Re: Time to Stick my Neck Out ,Nifty 7300
Will it work in this volatile market, if one goes long in Nifty Future May and Short in June or vice versa and square up the position comfortabily after good gain in any contract and wait for square up in next series.
There is a way out to exploit the difference between the values of two contracts. It's called spread trading and it works like this:-
Suppose NIFTY May is trading @ 5010 and NIFTY June is trading @ 5030. Hence, one can go long May contract and Short June Contract and thus gaining 20 points. Here we bet that the spread will eventually come down and thus we will gain from the trade. If Spread widens, we start loosing out on the trade. Now if May contract goes to 5050 and June is trading at that time at 5055, the spread has reduced to Rs. 5. We will earn Rs. 40 on may contract and Loose Rs. 25 on June contract, thus netting the difference in spread. However, If JUne contract is trading at 5080 when May contract is trading at 5050, we loose Rs. 10 as the spread has increased to Rs. 30.
Similar bets on increase in spread can also be made.
However, what you are proposing is that we Go long in May contract, ride the up trend and carry the short june position with us and when the downtrend start, we square off our May contract and later on Square off the june contract in profit also. Hence, initially except to the loss arising from spread differential, the position is risk free and later on it becomes a directional bet. Now, I fail to understand why one would like to do that? If a directional bet is to be made on a later date, why to pay brokerage and also carry the spread risk?
