 # NIFTY FUTURES CALENDAR SPREAD STRATEGY (CSS)

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Nifty futures - Calendar spread strategy ( CSS ):
( FUTURES CHART NOT POSTED AS TRADINGVIEW DOES NOT HAVE NIFTY FUTURES CHART. HENCE PLEASE VIEW FUTURES CHART IN OTHER SOFTWARES TO HAVE AN UNDERSTANDING OF THE CONCEPT)
Concept:
CSS is a strategy with an objective of profiting from spreads between far month futures and near month futures . The spreads are a function of interest rate.
For eg., as on 09/02/2018, the following are the nifty levels:

Nifty spot level is 10540
Nifty Feb futures 10543
Nifty Mar futures 10565
Nifty Apr futures 10582

The premium matrix is as under:

10540 10543 10565 10582
-----------------------------------------------------------------------------
10540 0
10543 3 0
10565 25 22 0
10582 42 39 17 0

The above matrix gives an overview of the premium levels of nifty .

These can be translated into interest rates. For eg, let us take Nifty Apr futures level 10582; Current spot levels is 10540; hence the futures premium is 42. This translates into an interest rate of 1.91%, which is derived using the following equation.

Futures = Spot X ( exp )^( r X t)
where, exp is the exponential function
t is the time in years.
r is the interest rate.

Similarly the interest rates derived for Mar and April futures are 0.80% and 1.80% respectively. Mar 0.80%, Apri 1.80% and May 1.91%; The calculation of interest rates has a relevance in this particular strategy. Before employing this strategy one should ensure that the interest rates are sloping upwards as the tenor increases.

Strategy :

Short the contract that corresponds to the highest interest rate and long the contract that corresponds to the lowest interest rate. In this case short April futures at 10582 and go long Feb futures at 10543. Ideally the spread that is locked is 39. It is a known fact that interest rates go down as tenor decreases and given that logic the spread of 39 is assumed to decrease going forward and the holding period is till the near month expiry date. Margin required for both the contracts is around Rs 60,000 (NRML). The max profit is Rs 2925 (39 x 75) per lot of long and short minus other charges; so approximately Rs 2,500 on a capital of Rs 60,000 for a period of 10 days which is around 4.9% absolute and 178% annualised.

Risks :

Risk to this strategy is widening of the spread where far month contract's rise is more than the near month contract's rise OR a scenario where far month contract's fall is less than the near month contract's fall. To mitigate this risk, keep a stop equivalent to the max profit.

Spread of far month contract over near month contract chart is attached for a visual understanding of the movement of the spreads.