stock futures for long term

F&O
1

can anyone share their thoughts on holding stock futures for the longer-term instead of holding that quantity in cash with the help of rolling over position every 3 months?

for e.g. say I am bullish on reliance and believe that the price of reliance will be up by at least 10 to 15% from the current price by next year, then instead of taking delivery and blocking all my money how about I buy one lot of reliance futures expiring 3 months from now and as it comes closer to expiry I will roll over the position to further 3 months and so on… so 4 rollovers in a year’s time.

if anyone has been doing it or if anyone has knowledge about this kind of stuff, can you share your views and potential negatives and positives?

thank you

2

Few things I can think of -

  1. Volatility will be high since it’s a leveraged position.

  2. You’ll have to factor in the cost of carry, which should be roughly 6-7%, per annum.

  3. Dividends declared by the company would not be paid to you. For example, if the company declares a dividend of Rs.10/share and the ex-date is a month from then, the near month futures will not be affected but the next and far month futures will be adjusted downwards by Rs.10/- to reflect the fall in share price on the ex-date.

  4. You can write covered calls for income and get margin benefit because of the offsetting futures position. Likewise, you can also hedge through long puts.

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3

Yes, pretty much what Suyash said.

You are correct in your overall thinking though. This is exactly what derivatives were made for when they started out. To take a position in the directional movement of an underlying at a fixed price with a smaller upfront. If you feel strongly in your conviction and the directional trade plays out as you intended. Works :slight_smile:

If it doesn’t you have some extra work cut out for yourself managing the position(s) and keeping a track of things such as expiry, liquidity, strikes etc

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4

so if a company declares a dividend and futures holder does not get that money, would the buy average be adjusted?

5

No, it wouldn’t.
Only, in case the dividend declared is more than 5% of the price, then the futures buy price will be adjusted. If you’re planning to go long in RIL futures, this dividend factor wouldn’t affect you much since the dividend yield of Reliance is very low.

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6

if we look at the IT stocks where dividend yield hovers around 1 to 3 percent in such stocks I guess it may make a big dent in futures holding is that correct understanding?

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7

Usually the ex-date isn’t until a month later and the near month futures are not affected. But yes, the next and far month futures will account for the dividends after it is announced.
Also, the liquidity in the far month futures would be a challenge. The liquidity in the next month contract is still okay.

Personally, I don’t go via the derivative route for taking positions in stocks I would want to own.

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8

ok great thanks Suyash for helping me out with this and sharing your thoughts. :slight_smile: