Handling mismatch in Future and Spot prices during Stock Expiry

Trading
1

Hi all,

We know that Future prices of stocks can differ from spot prices based on many factors such as interest rates, bullishness, dividend expectation etc.

This post is not about these deviations, but rather some curious cases of pricing mismatch during monthly stocks expiry. I wonder if it is possible to benefit, if not, at least avoid losses due to such deviations.

Let’s talk about 3:25 PM on a monthly expiry day (last Thursday of month). The final price is more or less settled by this time, as it is calculated based on weighted average of the last 30 minutes.

I will talk about two cases:

  1. Future trading at a discount. I have seen this many times in Kotak Futures (did not monitor yesterday though). Say the Spot price is 1797 and has been around this level from 15:00 to 15:25. But the Future is trading at 1793, i.e. a negative premium of 4. This negative premium is shown in options as well, e.g. 1790 CE will trade around 3 instead of 7. If one needs to roll-over short positions at this time, then it is a good time, but for someone needing to rollover long positions (i.e. sell current month, buy next month) it is a loss of 4 Rs., i.e. 400x4=1600 Rs. per lot.

If one is holding Kotak in Cash, then in theory one can sell the stock at 15:25 and buy the current month Future of same quantity. But, post 0.25% delivery brokerage at Zerodha, plus STT etc., one will not make any money.

  1. Future trading at a premium. This happened yesterday at the Persistent counter. The final price was 7519, but no one was parting with their futures for below 7550. People who were long in current month and still holding it, made decent profit… People who were short, were sort of trapped with additional losses. Again these people who were short on the future, could have bought it on the spot and delivered the stock, thus avoiding the price deviation, but it will be a similar expense of around 0.3-0.4%.

I have two questions:

  1. What causes this big arbitrage (I’m wondering big houses with lower delivery brokerage can easily benefit from this, thus bringing the arbitrage down, why don’t they?).
  2. I wonder if it is possible to benefit, if not, at least avoid losses due to such deviations, for a retail trader.

thanks in advance.