If i want to capture the difference in Price between a stock and its future value , how best can i gain this difference ?
Lets say Reliance is trading at 800 and Nov future is trading at 810 , lot size of Reliance is 1000.
is it possible that i purchase 1000 shares of reliance and short a Reliance Future and square both off at the end of the month to get the difference ?
Alternative is there a way i can have an auto square off , since i already have 1000 shares of Reliance i need to deliver.
Please let me know the pros and cons of this method and also if the gain could be too lil considering the transaction charges involved.
Yes, you can. Its called an arbitrage trade, where you sell Futures, buy stock and try to capitalise on the price difference that exists.
In your case, the riskless profit that you can make is Rs.10*1000 = Rs.10,000
But look at the cost of this trade:
To buy 1000 Equity shares of Reliance, you’ll need to have Rs.8,00,000 in hand
To short 4 lots (1 lot = 250) of Reliance Futures you’ll need Rs.1,20,000
So your total investment is Rs.9,20,000 on which your return is Rs.10,000 which is 1%. The cost of Financing is probably more than the return that you would make on this trade. You haven’t even considered the cost of trade which would include brokerage, transaction charges, STT which would further reduce your profit percentage.
This trade would make sense if there is mispricing in a stock and its future contract. If the Future contracts are priced higher than what it should, then you can take such a trade and benefit from the difference, the chances of which are almost nil considering algo systems & super computers which are always on the lookout for such mispricings.