The Nifty indexes track stocks of various size and segments of the economy, providing a gauge of how different segments of India's stock market are performing. Futures provide a way to trade these indexes, by betting on the direction of the index. Futures are used by retail day traders, longer-term traders and institutional traders.
Since the Nifty is one of India’s stock market indexes, the futures related to the index primarily trade in India, on the National Stock Exchange (NSE) of India. Nifty futures also trade in the U.S. via the Chicago Mercantile Exchange (CME) and in Singapore on the Singapore Exchange (SGX). U.S. Nifty futures are infrequently traded, with typically zero daily volume, and will be addressed briefly at the end of the article. Nifty futures on the NSE are actively traded, and are therefore more useful to retail and institutional traders.
There are three main Nifty futures that trade on the NSE. The CNX Nifty tracks 50 stocks from 22 sectors of the economy, providing an overall gauge of India’s stock market. The Bank Nifty tracks the largest 12 banks on the NSE, and the Nifty Midcap 50 tracks 50 midcap stocks listed on the NSE.
See Also: 25 Stocks Day Traders Love
Nifty Futures Liquidity
CNX Nifty futures contracts provide adequate liquidity for active day traders, hedge funds and longer-term traders, although volume can vary significantly from day to day.
The Bank Nifty is also active enough for most short- and long-term traders, although once again volume can vary significantly from day to day. Day traders will need to pick which days are best to trade, while longer-term traders aren’t likely to face significant liquidity issues.
The Nifty MidCap 50 usually does very little if any volume, and there is not useful information for retail traders.
Who Uses Nifty Futures and Why?
Day traders, swing traders, hedgers, and hedge funds all trade CNX Nifty and Bank Nifty futures. The liquid market allows for all these traders to attain and exit positions with relative ease (most days), and in quantities that suite each class of trader.
Trades are usually taken for speculative reasons, anticipating the future direction of the broader stock market (CNX Nifty) or the banking sector (Bank Nifty). Traders can profit from both up or down markets by buying or selling a future respectively.
Hedgers or hedge funds may also use any of the Nifty contracts to hedge other positions. For example, if long a large contingent of stocks a trader may sell some CNX Nifty futures to hedge the long positions. That way, if the index falls (and likely many of the stocks in the trader’s portfolio as well) the loss will be partially or fully offset by the gain attained by the short futures position.
Institutional traders may use the Nifty MidCap 50 for the same reasons mentioned prior, as well as providing funds with more precise exposure to a certain segment of the economy. Retail traders may want to use it for speculation in the midcap segment of the economy, but lack of volume will significantly hamper these efforts.
Nifty Futures Terms and Expirations
Each Nifty futures contract has an expiry date, on the last Thursday of the contract month. Traders will typically close out futures positions before expiry, and re-establish positions in futures contracts where the expiry date is further out.
Nearly all futures volume takes place in the contract near expiry. For example, if it is February, nearly all the trading volume will be in the March contract.
Nifty Futures Exchange
Nifty futures are traded on the National Stock Exchange (NSE) of India and are cleared through the National Securities Clearing Corporation Limited (NSCCL). This clearing agency acts as a counter-party to all deals and guarantees settlement so traders can collect profits, and are responsible for losses.
Nifty Futures Pricing, Volume and Specification Information
For current information on Nifty futures volume and prices, and to see to when contracts are expiring, visit www.nseindia.com. Click on “Live Market” and select “Equity Derivatives.”
Choose the Nifty futures contract you’d like information about.
CNX Nifty and Bank Nifty futures volume and current prices are also typically available on large financial sites.
Nifty Futures Margin
Opening a futures position requires that you put a margin payment. The margin required to open a position fluctuates with volatility, so it may not remain static. It is based on a Value-at-Risk model, which requires that the margin put up is large enough to cover one day’s worth of losses based on historical volatility.
Nifty Futures in the U.S. and Singapore
There are two Nifty futures contracts traded in the U.S. on the CME: the E-Mini CNX Nifty (EMF) and the E-Micro CNX Nifty (MNF). Unfortunately, there is little if any volume in these contracts on a daily basis, and therefore they are of little use to retail or institutional traders.
Another alternative is to trade the iShares India 50 (INDY) ETF, which tracks the CNX Nifty Index, and has daily volume of more than 150,000 shares.
The Singapore Exchange (SGX) offers the SGX CNX Nifty Index Futures for trade, priced in U.S. dollars. Often more than 10,000 contracts change hands on a daily basis in the near-term contract, making it a liquid alternative to trading Nifty Futures on the BSE.
See Also: Ten Commandments of Futures Trading
The Bottom Line
Nifty futures are used by all sorts of traders, from speculative day traders to institutional hedgers and longer-term traders. Nifty futures can be traded on the BSE (in Indian rupee), GSX (U.S. dollars) or the CME (U.S. dollars), although the CME futures usually have little to no volume.
Margin requirements vary by contract and on the BSE will fluctuate based on volatility. CNX Nifty and Bank Nifty on the BSE provide adequate liquidity for nearly all types of traders, as does the SGX CNX Nifty futures contract on the SGX exchange. These are the contracts where retail institutional traders will focus their speculative and hedging endeavors. The iShares India 50 ETF also provides a liquid non-futures alternative to trading the CNX Nifty index.