Assume a future is trading at a significant discount to the spot price and that an investor already owns the stock. This situation can be arbitraged with zero risk for a profit. Sell the stock and buy the future. Wait until settlement when the prices align.
At settlement, buy the stock andsell the future. You have locked in the differential and continue owning the stock. However the availability of this arbitrage creates downwards pressure on spot prices until the settlement, at which time the prices are likely to jump because of the buying.
Most stocks in the F&O segment are now trading at discounts on the June futures series. We could expect a continuous process of arbitrage until either the carry-differentials drop below the risk-free return or sentiment changes or settlement arrives. It's difficult to recommend trades on this basis since there is considerable intra-day volatility and the window of opportunity for arbitrage is generally short.
The best one can suggest is that you should keep a benchmark of 6.5-7 per cent annualised as the risk-free return. Allowing for slippages and execution error, this translates into a differential of 0.75 per cent or more nbetween futures and spot prices in a given counter.
A lot of stocks are offering that sort ofdifference. Tata Motors and Maruti for example, are trading at discounts of over 1 per cent in the futures market.
If you identify such stocks and miss the arbitrage opportunity, keep track of the potential offered by the reverse trade. Stocks that have been sold down over the settlement will firm up in the last week of settlement.
Again in general terms, a few unhedged long positions are possible given that some stocks seem to be bottoming out. Taking long futures positions across Hindustan Levers, HDFC, Dr Reddys, Ranbaxy and Maruti could work.
Cement majors like ACC, Gujarat Ambuja and Grasim could also be due to bounce inside the settlement. There could also be a knee-jerk pullback in the HPCL and BPCL scrips because a petrol price hike is due.