Wipro the futures are trading higher than cmp of spot eg 700 compared to spot cash cmp of 653 so it was possible to short futures using NRML by holding overnight what if its the other way round ie, future price being lower to spot price i can take long position in nifty futures what about shorting nifty till expiry.. is it possible ?? or i would end up with short delivery ?

    • Karthik Rangappa says:

      There is no concept of short delivery in Futures market, so you can trade futures irrespective of where the futures is trading wrt the spot.

      • Rohin says:

        i guess i was misinterpreted. i’ll clear it …. in example of wipro given above,there is this statement
        “The thumb rule in any sort of ‘spread trade’ is to buy the cheaper asset and sell the expensive one. Hence going by this, we can sell Wipro Futures on one hand and simultaneously buy Wipro in the spot market. ”
        it says buying of wipro from the spot market @ 653 and shorting wipro futures @ 700 cuz obviously wipro futures being expensive than fair value of its spot price
        but conversely
        if futures are let’s say @ 645 and spot @ 653 and there are 7 days left for expiry i can go long in futures till expiry, but i cannot short in Nifty spot for more than a day to get a fixed return

        • Karthik Rangappa says:

          Rohin – unfortunately you cannot short in spot and carry forward the short position overnight. In such cases, you will simply have to let go.

  60. Rohin says:

    it would be like Reverse Cash-and-Carry-Arbitrage

  61. Georgy Mathew says:

    Spot price * [1+ rf*(x/365) – d], d assumed for wipro and infosys stock is zero because they haven’t announced the dividend. this means these stocks will be trading at premium until latest dividends are announced?

  62. Charles says:

    Sir, how is it possible that a next month future trades at discount to near month future.
    can it sustain till expiry of near month or will the spread eventually come in positive
    thank you

    • Karthik Rangappa says:

      Technically it should trade at a premium, but the short term demand supply can dictate the theoretical pricing formula. Short term can extent to the entire expiry.

  63. NARESH says:

    what is the relation between (a) OI (b) Change in OI and (c) premium and/or discount of futures. If there a link where this can be observed. How to interpret it at the same time . Thanks

    • Karthik Rangappa says:

      Naresh – you should check the table I’ve put up in the OI chapter. This will help you get the answer I guess.

      • Naresh says:

        is it as simple as that – if open interest increases and premium increases, then it could be bullish ? can you assume that if the stock price increases but futures OI decreases, then this is short covering ???

  64. S S Dahale says:

    What is necessity ( more advantageous) of making Arbitrage in Futures trading , when 1 is sure that , both the equity and its futures have surged / declined to such an extent , that is , in coming days ( … maybe tomorrow ) there will be a correction,
    like what happened, 2 days before on 2 nd May 2016 , STFCL spot / futures both May (current month) and June ( *** far month)has gained momentum of +12 % to +16 %,
    I am the fair opinion ( many may differ)that , if a scrip behave s either +/- 10 % , one should take a position against the market-movement , once it crosses that 10 % by more i.e + /- 11 %.

    so instead of using one’s funds for taking arbitrage position , like as STFCL being closed on 29 th April 2016at 980, and has made rise to 1100 at 13.15hrs on 2 nd may 2016, instead of buying equity 9either intraday- or otherwise STFCL @1100 and selling may / *** june futures @1120
    .

    when one / you are sure , within short period it is going to correct the price,
    so my view one should short 2 position of either may /*** June features of – STFCL @1100 and @1125.

    any views specific to counter my view are welcome…… [email protected]

    • Karthik Rangappa says:

      The position that you suggest taking sounds more like a directional bet rather than an arbitrage, unless I’m missing something here.

  65. shankar says:

    Hi,

    I see ITC JUN fut is trading at a discount to its spot price currently and read news that its gonna announce dividend during q4 results. So this is according to what is written above.

    My doubt here is that, will the futures price converge to spot here also at JUN expiry. Or will it be spot = futures + dividend?

    Thanks,
    Shankar MR

    • Karthik Rangappa says:

      Usually the futures price gets adjusted to spot after the dividends are paid. However this also depends on the demand and supply at that particular moment.

  66. s sinha says:

    How can one roll over future BUY position to the next month future with minimum loss on premium

    • Karthik Rangappa says:

      The only option for now is to let the current month contract go into expiry while at the same time buy the next month’s contract.

  67. Sonali Mitra says:

    How do I actually trade an arbitrage when the Future Price is less than the Spot Price? How is it possible to sell scripts on the Spot market and hold till expiry when I do not possess shares in the first place? Is there any system that allows me to sell in the spot market and hold till expiry of the future? I understand the mechanism when Future price is more than the Spot though but the mechanism of the reverse has me stumped. Please help. thanks

  68. Krishna.K says:

    Hi sir,
    I have a small doubt regarding the futures trading at discount.you said that SHORT TERM SUPPLY AND DEMAND IMBALANCES IN FUTURES CONTRACT, causes the futures trading discount. can you please give me some clarity on this sir.
    Thanks&Regards.

    • Karthik Rangappa says:

      If for some reason, the futures are sold (maybe long unwinding) and goes below the spot, then it is said that the futures is trading at a discount.

      • Krishna.K says:

        Thank you very much for clearing the doubt sir.
        one more doubt sir. i saw in a news paper that “bets in f&o segment decreased so the spot price is decreasing” not exactly written like this . can you please explain the reason behind this sir.

  69. shanti says:

    in calendar spread (what if the mid month contract doesnt stick to the fair value) , for example if the market value of mid month futures is also high ,then how it will turn out .
    thanks&regards

    • Karthik Rangappa says:

      There is certainly a possibility of this, in fact there is no guarantee that the spreads should converge by expiries. One needs to diligently evaluate the situation carefully.

  70. Harshit says:

    Sir after reading this module i started checking the prices of different stocks having different maturities and i encountered that :
    For the july month expiry GMR INFRA is trading at 13.55 For the august month expiry GMR INFRA is trading at 13.70 and for the September month expiry GMR infra is trading at 14.So my question is that is it possible for me to sell GMR infra at Rs 14 having a expiry on september and instantly buying a JULY month contract at Rs 13.55 and make profit of 0.45 per share instantly??

    • Karthik Rangappa says:

      Technically yes, and you will profit as long as you establish that either July/Sept contract is not priced right.

  71. Harshit says:

    Sir after reading this module i started checking the prices of different stocks having different maturities and i encountered that :
    For the july month expiry GMR INFRA is trading at 13.55 For the august month expiry GMR INFRA is trading at 13.70 and for the September month expiry GMR infra is trading at 14.So my question is that is it possible for me to sell GMR infra at Rs 14 having a expiry on september and instantly squaring off or unwind my position by buying a JULY month contract immediately at Rs 13.55 and make profit of Rs 0.45 per share instantly??

  72. Harshit says:

    Sir if this is the case than every body will first sell far month future contract and instanly square off his position by buying a near month future contract and make instant profits.As in most of the cases far month future contract is priced higher than the near month future contract..

    • Karthik Rangappa says:

      The trick is to make sure you know the pricing right. Agreed, Futures always trade a premium (in most cases), but that alone does not justify for a trade. You need to establish if there is a mismatch between the theoretical and market price, if there is a mismatch, only then you have an opportunity to profit.

  73. Harshit says:

    Sir,but in most the cases there is always a mismatch in pricing because the far month future price in most of the cases is higher than near month future contract so all you need to do is just sell far month future contract and immediately square off your position buy buying a near month future contract and earn instant profit.Is that right sir???

    • Karthik Rangappa says:

      Mismatch exist, but you as a trader should be able to figure out to what extent the mismatch is fine. Anything beyond the acceptable level is when true opportunities comes about.

  74. sreerag says:

    Hi, sir. if iam looking at a 5 min. chart of a an equity future, is it really the buyers and sellers of future contracts driving the market, or is it the buyers and sellers of the underlying equity driving the price of the futures in the chart. i found the charts of futures and equities moving in a similar pattern as if they are moving in sync, if it is so the buyers and sellers of future contracts have no role in driving the price of fututres?

  75. Shailesh says:

    Under 10.3]calendar spread – you wrote in this chapter that “the spread is the difference between the two future contracts i.e 700 – 665 = 35 points”. Suppose lot size is 1 share, i am long on current month contract and it is trading at 100 rs and i am short on mid month contract and it is trading at 105 rs, spot price is 99 rs, this means that profit must be locked at 5rs i.e the difference between two future contract, if spot price drops to 95 current month contract value also decreases to 96 and i make a loss of Rs 4 when i sell the current month contract and similarly since the spot price has decreased mid month contract [on which i am short]price will also decrease to Rs 101, so when i buy the mid month contract the profit will be Rs 4, thus on current month contract i am loosing Rs4 and on mid month contract i am earning Rs 4 thus no profit no loss, then how can you prove the statement “the spread is the difference between the two future contracts”, as per your saying in this case profit must be Rs 5 but there is no profit no loss.

  76. Lijoo says:

    Sir,
    For spread using nifty or stocks which is more beneficial. Also we have to wait till expiry or can we square off the spread earlier. Also in Pi, if I add nifty spread for August and September, then it shows a number like 45 (it’s changing during market hours). What is it ?.

    • Karthik Rangappa says:

      Which over contract has higher liquidity is the better one! Given this, I’d stick to Nifty futures. Spreads are not available on Pi, I’d suggest you use NEST.

  77. Shashank Pujar says:

    Sir,
    1) If I forget to square off my long position on the expiry day, whether the exchange pays me considering the closing price of futures (closing price* lot size) or the spot market price of the underlying?
    2) Is it guaranteed that both the futures price and spot market price would come down to same exact value on the expiry day?
    3) If I want to apply CC arbitrage then i need to maintain a huge amount of ((spot price of asset*lot size of futures)+ full margin for 1lot of futures). So that I can hold both the positions till expiry. Correct me if am wrong.
    4) Lets say I have two lakhs in my account and I applied calender spread on Nifty current and mid month futures. Now because of hedging only Rs 20000 (just for example) is blocked in my account as there is margin benefit. So can I use the remaining amount (ie Rs 180000) in my account for trading until I close the calendar spread positions at expiry?

    • Karthik Rangappa says:

      1) On expiry day both the futures and spot price converges to a single price.
      2) Yes, this is how the Futures theory works, they converge to a single price
      3) Yes, it requires you to have enough funds
      4) Yes, you can.

      • Bhujith says:

        Today 25/8/2016, is the expiry day for August 2016 series.When I checked spot price of AB Nuvo, its 1280.80 whereas the futures price is 1279.75.There is a difference of Rs.1.05. As per theory, both prices should converge on expiry day.However,what does this minute difference indicate? Is there any oppurtunity available if such difference exists??

        • Karthik Rangappa says:

          You would have probably seen the last traded price, I’d suggest you look at the settlement price which is updated by 3:40 PM.

  78. Mrs. Shetty says:

    I feel so happy to know that now I too know the many jargons of Trading which I wud never have learnt in any classes. Thanking hundred/thousand times will be too less I feel. God bless u and all your team for the wonderful work.
    I wanted to get clarity on foll points, I wud like to know:-
    1. Do we have to work out the fair value.. or just the market price of resp contract as it is.. gives us the CS.
    2. During the normal course, nifty fut spread price of near, mid and far ..does not call for taking adv of CS trade. V can as well take long or short trade on nifty fut ..current fut using TA or our directional view. Is it right to say then that we need not scout for such differential CS .. or is it that we can profit more in such trades in futures rather than going for stocks trading under MIS.
    3. can CS trade be squared off on the same day as MIS or… is it wise to carry for few days .. or till nearing expiry.. to get the full potential of the trade. If the target of 10/15 points is achieved , can v square off the trade.

    • Karthik Rangappa says:

      Thank you so much for all the kind words. Words like these motivate us to be better and give much more than 100% 🙂

      1) If you intend to do a calendar spread, then estimating the fair value is required. This gives you a sense of how the market is pricing the futures

      2) Certainly, the end game is to be be profitable either which ways. However, you need to sure there is some consistency and you can repeat the process of identifying a profitable situation again and again

      3) You can choose to square of anytime you wish. But from my experience CS pans out well over few days.

  79. abhishek kumar sah says:

    in the table given to explain the calendar spread— so it means that the price of the 1st month futures contract at the time of expiry is same as the spot price(approx), also the 2nd month futures is trading at the same price at that time???

    • Karthik Rangappa says:

      Its kind of tricky…you identify the spread when it occurs (between the 2 future contracts) and close it before the 1st month expiry when you deem it suitable. At the end of the expiry, both spot and futures (of near month) will converge to same value.

  80. abhishek kumar sah says:

    can’t it happen that instead of futures price moving down, the spot move up and catch the futures price on expiry? though according to formula this does not seem possible as the futures price will go on decreasing due to reducing expiry days? but in one of your comment you have said that when the futures price is discounted sometimes it might happen that the spot price may fall instead of futures catching up the spot.

  81. Satish Mohite says:

    As you say that at the expiry both spot and future price converge. Let say today (08 Sep’16) spot price is @100 and Current future(29Sep’16) is @150, so is that mean as the time approach to expiry the spot price move up and future move down? (Because this is only possible in case of convergence). Is the below figure valid?

    • Karthik Rangappa says:

      Many possibilities –

      Spot stays where it is and futures catches up
      Futures stays where it is and spot catches up
      Spot declines, Futures increases
      Futures declines, spot increases.

  82. Satish Mohite says:

    In the calander spread example table row 1: why have you subtracted 660-665? It is necessary that mid month future value will also be equal to expiry value of current month value

    • Karthik Rangappa says:

      Not necessary, I have just assumed the prices here. At expiry the spot and current month futures converge, not the other month contracts. When you initiate a CS, it is important to track the spread and close it when you see a satisfactory convergence.

  83. Chithra Padmanabhan says:

    You mentioned that in calender spread the margins are greatly reduced as this is a hedged position. for ex. In case of one lot of Hindalco futures sell in sept and buy in October , what is the margin required?
    What are the risks in such calender spread strategy?
    Does your trading software identify such opportunities ?

  84. Vidyanand says:

    Hi Karthik, very well explained article, however if you do cash vs futures as explained all the profit will be lost in brokerage and transaction cost..The idea has merit If the basis is high

  85. Harish Patidar says:

    Dear Sir,
    Thank you very much for such a nice explanation.
    I have only one doubt about calculating future price. In future we do not pay entire price we pay only margin money. So Ideally the future price should be spot : (Price – Margin money)*(1+Rf(x/365))-d. As we can deploy that difference of spot and margin money to for risk free rate and earn interest on it. As per your formula we are considering interest on entire spot price whereas we atleast have to pay margin money.

  86. DANISH AHMAD ANSARI says:

    Current level of NSE Nifty is 4500. A 3-month Nifty futures contract is available at 4600. Risk-free rate is 10% and a yield of 8% per annum is expected on Nifty. Find out the fair value of the Nifty contract. What is the arbitrage opportunity? Find out the gain or loss to an investor if the Nifty value on the settlement date is 4200.
    Could any one please provide me its solution.

  87. Ananth S H says:

    Dear Karthik

    How to apply cash and carry arbitrage strategy for indices (e.g. Nifty / Bank nifty etc.) since we don’t have any instrument in SPOT market to buy index…. Do we need to buy Index based ETF in that case ?

  88. Aishwarya says:

    Hello Sir,
    In calender spread, if the actual market value of current month futures is trading way above the fair value, why should one long the mid month futures along with the short of the current month futures? Anyway by the current month expiry, we tend to get the guaranteed profits. Pls clarify. Thanks in advance.

    • Karthik Rangappa says:

      The thumb rule any arbitrage trade is to short the expensive contract and go long on the cheaper one. Since current month is trading higher than ita fair value, its perceived expensive.

  89. Futures Price = Spot price * [1+ rf*(x/365) – d]
    not able to calculate the future price. Could you please send me an excel file.
    would be a great help.

  90. rohin says:

    hie, kartik.. just a thought stuck me, instead of buying eq shares of a company from cash market can’t we buy it in derivatives market (exclude : quantity parity,dividends,rights etc ) and just keep on rolling it over near the expiry date.. at probably much lower cash compared to taking delivery

    • Karthik Rangappa says:

      Yes, you can do that. But remember you need enough money to fulfill the daily mark to market obligation. In case the stock falls 10-15% intraday, then the obligation can be quite devastating. This can be quite painful, especially if one does not have a deep pocket.

  91. Uma Bharathi says:

    Hi sir. I’m not able to understand the calculation done for future price. When we computer the formula. I’m getting different answer. Pls help me to understand this concept sir

  92. Mike says:

    Hi Few questions reg Calendar spreads ( Futures to Futures)
    1) How to chart them
    2) How to find if there is misprising ( any screening software ? add on?
    3) How to calculate margin offset easily and automatically?
    4) Do they really work after paying the brokerage and fees?

  93. Paras Lodaya says:

    Sir,I wanted to know,if there is suddenly a strong fundamental news about the stock,will the Calendar Spread technique work?

  94. Paras Lodaya says:

    Sir,
    In the future pricing formula,Is X the number of trading days or calendar days?

  95. Anil says:

    I have query which I need to clear, I analyse stock chart of cash market and get entry, exit price & SL, but how should I get the stock futures entry, exit and SL of the same stock to trade, as there is chart only for cash market to analyse. and spot and future price always different which sometime hit my SL and skip entry order. please help me. if is there any formula in excel to calculate the price difference compare to spot price let me know.

  96. MSP says:

    Hi Karthik,

    Stock future is trading at Rs.9 discount to spot. Volumes are heavy volumes both in spot and future. what should be done.

    Regards,
    MSP

  97. Mohit says:

    Hello

    I have 3 doubts
    1)fair value=(1+rf*(x/365)-d)
    how to calculate dividends if i want to trade nifty50 futures
    Do i need to check whether the top 50 companies are going to announce their dividends dates in near and mid month? or is it something else
    2) Also in many comments above or i see that may wrote to square off the contracts before expiry. But we cannot square off the the futures contract until the expiry is reached unless in options. right? We have to wait till the expiry
    3)Also suppose today i buy march futures and sell april futures the spread is 30. so on march expiry date the first contract will expire and the other will still be going on…so let it be a loss or profit…the actual profit/loss will only be calculated on april expiry date. right? which depnds on the spot price on april expiry day.

  98. Madhura Unale says:

    Dear kartik,

    What my understanding is – ‘opening price of an equity is calculated based on pre-market orders in pre-market session’. But for futures, there is no pre-market session. Please help me to understand how opening price of a future is decided?

  99. Dhruv Anand says:

    Hi Karthik,

    When does the arbitrage opportunity for a calendar spread arrive for near and next month of the same future if there is a significant difference in the Cost of Carry between the two future prices?

    Thanks,
    Dhruv

    • Karthik Rangappa says:

      Dhruv, Cant really take a call on when the opportunity arises. It really depends on the market and liquidity situation.

  100. abhay says:

    hello sir,here in this article you are talking about the differences between prices ,sir now applying this concept today I found the ceat ltd the mid month contract traded at 1476.20 and the for month contract is traded at 1550.70 but the my problem is that when I look at spot price the diffrence is in negative no. while in above example you are talking about the diffrence is in positive no. i.e, spot price is low and future price is high so in this sitiuation when the condition is just opposite so how can we take the position…..

    • Karthik Rangappa says:

      You should be comparing the two future contracts. Anyway, when you have an opposite situation, you should take the reverse positions.

  101. V P Shenoy says:

    I have seen that generally Futures price moves in the same direction as the underlying Spot price, even though not by the same amount. I have been observing the price of TCS (Tata Consultancy Services Limited). When the spot price has been going up, Futures price went up too and vice versa.

    However, ONLY TODAY, I found that the spot price of TCS is DOWN -7.10 while the Futures price is UP +14.10. What is the reason that Futures price went UP while the spot price went DOWN only today?

    • Karthik Rangappa says:

      Yes generally – Spot price dictates the futures price.

      Maybe futures is discounting a dividend?

      • V P Shenoy says:

        Can you give an example with formula about how to calculate the Futures price when dividend is declared? The examples given above do not take into account dividend. Thanks.

        • Karthik Rangappa says:

          Yes, will try and do that soon. However, it is quite straight forward – you just need to subtract the dividend (d) from the return (r) in the formula.

  102. Ayush says:

    Que 1). In calendar spread;
    case1- what if there is few points of differnce(assume 6 pt) between fair value and market value in current month contract.
    Case2- there is a gap of around 40 points between fair value and market value in mid month contract.
    ….what in this case
    Will i have to buy the 1st month contract and sell the 2nd month contract.

    Que 2) what in case of current month contract and end month contract, will this technique helpfull there?

    • Karthik Rangappa says:

      1) No point breaking your head if the spread is low
      2) Always treat in % terms, not absolute points wise
      3) Its the same

  103. Ayush says:

    Que3) sir, what do you mean by rf(risk factor rate), why you have taken it from the rbi current rate(8.3528%)?

  104. pushkar says:

    why is there a difference in the prices of infy on 20 Feb 2015 on nse website https://ibb.co/g78AJ5 and the pi software https://ibb.co/ekKvkk ?

    • Karthik Rangappa says:

      It is possible for the futures to trade lesser than spot. Guess, imbalance in demand supply is one of the reasons.

  105. P.V.SATHI says:

    I am a zerodha member (beginner). I like the above lesson 10. How am I get other lessons? Thanks.

  106. Jitendra Kumar says:

    I sir .I m a beginner .today ultra tech chem spot price decress 70 points .all strick of put call get increase except one stick price .its decress arroud 30 pts .sir may I know the ans why its happed .

    • Karthik Rangappa says:

      I’m guessing you are taking about a call option. Call option premiums decline in value when spot price falls.

  107. Ashish says:

    Regarding fair value calculation, I have a doubt.
    Following numbers I am putting in –

    Nifty 50 Spot price: 9,683.35
    rf : 6.3149
    d : 1.18
    Todays Date: 05-June-2017

    Future price of near month = 9683.35*(1+0.063149*(24/360))-1.18 = 9722.94 (but current month future is trading at 9,690.00)
    Future price of mid month = 9683.35*(1+0.063149*(52/360))-1.18 = 9770.50 (but current month future is trading at 9,707.15)
    Future price of far month = 9683.35*(1+0.063149*(87/360))-1.18 = 9829.95 (but current month future is trading at 9,730.70)

    I am not able to figure out what the wrong I am doing.
    Can you please help?

    • Karthik Rangappa says:

      You need subtract the dividend yield from the risk free rate.

      • Ashish says:

        Even when I am subtracting dividend from risk free rate, I am not getting the correct fair.
        Can you please calculate near month future fair value of nifty?

        Nifty 50 Spot price: 9,683.35
        rf : 6.3149
        d : 1.18
        Todays Date: 06-June-2017
        Days to expiry: 23

        Thanks

      • Ranjan Malav says:

        Shouldn’t dividend yield be 0 since nifty is an index and doesn’t give dividends or it is non zero because the included stocks in nifty might have to pay dividends? Also from where can I get this value?
        One more question, when you say you are using RBI 91 Tbill rate as a proxy for risk free rate, what is the actual value and where to find it?

  108. KUSHAN JOSHI says:

    Hey,
    In the calendar spread section, you are comparing the price of the mid month contract with the expiry value of the current month contract. Won’t the mid month contract be trading at a different price than the expiry value of the current month contract at the time of expiry of current month contract?

    Thanks

    • Karthik Rangappa says:

      Yes, hence we cannot expect a perfect convergence between the two contracts. We need to track the spread continuously and close it at a point where the convergence between the two spreads are satisfactory.

      • KUSHAN JOSHI says:

        But for the calculation of the mid month P&L, shouldn’t we subtract ‘665’ ( buy price of mid month contract ) from the price at which the mid month contract is trading at the time of expiry of current month contract?
        Why are we subtracting it from the expiry value of the current month contract?

        • Karthik Rangappa says:

          665 happens to be the buy price, so we take that value.

          • KUSHAN JOSHI says:

            No, I’m talking about the expiry value. Shouldn’t the calculation for mid month P/L be (price of mid month contract at the time of expiry of current month contract) – (buy price of mid month contract)

          • Karthik Rangappa says:

            True, it is supposed to be that way.Not sure if I’m missing something here…the assumption here is that the futures will converge to its fair value.

  109. Sameer says:

    Hi Karthik,
    Thanks Karthik for such detailed explaination.
    I just want know, up to what extent the future price depends on its demand/supply? Is there any limit on the difference between actual future price and the fair price caused due to high change in demand/supply?

  110. Aviral says:

    How does futures reflect any corporate announcements in its prices. For example, suppose a company undergoes a demerger which results in the underlying stock price being halved overnight? What happens to the futures in this case?

    • Karthik Rangappa says:

      The futures price gets adjusted as per the corporate action. This is usually informed by the exchanges to all the market participants well in advice via circulars.

  111. maneesh.ms says:

    Karthik,

    In this page you have quoted.
    “From the above example, clearly the current month futures contract is trading way above its expected theoretical fair value.”

    I am new to futures. Could you please explain how this is possible in futures market. How could the current/mid month futures trade above the value calculated by pricing formula. All I can imagine is that future price is derived from spot and the players in the futures market based on their views decide to either buy or sell looking at the latest price per formula. Is there a concept of last traded price in futures? Please explain.

    • Karthik Rangappa says:

      Well, on one side you have the theoretical value. But on the other, markets have their own demand supply dynamics. This leads to price disruptions, which basically further leads to the price difference between futures and spot.

      • maneesh.ms says:

        I think I got your point. In a scenario like below,
        Wipro Spot is trading at = 653
        Current month futures fair value (30 days to expiry) = 658
        If I am bearish on Wipro Spot/Wipro futures , I can sell at a target price less than 658, if there are no buyers at 658.I think this is what brings the difference between fair value and actual value of futures. Please correct me if I am wrong.

        I must say one thing. Excellent articles. I have never tried futures trading. Didn’t even understand it. Now I have some idea. Thankful to you Karthik.

        • Karthik Rangappa says:

          True Mahesh, your understanding seems to be headed the right way.

          Happy you liked the content, good luck and happy learning!

  112. Parth says:

    Hi Karthik, I have a question about Calendar Spreads. Can I apply Calendar Spreads Strategy as follows,

    TATA STEEL Spot LTP @520.60
    TATA STEEL Future June @521.85
    TATA STEEL Future July @ 514.70

    NIITECH Spot LTP @577.30
    NIITECH Future June @578.40
    NIITECH Future July @ 576

    I see that the current month contract is expensive in compared to mid month contract. There is some points difference between both the contracts. Can I get a benefit from it? ( If i had done this today ! the expiry for the June month is Tomorrow)

    • Karthik Rangappa says:

      You can based on the assumption that the difference between the two will shrink and you’d profit from it. However, I’d be a little hesitant to carry this out, considering tomorrow is the expiry for June futures.

  113. krupakar says:

    Hi Karthik, Is there any tool for identifying such scenarios.

  114. Akshay Pandey says:

    Hello Karthik,
    Earlier we learnt that futures price mimics the spot price but in ‘Cash & Carry Arbitrage’ we see that both of them are moving in different directions, this is making me confused. Pls tell me Am I thinking wrong? and help me to clarify this doubt.

    • Karthik Rangappa says:

      In cash and carry, we are dealing with the spot price of the same stock across two different exchanges. You essentially buy on one exchange and sell the same qty in the other.

  115. Abhilash says:

    Hi Karthik, It’s regarding Cash and Carry Arbitrage Trading …
    Cash and Carry trades executes when BUY @ Cash market and SELL @ Futures market till Expiry …
    Say, the Stock had a nice Rally , Our Cash entry will be in Profit, Our Futures entry goes to M2M Process …

    My questions, We have used entire fund for taking these positions … what if the Margin amount came less than Exposure Margin
    and then came down to SPAN margin ( Span : 7 and Exposure : 5 )… On this occasion, do we need to pump money or will it be balanced with Cash market Positions , because in Cash market we are in excellent Profit ?

    Thanks

  116. VIJAY ARORA says:

    HELLO KARTHIK SIR,
    I HAVE GONE THROUGH RICH-KNOWLEDGE IMPARTING MODULES OF ZERODHA…I AM THANKFUL TO YOU FOR UPLOADING SUCH BEAUTIFULLY NARRATED MATERIALS FOR NOVICE LIKE US…I FURTHER REQUEST TO YOU UPLOAD MODULE ON ‘ROLLOVER’ ITS IMPORTANCE AND ‘ROLLOVER COST’ SO THAT WE GET BENEFITED.
    PLEASE SIR…THANK YOU IN ADVANCE AS EXPECTING YOU WOULD LOVE TO DO IT…

    • Karthik Rangappa says:

      Vijay, rollover is not really a big thing. It is just about carrying forward your position to the next series. In my experience, I’ve not really found any valuable information coming out of ‘rollover data’.

  117. Amit Vij says:

    Hi Karthik Sir..
    Sir in cash and carry arbitrage why is there a need to find whether future price is at premium or dicount. If we are taking opposite positions in both cash and future market then we will always have profit irrespective of whether price at expiry increases or decreases. Please explain this sir..
    Thanks

    • Karthik Rangappa says:

      You need the price to build a perspective, Amit. You cannot be profitable as the price may (or may not) be sustainable.

      • Amit Vij says:

        Thank you Sir for your reply. But still I am having the doubt. It’s not fully clear.

        • Karthik Rangappa says:

          Which part is not clear?

          • Amit Vij says:

            I maen to say that in your example above you took three different prices at expiry to show that the profit would always be same. Then I just can’t understand why is there a need to find the fair price. If I take a long position in Cash market and a short position in Future then I will earn the spread between them irrespective of what the price is and if I take opposite positions in both markets then also I will earn the spread. So why fair future price is necessary and why one would need a perspective?
            Thanks

          • Karthik Rangappa says:

            Well, the whole thing is valid because we were able to peg the market price with the theoretical price to get a sense of how cheap or expensive the futures really is.

  118. Aditya says:

    In the main text futures formula is Futures Price = Spot price * [1+ rf*(x/365) – d] whereas in the key takeaway section the formula is Futures Price = Spot price *(1+Rf (x/365)) – d , sir please clarify the same

  119. Pradeep says:

    Hi,
    I have applied the same formula for Apollo tyres dated:8/9/2017–Spot was at 252.4 & Sept 28th Futures was at 252.65at day close .When I calculated I got the futures price as 253.3 …Can you please explain for Sept futures ..

    • Karthik Rangappa says:

      It seems ok to me PRadeep, why do you think its wrong?

      • PRADEEP says:

        Sir,
        There was a difference of 0.65 paise in the market close price of Apollo Tyre futures on 8/9/2017 and the price which was calculated manually .Was wondering where this difference is..Close of Futures price on 8/9/2017 was 252.65 and when calculated it was 253.3.How to trade in such an instance.

        • Karthik Rangappa says:

          Such minor deviations from the fair price is normal, Pradeep. It may not be worth trading these considering the charges involved.

  120. Pradeep says:

    What Should be the dividend yield to be applied for Apollo Tyres for calculating futures pricing for trade date–8/9/2017′

  121. KNV says:

    If the Nifty Futures is trading at a premium (say 0.1%) against spot , but well below its fair value (say 0.1%) & change in OI is 4.5% what do you conclude.

    • Karthik Rangappa says:

      This is actually a nonevent as all the numbers that you’ve quoted are quite small. However, if the difference between the fair value and spot is large, then maybe we do have an arbitrage situation.

  122. Himanshu says:

    Sir, can we take future trade on the basis of technical analysis??

  123. Subir says:

    Hi Karthik,
    I’m currently following Infy. And from the historical data, i’ve seen that there is always a price arbitrage of about Rs.17-20 at the start of the series between the spot and the futures mid month contract. For eg: Today infy spot is trading around Rs.939 while the infy fut nov is trading at 919. Is this a price arbitrage opportunity?

    Thanks.

  124. Rakesh says:

    Hi,

    In the post, it says days of expiry of contract? Does the remaining days mean the remaining trading days for the contract (or) all the days including weekends + holidays?

    Thanks,
    Rakesh.

  125. PRAKASH says:

    Dear KARTHIK SIR,
    Great to learn from your simple illustration. I have a query…..For trading long in future contracts , is it compulsory to put stop loss, and is it mandatory to increase margin amount during the trading day when the price of a contract decrease (compare to bought price)

    • Karthik Rangappa says:

      It is a good practice to put a stop loss, not mandatory. Yes, in case of increased volatility on the stock intraday margins can increase.

  126. hitesh says:

    hello
    can i purchase a future contract of current series and sell the future contract of next series simultaneously also
    can i square them off next day by setting the target differently for both the order?
    what will be the margin required for the trade?
    or
    do i have to hold them till the expiry ?
    pls reply
    hitesh

  127. Saurabh says:

    Hi Karthik,

    Thank you for posting insightful article.
    I have a question on the concept of basis . These are conceptual questions and seek help from your end .

    At the time of maturity , basis as we discussed should always be zero meaning future price = spot price at maturity
    My question is around this point . Consider a farmer who is short on 3 months corn future. Now the very reason he entered into this contract is to reduce possible price decline and hence to reduce exposure against price risk. So in this example let say at the time of maturity if the spot price goes down due to low demand (high supply) , and hence the future price to make basis zero , the very purpose of farmer’s hedging gets defeated.
    I think I messed up with this concept .

    Thanks

    • Karthik Rangappa says:

      Not really, Saurabh. If the futures price goes down (following the spot), then he makes money on short futures which is offset by the long position in the spot, therefore isolating him from market movements.

  128. hitesh says:

    hello kartik
    can i keep one contract and square off another next day? or
    do i have to square off both the contract simultaneously?
    regards
    hitesh

  129. Rahul Khandelwal says:

    Hi Karthik,

    I have a question regarding calendar spread. In you article you have assumed that Wipro Mid month contract is trading at its fair value 665.
    You have also assumed that Mid month contract will continue to trade at its fair value.

    While calculating P&L at expiry, for your long position you have taken current spot price as current price for Mid month contract. Is this correct?

    Regards,
    Rahul Khandelwal

  130. Rajesh says:

    Hi, I have a few queries.
    What is the market price of a future? Is it the LTP ?
    If this is so , then it will vary according to the bids and asks. So, is ‘fair value’ only an indicator to what the price of the future should be theoretically ?

  131. Shashwat says:

    If the price of futures and underlying asset always converges, then if I buy number of shares equal to lot size and short one lot in futures, will it always return in profit?

    • Karthik Rangappa says:

      You can provided the futures is not priced in properly. I’m covering this strategy in detail in the current module on trading systems.

  132. Amey says:

    Dear Karthik Sir,
    First of all , thank you very much for making us understand the concepts very easily and for giving amateurs like us the opportunity to take part in the market action all on our own without relying on useless paid advisory services.
    I have few doubts related to calendar spreads although you have given the best expalination possible but still i am somehow getting confused in the concept, I have the following example as on 26th dec of nifty futures can you please tell me if there is an opportunity for a calendar spread here
    Nifty Spot – 10,531.5
    Nifty Dec 2017 Future – 10530.15 (expiry in 2 days) Nifty Fair Price – 10530.45 (my calculation, please correct if i am wrong)
    Nifty Jan 2018 Future – 10571 (expiry in 30 days) Nifty Fair Price – 10535.45
    Is there any trade here ????

  133. Ram says:

    Hi,
    Why is futures pricing formula based? Isn’t it supposed to be a buyer willing to bet that stock price might be at price X 1 or 2 months from now? Every buyer can bet at different prices.

    If its fixed formula, then any stock if its current price is same now, then their corresponding future price are also same. Formula does not take into account real value of underlying asset and its variations based on sector they are in and other factors. Gold example was good, but with formula based and 1 price for a future seems to a mismatch.

    thanks,

    • Karthik Rangappa says:

      The formula is based on the assumption that there is a certain cost for the funds. Also, remember the Futures price has the spot value as a key input.

  134. Sudeep Poswal says:

    Hi Karthik,
    Is there any way by which I can get all the stock prices and their corresponding future prices (for all the three series) in excel in order to find out the C&C opportunity ?
    Secondly for finding out the arbitrage opportunity, where can I get the prices of all the stocks futures prices on two stock exchanges in excel in order to compare immediately and execute the strategy ?
    P.S- I am a Zerodha member, please let me know if we have any such resource internally.

  135. Sumil says:

    Hi karthik,

    In the calendar spread example above, have you assumed that the both current month and mid month contract will have the same expiry value?

  136. sravan says:

    Dear Karthik sir,
    Is there any formula for calculating the fair value of spot price?
    Thanks in advance.

  137. Daniel says:

    Sir as you have mentioned about the module “Trading Strategies”, is it the one which is under progress under the name “Trading Systems” ?

  138. Yusuf Rampurawala says:

    why do you say that it makes sense to square off the positions in spot and futures market, just before expiry, in case one has executed the trades to take advantage of cash and carry arbitrage? Same question for calendar spread?

    what i understand is, if say spot is 700 and futures is 750, then i will buy in spot market and take short position in futures market. On expiry, if futures is at say 690, then i make profit in futures market (+60) and loss (-10) in spot by selling the share bought at 700 for 690…..so how does it matter whether i square off positions in the two markets before expiry or allow auto square off on expiry?

    • Karthik Rangappa says:

      When I say just before, I’m talking about literally 10 minutes before – at 3:20PM. If the option is ITM, then you will save on STT.

  139. prathmesh mahajan says:

    Sir,
    Hero Motocorp Feb future -3496.55 and mar future-3512.50 so can i use calendar spread .
    is it right to buy Feb future and sell Mar future….
    pl revert …

  140. prathmesh mahajan says:

    Sir if i am getting current month and mid month future on discounted rate the what i should do… same as for both future on higher rate… so can we use calendar spread techniques at this point….

  141. Srinivasan says:

    Hi Karthik,
    You have shown dividend to be reduced from spot(1+r) … But I have seen some books reduce the dividend yield from the r and then compound the spot rate as follows: spot[1+(r-d)] or in case of continuous compounding Spot e^[r-d]

  142. Muralidhara S Navada says:

    Hi Karthik, can you pls explain why sometimes future trades at a discount and what are its implications? Why is dividend reduced from the pricing? Could not understand the logic.

    Really Appreciate if you can explain this.

    Thank
    Murali

    • Karthik Rangappa says:

      Futures in fact trade either at a discount or at a premium, this is purely a function of demand and supply. However, there is a formal formula which guides the rate at which futures should trade given the rate of the spot. Adjusting the dividend is to ensure that the effect of dividend (which is captured on spot) is also captured on the futures. Think of it as a fair representation of the futures price.

  143. Priyank Saxena says:

    Hello Sir,
    Sometimes I see in some commodity that the next month future contract is trading at discount to this month contract. Will it be a good trade opportunity to go long with the next month contract and short this month contract.

    • Karthik Rangappa says:

      Yes, as long as the prices are justified. Please remember there will always be some difference but this should not really justify a trade.

      • Priyank Saxena says:

        Thanks sir for the reply
        Sir Nowadays different crude mini contracts are trading at
        Crudemini July 4614
        Crudemini Aug 4584
        Crudemini Sep 4545

        What I think that crude is falling nowadays so this can be the reason for discount of next month.
        If I take a trade in August and September calender spread, does this specifies a good calender spread trading opportunity??

  144. prathmesh mahajan says:

    Sir , Mar and Apr Future are discounted then what should i do , which future should i buy and sell…

  145. Aishwarya says:

    Hello sir,

    Today’s nifty spot – 10493
    Rf – 6.35%
    x- 30
    Fair price for FUT NIFTY MAR 2018- 10547
    Actual FUT NIFTY MAR 2018 – 10520

    Fair price for FUT NIFTY APR 2018- 10604
    Actual FUT NIFTY APR 2018 – 10555

    So, is there a trade here?? Which one we should buy as both are trading at higher prices.

    Thanks
    Aishwarya

  146. Tanay says:

    Hi Karthik,

    First of all hats off to you for your understanding of the subject and putting it up into these modules.
    Here is a small doubt I have. Please take some time to resolve it.
    In this module the Formula reads ‘Futures Price = Spot*[1 + r(x/360) – d]’
    But, in the below link (from CME Group website), I found it to be a little different. Also, In the key takeaway section you have mentioned the same, which reads ‘Futures Price = Spot*[1 + r(x/360)] – d’
    http://www.cmegroup.com/trading/equity-index/fairvalue.html
    Please clarify the right one.
    Also will be greatful if you can provide the excel for the same.

    Kind Regards,

    • Karthik Rangappa says:

      Looks like I’ve not placed the brackets properly 🙂
      Go with Futures Price = Spot*[1 + r(x/360)] – d .

  147. Max says:

    So if the futures price on the index is above the current value of the index, will that have any effect on the value of the index going forward? Do we expect the index to raise in response?

    • Karthik Rangappa says:

      Nothing really – futures do oscillate above and below the spot – called premium and discount respectively. This is largely because of the demand and supply situation.

  148. trader says:

    is calendar spread a no risk strategy just like cash and futures arbitrage?

  149. Vivek Anand says:

    Hi Karthik in your example of Calendar spread shouldn’t the fair value of mid month future on the day of expiry be calculated using the future pricing formula which,obviously is function of spot price. So, for the spot of 660 with T-bill rate 6% and 28 days remaining in expiry future fair value should be 663.04. Similarly, for 690 / 725 spot price it should be 693.18 & 728.34 respectively and if, other demand supply factor are constant future price should be close to it’s fair value thus, using 665 at mid month price seems confusing to me.

    Not sure if, above question makes sense but, would appreciate your inputs and sorry, to keep you bugging but, as I keep reading your amazing lessons and doubts keep popping!!!

  150. Udit Jindal says:

    Sir, as you said all short contracts are strictly on intraday basis,so when we initiate a spread position as shown in this chapter where we go long in spot and short in futured ,which includes shorting too,does that mean that we will have to close the spread position in a day..in other words,is this spread just a day lasting?

    • Karthik Rangappa says:

      For this you will have to employ futures. You cannot short in EQ and carry forward the position.

      • Udit Jindal says:

        okay thankyou sir.

        • Karthik Rangappa says:

          Welcome, Udit 🙂

          • Udit Jindal says:

            One more question sir..What is difference between Cash and carry arbitrage and hedging a single stock ?
            As written..both involve position in spot market and counter position in futures market..but we make LOCKED profits in former however no profit /no loss in latter ie hedging.

          • Karthik Rangappa says:

            Well, the intent is different – apart from that, the mechanics of carrying out the trade is somewhat similar.

          • Udit Jindal says:

            Please correct me if i am wrong sir
            We use c & c arbitrage in case future is not fairly priced ie its expensive or cheap as compared to spot and use hedging when the security is fairly priced however we want to be indifferent to future movements?

          • Karthik Rangappa says:

            Absolutely, Udit. Like I said, the mechanics is the same, the intent or the objective of the trade is different.

          • Udit Jindal says:

            You are making invaluable contribution for investor education sir, thankyou 🙂

          • Karthik Rangappa says:

            Happy learning, Udit 🙂

  151. Vivek Anand says:

    Hi Karthik – While looking for C&C Arbitrage opportunity noticed today that that spread for Fortis is 1.23% (Future is expensive) at closing with expiry being tomorrow. Basis whatever I have learnt from your beautiful lesson the price of both Spot & Future should be the same on day of expiry and this is logical too. My question is that will this spread come to Zero from market opening or sometime during the day.

    • Karthik Rangappa says:

      I think the spread had already narrowed. Did you take the trade?

      • Vivek Anand says:

        No I did not take position. I am just doing virtual trading to understand the dynamics before taking plunge in however, have started shorting far off call OTM closer to expiry and made some money in last two months. Thanks to you.

        • Karthik Rangappa says:

          Happy to note that, Vivek 🙂

          Markets are full of opportunity, it’s upto you to spot them 🙂
          Prepare well and enter when you are convinced! Good luck.

          • Vivek Anand says:

            Thanks Karthik. Another question – When doing C&C arbitrage in my understanding M2M should come into play for the future position so, in case the future position is moving against me till I square off the position then every day I will have to deposit some money and thus, affecting my cash flow. Is my understanding correct?

          • Karthik Rangappa says:

            Yes, that is correct. As long as you hold a futures position there is mark to market applicable to it. Good luck with it!

          • Vivek Anand says:

            Thanks a lot. In your experience what are the chances of future position reaching Margin call in a month period. I know it is very broad but, just needed to know your expert viewpoint.
            Is there a way to predict Margin requirement for worst case scenario for a period?
            In case there is no way to do so (predict) will Zerodha give me a Margin call before squaring off my position?
            In case Zerodha doesn’t give a call what is the best way forward – may be work your way around by keeping twice or thrice of exposure margin idle?

            Finally, (just for now ?) when are you coming with simplified version of Calendar spread?

          • Karthik Rangappa says:

            Vivek, I’ll include that in the current module, hopefully very soon 🙂

            Margin call depends on how much money is there in your trading account and how much of it is parked as margins.

  152. Prakhar says:

    Suppose sbin future was trading at a premium of 0.5 points at a particular time. So if i would have sold one lot of futures contract and buy 3000 shares in spot market and hold the position till expiry date. Will it result in rs1500 profit.?

  153. chetan says:

    no of trading session left to be considered is actual numbers excluding holidays or total number of days?

    • Karthik Rangappa says:

      This is called the day count convention….you can either take the actual number or the number of trading days. It really depends on you. I prefer the actual number of trading days.

  154. Pakya says:

    If DISH TV spot = 72.70
    dish tv April fut = 73
    dish tv May fut = 72

    According to this chapter, randomly if I make calendar spread-
    April fut sell & may fut buy, then my profit will be 73-72 = 1 point per lot correct?

    If not please suggest me because i’m new in Future Trading
    Thanks Karthik SIR

    • Karthik Rangappa says:

      Yes, that is correct. However, you need to adjust this for transaction charges. By the way, I will discuss a more reasonable approach to calender spread in this module – https://zerodha.com/varsity/module/trading-systems/

      • Pakya says:

        (1) But, anytime we have to sell future current month contract & buy mid month future contract, Is it correct? Plz correct me. As newbie trader.

        (2) On expiry day current month future price = spot price, correct?

        (3) If today is expiry, then mid month future price = spot price or greater than spot price? Which is correct exactly?

        (4) Is there future strategies written by you? or share any online link.

        Thanks for teaching! 🙂

  155. Justin says:

    How to calculate or know the dividend for nifty

  156. Radhekrishna Piilai says:

    (1) How to make calendar spread- first sell & buy….both orders 1 by 1 ?

    (2) For calendar spread, if I sold current future contract first then I require full margin. But, when next when if I buy mid month future contract then I will get margin benefits, correct?????

    • Karthik Rangappa says:

      1) Calendar spreads involve you to buy and sell two contracts of the same assets, across two expiries, in similar quantities. The order as in which contract to buy and sell does not matter
      2) Yes, but at the time of execution, you will need full margins.

  157. Prakul says:

    Dear Sir,
    Kindly go through following table of my trade: First 2 orders I booked profit =6000/- (1500 + 4500)

    But, for 3rd & 4th order, blank places i want to need to book my profit…..!
    So…
    What can I do for that? If I will keep this till expiry so is it profitable?
    What should I have to do? please tell me as you are most experienced person as well as my teacher…. 🙂
    Order Mode Lot Buy Sell Profit / Loss
    HCC18APRFUT FUTURES 15000.00 25.00 25.100 1500
    HCC18MAYFUT FUTURES 15000.00 25.50 25.800 4500
    HCC18APRFUT FUTURES 15000.00 ______ 25.000 9000
    HCC18MAYFUT FUTURES 15000.00 25.65 _______ -20250

    Thanks 🙂

    • Karthik Rangappa says:

      Prakul, I’m unabe to understand your query. Are you suggesting that you have two buy positions @ 25 (April) and @ 25.65(May). Well, the only way to profit from it is to hold it (assuming you continue to remain bullish). Btw, the markets are up today and you may just get an opportunity to book profits.

      Good luck!

  158. Vivek Anand says:

    Hi Karthik – Before taking plunge in the market of C&C Arbitrage can you let me know how do one ensures that the spread is maintained when acquiring the position on real time basis. The reason of asking this is because if, one places market order for both positions the spread can reduce to an extent that one does not make any money and if, one places limit order there could be a scenario that the one of the position gets picked up and the other one never reaches the limit thus, forcing one to book loss on the position that gets picked up (i.e. if, this position goes against).

    Hoping you understand my query.

    • Karthik Rangappa says:

      I understand, Vivek. In fact, this is the biggest risk in taking up these trades. Execution risk can eat away the estimated profits – and you could be left with very little on no real money on the table. Unfortunately, there is no way to deal with it.

  159. Satyam says:

    In first example of practical application (spread between spot and future) I think we can still take trade if future is trading at 658 taking profit of 5 points if not more than that.Correct me if I am wrong.

  160. saikat says:

    I hv a question
    Futures Price = 2280.5 * [1+8.3528 %( 7/365)] – 0
    =2283
    how sir plz expln

  161. Nikunj Purohit says:

    Let suppose I am holding Vedanata shares @ price 300 and it is going ex-dividend @ 20 tomorrow. What will happen to my position in future? Will it show a loss or buying price will adjust according to dividend? And what will happen in case of spin-off?

    • Karthik Rangappa says:

      No, it wont show a loss. The futures contract will be adjusted to the extent of dividend paid and hence there will be no P&L influence on the contract.

  162. Kishan Modi says:

    Karthik,

    If the market thinks that price of a stock will fall, then futures will be trading lower than spot. Is this also the case of ‘trading at discount’ or backwardation (for commodities)?

    Thanks!

  163. Sunny says:

    Does the price of a future changes, if the interest rate changes after the RBI announcement? If the interest rate goes down, does the people holding future prior to the RBI announcement date have to take a loss?

    • Karthik Rangappa says:

      Yes, the interest rate has an impact on derivatives but there is nothing like they take a loss etc. Really depends on the position they hold.

  164. Aman Gupta says:

    Hi,

    Sir I am little confused in the calender spread strategy for squaring the position of mid month contract. I need to sell the mid month contract to square off the position as we have already bought mid month contract. But the prices will be different in this case, spot price and mid month futures(at the expiry of current month contract).
    The spot and future price for mid month will not converge at the expiry of the current contract. Why we are calculating P/L for mid month the same way as we are doing for the current month given the spot will be different?

  165. Pt says:

    Hello sir,

    Today nifty spot down by -0.75% and nifty may future down by only -0.49%. It is very big difference. If nifty future is mimicking nifty spot, then why this difference happens?

    • karthik jayasimha says:

      Yes, you are right. In such a case how can we buy the index at the spot price?

    • Karthik Rangappa says:

      This can happen due to the regular demand-supply situation in the market. Its common for the futures to go into premium or discount.

      • karthik jayasimha says:

        Dear Sir,

        Thank you very much for your support. I still have a doubt in cash and carry arbitrage. Today bank nifty expired at 26016.8 and the futures price is 25969.95. In this situation can we sell 1 lot in options at 26016.8 and buy 1 lot in futures at 25969.95.
        Kindly clarify.

        • Karthik Rangappa says:

          If you are doing this, then you will have to ensure that the delta matches. So for one lot of futures, you will need 2 lots of ATM options. Have discussed more on Delta in the Options module.

          • karthik jayasimha says:

            Thank you very much for your speedy response. I have already gone through the options module as well and i had considered deltas but had no idea regarding which one to sell (ITM, ATM or OTM) and the number of lots.
            Your guidence has made people like me to think up to this level.

          • Karthik Rangappa says:

            Your efforts to learn is what is helping you, Karthik. Good luck and keep learning 🙂

  166. karthik jayasimha says:

    Dear Sir,

    I have a doubt in cash and carry arbitrage. You have mentioned that if there is a difference between the spot and futures price, in the example M/s Wipro, you have mentioned to buy in the spot market and sell in the futures. My doubt is if we sell the futures we have to do it according to lot size but how we have to go along with buying in spot market, that is, quantity?

    • Karthik Rangappa says:

      Yes, for this you will have to adjust based on the Rupee value. I will kind of discuss more on this in the ongoing module i.e Trading Systems.

  167. Parthasarathy says:

    Amara Raja batteries june future price is 50 rupees discount to its spot price. This is start of the series. Why is there such a huge discount?

  168. Rajesh says:

    Karthik,

    Script : Bajaj-auto.
    Date : 08.06.18
    Futures price for the June month expiry is above than the fair value and futures price for July month expiry is well below than the fair value based on the futures pricing formula i have calculated. Is there a trade here. Can I sell this month expiry and buy next month expiry.

    • Karthik Rangappa says:

      You can, but make sure you close the trade before the expiry. Make sure there is no corporate action during this time.

  169. Anurag Dusad says:

    Sir, there is “Cost of Carry” link below Order Book table in NSE Derivative Quote page. Kindly explain what this is and how does it relate to Futures Trading?

    Can I just ignore it?

    • Karthik Rangappa says:

      For all practical purposes, you can ignore it, Anurag. Cost of carry represents the futures premium to spot.

      • Anurag Dusad says:

        Thanks.

      • vinay` says:

        sir wrt cost of carry(ie diffrence between spot and future),will it be logical to get the 200days of cost of carry,get the mean of the data find SD and try to spot opportunity for intraday or swing trading whenever the coc reaches certain level of SD?

        • Karthik Rangappa says:

          Interesting thought, Vinay. Have never explored this angle, maybe there could be some opportunity here 🙂

  170. Shyam says:

    If futures price is less than spot what does it imply actually? WHat are the reasons behind this?

    Does it mean that this stock is in bearish zone?

  171. Yash says:

    Hi,
    There is a small error in the futures pricing formula.
    Futures Price = Spot price *(1+ rf – d)
    If d is inside the square brackets then it should be dividend yield and not the absolute value of dividend.
    Btw, Thanks for explaining futures in such simple terminology.
    Cheers!

  172. Hammad says:

    In Cash and Carry Arbitrage, we are basically capturing/exploiting the difference of spot price and future contract price. If this difference is large, profit is large and vice versa. I really don’t understand the significance of calculating the fair value of future contract because as long as arbitrage exist between spot and future contact we can capture it.

    It will be great if you can provide some more information on significance calculation of fair value. Is there something I am missing ?

    • Karthik Rangappa says:

      This is because that on a regular basis, there is bound to be a difference between cash and futures, this is attributable to the ‘cost of carry’. Fair value gives you this estimate of Futures price. Afterall, you should not mistake the regular difference between cash and futures for an arb opportunity.

  173. sk says:

    Hi,
    I have a simple query.
    How future price follows spot?
    isnt it depend on bids and sells? they may be different in spot and futures market no?
    how supply and demand affect futures price?
    how spot and future price moves identically?

    • Karthik Rangappa says:

      The pricing is such that the futures price follow the spot price if any difference then the arbitrageurs step in to correct the difference.

  174. Udit Jindal says:

    Hello sir, In calender spread, lets say jan future price is 500 and feb future price is 550.Assuming to go long on jan and short on feb, lets say convergence price in january end is 525, this means my profit will be 25(Jan long) and 25(feb Short)=50
    But talking in terms of price moves,thats a +25 movement in january,which although would give us 25 points profit in jan,But as price moves in tandem,a 25 point increase would also mean a 25 point increase in feb contract,which will do us a loss of 25 points in feb short contract.So effective p&l=0 (as also explained by you in some previous chapter).
    Am i missing something or these statements are self contradicting as in 1 context we make profits and in other context that is price moves we make nothing?

  175. prakhar says:

    how would corporate action would affect my open futures position for example payments of dividend or stock split etc.

  176. shyam says:

    Hi kartik

    For the last 1-2 days I have noticed the banknifty futures is trading at high premiums compared to Spot. Bank nifty spot is trading at 27183 at 2 pm and Sept futures are trading at 27354 and Oct futures at 27450 and Oct futures at 27453. Diff of more than 180 points

    I wanted to know why is it trading at such diff? Though charts are indicating bearishness does this mean we can expect the price to go up ?

    Can we initiate calendar spreads to capture this diff as you said Spot and futures converge.

  177. Ashish says:

    Hi Kartik,

    I have a query on Calendar Spreads. If current month future price is cheaper than fair price and far month price is higher than fair price, can be take advantage to pocket the arbitrage. E.g. for a NIFTY stock, spot, current FUT and mid-month FUT are at 317, 315 and 327 respectively. In case I sell mid month and buy current month, I can pocket 12/lot (at 2200 lot size easily making 26400 by blocking 21000 margin). However, if mid month doesn’t restore to its fair value by current month expiry I won’t be hedged. Margin requirement goes up. Is this a good trade to opt for?

  178. Guru says:

    Hi Karthik,

    I don’t seem to have the option to trade futures on kite mobile app. Can you please advise if this feature is available on mobile app? if yes – do I have to make any request to enable this to my account?

    Kind regards,
    Guru

    • Karthik Rangappa says:

      It is very much possible, Guru. Add it to your watchlist like the way you do on Kite web, once you see it the market watch, you can easily trade.

      • Guru says:

        Thanks Karthik, didn’t realise that I can search futures on the same space where I search for equiry stocks.

        Also, it is a wonderful feeling to know that somebody is there to listen to your queries (no matter how stupid it is, until you know the answer it bothers a lot) and answers promptly. Thanks for being our mentor. It is a good learning ride for me (including its application on the stock market). Thanks for being there for us 😊👍

        Kind regards,
        Guru

  179. Pritam says:

    sir,
    in the last table you have shown that at the expiry spot will be in 660. so current month future price and far month future price will converge because of that i make a profit of 40 rupee. But i think that far month future price will not converge with the spot at the same day. But you have shown that for the far month future expiry we make a loss of 5 rupee (660-665). How can it be possible because it show that far month future price also converge with the spot in the current month expiry date.
    Any help from anyone will be appreciated.

  180. Bharath N says:

    Hi Karthik,

    Can we look at the delta of
    1. ( Market Future – Spot ) for “Cash & Carry Arbitrage”
    2. ( Deviation of different expiry Futures contracts (1m/2m/3m) prices from the current spot price ) for “Calendar Spread”
    Instead of calculating the fair value with the math formula to validate presence of a “Spread Trade”?

    My intuition is that fair value is mostly close to market future price and calculation is based on the dynamics of interest rates and dividend yields .

    Hence, can we logically deduce the presence of the “Spread” from extent to which a various future contracts (1m/2m/3m) market price is deviating from spot price and check the outliers (the one which drastically deviates from spot) to either go ahead with calendar or arbitrage.

    Thanks in advance!

  181. Bharath N says:

    Hi Karthik,

    In your example of Wipro,

    Wipro Spot is trading at = 653

    Actual market value of current month futures = 700 (30 days to expire)
    Actual market value of mid month futures = 665 (60 days to expire)

    Strategy is “short on current” and “long on mid”.

    Assume our spot for current contract expire = 725.
    Hence “current month futures” converge with spot price = 725 on expiry date

    However, the “mid month” contract price on expiry of “current month” can have a value different from 725 ,is this right?
    Assume “mid month contract on expiry of current month contract” = 640. (this means mid month has just turned current)

    With this set up,
    For short position, i made loss of = 700-725 = -25
    For long position , i made a loss of = 640-665 = -25

    Total loss = -50.

    Hence this calendar spread failed for the above setup.

    Do you think this assumption of our mid month contract on expiry of current month ,VALID? if so, then calendar spread also have some risk (no matter how low) , is this correct?

  182. Praveen says:

    Is there any margin benefit in cash and carry arbitrage? Generally to buy a stock and to short the future we need minimum 5 lacs plus maintenance margin. But as both are hedged so are not we given any margin benefit just as we get in calendar spread?

  183. Yadav says:

    How to you get No. of days remaining for expiry as 34 for mid month and 80 for far month..I am getting 35 and 70 days remaining if i use 19thFeb 2015 as the base date for calculation ?
    26thFeb 2015 – 19thFeb 2015 = 7 days
    26thMar 2015 – 19thFeb 2015 = 35 days
    30thApr 2015- 19thFeb 2015 = 70 days

  184. amey says:

    Dear Karthik,

    I have a query regarding Nifty futures and kind of an anamalous behavior of the same:

    Nifty Spot on 09-11-2018 closed down -0.12%
    Nifty Dec-18 Futures 09-11-2018 closed up 0.09%

    Today, i.e. 03-12-2018, I observed that at around 11:00 am, Nifty spot was trading at 10890 while Nifty Futures were at 10912.
    Nifty Spot closed lower at 10883.75 while Nifty Dec-18 Futures closed higher at 10931. The difference in closing returns for the single day for Spot and Futures is 0.22% and that too when prices should’ve converged (comparatively).

    How can this be? Logically, since spot closed below the observed price at 11:00 am, futures also should have closed below the observed price, but instead, there is a significant difference and divergence. Also, another factor is that since the days to expiry decreased on near closing, the difference between Spot and Futures should have decreased in fact. How did it increase?

    Further, even if direction of Nifty Spot and Futures has been the same on most instances, the returns are far from similar. Why is this so? Do the returns of Nifty Spot and futures even out during the whole term of the contract or are there significant differences always?

    Lastly, where can we get prices for historical contracts that aren’t traded anymore?

    Looking forward to your reply.

  185. Harinatha Rao says:

    M. Karthik,
    I am little confused about “cash & carry arbitrage. In the example Wipro Spot is less than future price. So we buy Wipro Spot. Being Spot is it not necessary to square of the same day. Can we wait till expiry. Please clarify my doubt.

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