Stock futures are on their way to fill the speculation void created by the demise of badla. And given the current trend, it is quite possible that the volumes in stock futures will surpass the volumes of the cash segment in the near future.
From Rs 89.15 crore on November 9, when futures trading in 31 stocks was introduced, the volume has zoomed to over Rs 308 crore on November 27 and Rs 363.29 crore on December 7 on the National Stock Exchange (NSE), thereby lending liquidity to the derivatives mart.
Currently, the volume is much lower than what is logged by the cash segment of these 31 stocks at Rs 1,350.46 crore (on December 7), but the investors seem to have taken to individual futures like fish to water.
Compared with the performance of individual stock options when it was launched in July last, futures seems to have come out with flying colours.
Brokers said the popularity of futures may be attributed to its capacity to mimic the traditional carry-forward system.
The investors find the straight method of futures trading similar to that of the erstwhile badla system.
"Options trading was mostly Greek to the Indian investors but futures is very similar to our earlier domestic futures (badla). This has led to a higher volume compared with options," a stock broker said.
Stock futures have met the expectation of giving the much needed leveraging ability to investors and resultantly, improved the liquidity and volumes in the cash market as well, markets sources said.
"Through careful timing of the execution of two deals, one in the spot and the other in the futures market, one can easily lock up the funds for a given maturity period to earn pre-determined returns," a broker said.
On the last Thursday of the month, square up the two positions by selling spot and buying futures.
The accuracy of the timing of the trades, margins, brokerage and depository charges are the costs one has to bear before calculating the returns from such arbitrage positions, dealers said.
Participation by institutions in the futures is likely to make it a virtual money market in equities and the returns from using futures as a badla product may be in line (slight premium over call rate) with those obtained in the call money market in the banking system, brokers said.
Further, futures are superior to badla as a fixed-income instrument as the cost of carry in futures is known both to the buyer and seller at the time of entering into a contract, brokers said.
In badla, the returns were decided on weekly basis and were prone to some adjustments. When futures become delivery-settled, it will serve as a pure badla product with maximum transparency, a broker said.
For example, one may buy the Reliance Industries stock in the spot market at Rs 260 and simultaneously sell one-month futures of the same scrip of the same quantity at a strike price of Rs 262.
In another scenario, when the futures are quoted at a discount to the spot market, institutions and others holding a large inventory can claim backwardation (remember undha badla?) charges by selling spot from their existing stock and buying futures.
In other words, this may work as a sort of stock-lending, dealers said. The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), both commenced futures trading in 31 stocks on November 9.
Futures contracts on individual stocks expire on the last Thursday of the maturing month. New contracts are introduced on the Friday following the expiry of the near month i.e. the one-month contract.
The futures segment of the both the stock exchanges are witnessing surge in trading activity as retail investors are gradually increasing their hedge positions against the cash market, dealers said.
