May-June futures spread spawns arbitraging

The spread between Nifty May and June futures has increased due an oversold market, thereby providing arbitrage opportunities to day traders and speculators.

While Nifty June futures are trading at a backwardation of 35 points, the May futures are at a discount of eight points to the spot Nifty which closed at 1,606. The Nifty May futures expire on Thursday.

Total volumes in the derivatives segment were of the order of Rs 10,720.93 crore today.

Says a derivatives analyst with a domestic brokerage firm, "Nifty trading at a huge discount means there are lot of short positions that are being shifted to the next month with a negative bias. Even frontline stocks are currently trading at a huge discount to spot prices and the last day of the current expiry is expected to be extremely volatile."

Analysts said that the Nifty and most frontline stocks were trading at discount because of the dividends embedded in index heavyweights.

This has contributed to a 13 to 15-point discount in Nifty June futures. "However, even if the dividend factor in index heavyweights is excluded, the Nifty is still at a discount - which indicates that there are no buyers," these analysts pointed out.

Says Rohan Deshpande, a derivatives strategist with Renaissance Securities, "There has been a lot of delta hedging taking place. (Delta hedging is an option strategy to reduce the risk associated with price movements in the underlying securities achieved through offsetting long and short positions.) And if the gap between the Nifty May and June futures widens, it will be interesting to see how speculators manipulate the current month rollover which will indicate market's direction."

Manohar Wadhwa, manager, derivatives, SSKI Securities, says that there are opportunities for calendar spreads - that is buying the current month and selling the next. According to him, steep discount of 35 to 40 points at which the June futures are trading is unusual.

Though 65 per cent of the positions have been rolled over, this could also be the result of spread arbitrage or spread futures trading by speculators.

Given the huge arbitrage opportunities available for traders, there could be another speculative move of about 300 points in the coming week.

With just two days remaining for the expiry of May futures, the open interest in Nifty June futures increased by 72.5 per cent to 5100800, with the cost of carry being a negative 30.15 as of May 24.