Understanding Premium and Discount in Nifty Futures

By | March 30, 2013 1:07 pm
10 Comments

This article will help newbie traders in understanding the difference in premium and discount in Nifty Futures and how to use them in trading.

Nifty Futures is a financial instrument in which futures contracts are done on the basis of CNX  Nifty index which is the benchmark of NSE. Nifty Futures keep moving in Premium and Discount compared to Nifty Spot price. We hear a lot of experts talking like NIFTY is available at Discount of 20 points? or Nifty Premium is increasing ? So what does they mean exactly.

What is Premium and Discount in Nifty?

 

Nifty Premium –If Nifty future is trading higher than nifty spot, then nifty future is trading with premium. The Highest Premium seen in Nifty was 70 points in 28 Feb 2012 expiry when market rose 20% in matter on 2 months.

Premium = Nifty Future Price – Spot Nifty Value

For Eg: Suppose  NIFTY is trading at  5000 and NIFTY FUTURE is trading at  5020 in this case Nifty is trading in Premium of 20 points (5020-5000)

 

Nifty Discount –If Nifty future is trading lower than nifty spot, then nifty future is trading with Discount.

Discount = Spot Nifty Value – Nifty Future Price

For Eg: Suppose  NIFTY is trading at  5000 and NIFTY FUTURE is trading at  4990 in this case Nifty is trading in Discount of 10 points (5000-4990)

 

What is significance of Discount and Premium availability of NIFTY?

As per Thumb Rule

When discount widens , bearish mood of market is increasing

When premium widens , bullish mood of market is increasing

But at times, things can go the other way round also.

Sometimes bullishness may also lead to widening of the Nifty futures discount, as explained below:

  1. When FII’s are long on the markets, they short Nifty futures as a hedge.Nifty Futures are less volatile than individual stocks. If the stocks move up, the loss in the futures will be relatively less.This selling results in huge discount in Nifty Futures.
  2. Another reason for Discount happens during result season when Companies declares dividends, Large number of index stocks going ex-dividend and it lead to discount in Nifty.

Trades should always note when Nifty trades in Premium excessive of 40 points, its a warning bell small correction is round the corner which will lead to lowering of premium in Nifty.

Premium and Discounts converges to zero at the closing date of future ie on last thrusday of every month.

 

 

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10 thoughts on “Understanding Premium and Discount in Nifty Futures”

  1. Shantanu Kumar

    Nifty slipped into discount in last few min of trade. Is that a bearish signal just before budget & expiry?

    Reply ↓
  2. ravinder

    Hi,
    sine I understand the chart patterns on intra day basis, how can one understand if stock has is trading or trending. thanks

    Reply ↓
    1. Bramesh Post author

      Ravinder,

      If stock keep making higher high or Higher low its trending

      Rgds,
      Bramesh

      Reply ↓
  4. mbhaskarrao

    very nice. easy to understand. pl. explain about options and how to determine the trend of nifty

    Reply ↓
    1. Bramesh Post author

      Dear mbhaskarrao,

      To understand trend in nifty you can follow the trend changer level which i give on site on daily basis.

      Rgds,
      Bramesh

      Reply ↓
  6. BALA

    Sir

    Very nice and lucid . Will you please also explain the significance of closing rate of one month contract and the next month contract in future. For example, March end and April series .Why the values are not coming and sychroning viz either march closing should be april closing but differs .Thanks

    Reply ↓

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