Algo trading data analytics

Does Indian Stock market provide Arbitrage trade opportunites to retail investors ? Yes it does . Arbitrage is not only a money making opportunites for Arbitrage Funds that finish their duty by paying retail investors a small pie of what they earn ( look at the expense ratio of most funds… are they not exorbitant ? )

We will take a cute csae of Coal India Limited Arbitrage opportunities in the month of December 2021 to illustrate how retailers can make handsome gain out of Arbitrage Trade. One of my brilliant friend, Mr Ankit Agarwal, a data scientist and avid stock trader in Zerodha spotted a brilliant opportunity for us to make risk free handsome money by doing arbitrage trade between spot and future for a stock declaring dividend. There are a total of 188 stocks in NSE, that decalre dividend round the year.

Coal India decalred dividend of Rs 9 Pper share of face value 10 with a record date on 07-12-2021 and payment date on 21-12-2021 in the month of November 2021 and opened an arbitrage opportunities for the month of December 2021.

Those who bought 4200 Coal India stock and just one lot of future on 2nd or 3rd december with a price differential of just Rs 0.98 could lock an Arbitrage Opportunity for Rs 9.88 per share for the future expiry on 30-12-2021. Those buying stocks on zerodha platform is again comfortable since Zerodha does not charge brokerage on buying leg. The future and other charges does not go beyond Rs 0.02 per share and hence a differential of just Rs 0.98 between stock and future makes arbitage trade viable taking risk free yielf of 5.5 % per annum.

The total inverstment of stock and future will cost a little less than 8 lakh for one lot ( with the then price hovering at Rs 150.95 ) and your earning by the end of December is around Rs 40500. You earn a hopping 5 % per month ( taking annualized return of 60 % ).

The question is : Does all stocks acting as underlysing for 188 futures traded in NSE provide 60% annuliazed return ? This is a little research question .
Research invloves a little of back testing of past 2-3 years of data such as

  1. Collection of all data on NSE announcement against all 188 dividend paying stock and noting down the record date and dividend paying date in 2-3 financial years.
  2. Find out the stock and future price differentials one day before ex-dividend day at least to confirm arbitrage opportunities.
  3. Working out capital requirement for just one lot of future ( easy for retail investrors to mobilize ) since the lot sizes varies across the stocks
  4. Finding out the profit on capital employed for a typical arbitrage month ( such as the above example of Coal India Ltd for the month of December 2021)
  5. Working out the return on inverstment for individual stocks and then total return for entire capital employed on rotation basis. The capital being locked for a month gets released next month and fresh infusion is not reuired every month unless there are overlapping of dividend declaration.

Anyone interested to do this reserche can contact me personally for generating fruitful investing insights for retail investors.
Thanks for reading this lenghty article and thanks in advance for all relevant insights.

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Hi all there is a catch here in the above dividend arbitrage gain.

Unless the above arbitrage is excuted usnign a suitably written Algo, there are often risk involved when selling spot after the expiry of the future. The differential that one enjoys on the day of striking the arbitrage is what will play crucial role while selling the spot after future expiry.

The logic to be built in the algo for selling spot is therefore to be intelligently worked out to mitigate risk of landing with no profit and no loss. Under such scenario , the money remaining locked in the arbitrage deal is loosing out earnings that it would have got if it were in the bank.