How to trade in cash future spread?

I had checked BSE has cash future spread.

How can i trade in this spread?What are the margin requirements for this spread?



Spread Order report: Window to monitor the orders placed, cancel/modify spread orders, see the picture below.

ZT Spread Orders

Once clicked on Spread Order the following window shows up; do note the 3 different order types in the pic below:

ZT Spread Orders

Will explain taking examples for all the different order types mentiond in the above picture

1. Order Type, SP (Spread):

SP order type is used for taking a calendar spread position. A calendar spread is a contract where you buy/sell a particular month contract (Futures or Options) and sell/buy (take an opposite position) of the same contract of a different month. Why would someone want to do such a trade???

Assume that you see Nifty February futures trading at 5900 and March futures trading at 5960, you feel that this difference of 60 points between both the months is quite a bit and this will reduce to 30 points in the next few days, how do you profit from this idea? The idea is to profit without taking any naked directional risk, i.e., immaterial of the market going up or down, you should be able to profit if this difference between both the futures reduces from 60 to 30 points.

The easiest way to do this is to sell March futures at 5960 and buy February futures at 5900 in 2 different orders and when the difference is lesser than 60 you make profits, and if the difference is more than 60 you make losses. In a position like this there is hardly any market risk and because of this the margin requirement to setup a calendar spread like this as per exchange norms will be very less. Just to give you an example, the margin required for 1 lot of Nifty is around Rs. 28000, so in the above case since you have 2 lots the margin requirement should ideally be Rs. 56000.

But becaue this is a calendar spread the margin requirement for both the positions together due to the reduced risk is only Rs. 6000 and not Rs. 56000. You can check the SPAN Calculator to see this benefit.

The issue with entering a calendar spread in 2 different orders like above is that (a) There is a risk that the price moves between placing both the orders (b) you would have to pay brokerage for 2 orders to enter and 2 to exit (not that we would mind). By using the SP order type in the spread order window, all the above 2 issues get fixed.

*Imp: Do note that while placing the spread order like above you will need margin on one side of the future completely, but as soon as you take the position the margin drops. For eg to take a spread position of buy 1 lot feb nifty and sell 1 lot of March nifty, you will need around 30k to place the order. But as soon as the order is executed, the margin required drops to around Rs6000.

To track the exact difference between 2 calendar future contracts, NSE gives you a specific quote which can also be traded directly. To track this see the picture below:

ZT Spread Orders

Here are the tricky few bits: this difference which is shown on the spread contract can be positive, negative, or zero, which is not possible for all other contracts other than spread contracts. So if October Nifty is at 6200 and November Nifty at 6190, this spread contract in the above figure will be -10.

Here is where Iā€™d ask all traders to exercise caution, as trading the spread differs from trading an underlying. Though you are actually buying the spread you are actually selling the spread contract and hence you can see a red window even though it is a buy order (ideally it should be blue). In the above example, if I put the price as Rs. 20 the spread will get created at the market price and if I put say Rs. 60, it will go as pending as shown below.

Spread order report is under the Orders and Trades menu and the link to the menu is shown on the first pic of this blog.

ZT Spread Orders

So if you think that a spread is going up you will use the buy order window, buy it at 30 and sell it when it reaches 35, or similarly if you think it is coming down you sell at 30 and buy it back when it comes to 25. These spread contracts are not very liquid contracts so exercise caution when setting them up.

When you trade using the Spread Order window the margin benefit is instant. So if you have around 6k in your account you can take a position in 1 lot of the above contract. 

 Hope it Helped :)