This strategy is only applicable if the futures price is comparatively cheaper to the spot price of the asset. i:e possibly the execution of the short sale should exceed the price of the futures contract and the costs associated with carrying the short position in the scrip.
For example:Let's take an scrip currently trades at Rs:100, while the one-month futures contract trades at Rs:96. In this situation, the trader or arbitrageur would initiate a short position in the scrip at @ Rs:100, and simultaneously buy the one-month futures contract at Rs:96. Upon expiry of the futures contract, the trader accepts delivery of the scrip/stock and uses it to cover the short position in the scrip/stock, thereby ensuring an arbitrageur or risk-less profit of Rs:4 excluding brokerage and taxes.
HeroMotoCo:
Which is trading at discount prices of Rs:86.05 in September series, which accounts for
bps: (86.05*10000/1972.8) = 436 bps
We can lock in the difference of 436 bps for September expiry at current prices. This will result in risk-free profit of Rs:86.05/share excluding brokerage and transaction cost.
Trade Execution:
For example:Let's take an scrip currently trades at Rs:100, while the one-month futures contract trades at Rs:96. In this situation, the trader or arbitrageur would initiate a short position in the scrip at @ Rs:100, and simultaneously buy the one-month futures contract at Rs:96. Upon expiry of the futures contract, the trader accepts delivery of the scrip/stock and uses it to cover the short position in the scrip/stock, thereby ensuring an arbitrageur or risk-less profit of Rs:4 excluding brokerage and taxes.
HeroMotoCo:
Which is trading at discount prices of Rs:86.05 in September series, which accounts for
bps: (86.05*10000/1972.8) = 436 bps
We can lock in the difference of 436 bps for September expiry at current prices. This will result in risk-free profit of Rs:86.05/share excluding brokerage and transaction cost.
Trade Execution:
Scrip Name
|
Buy 1 lot Sept Fut @
|
Sell 125 shares from demat @
|
Difference
(in BPS) |
Gross Profit
(in Rs) |
Holding Period
|
HEROMOTO
|
1886.75
|
1972.8
|
436
|
10752.05
|
Till Expiry
|
Buy 1 lot of Heromoto Sept futures @ Rs:1886.75 and sell 125 shares (demat holding) at @
RS:1972.8 Execute the arbitrage with a difference of Rs:86.05/share.
Things to watch out before executing Reverse arbitrage.
Things to watch out before executing Reverse arbitrage.
Happy Trading !
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