Understanding Discount in Nifty Futures

This article will help newbie traders in understanding the difference in premium and discount in Nifty Futures and how to use them in trading.

Nifty Futures is a financial instrument in which futures contracts are done on the basis of CNX  Nifty index which is the benchmark of NSE. Nifty Futures keep moving in Premium and Discount compared to Nifty Spot price. We have seen many time  NIFTY is available at Discount of 20 points? or Nifty Premium is increasing ? So what does they mean exactly.

What is Premium and Discount in Nifty?

Nifty Premium –If Nifty future is trading higher than Nifty spot, then Nifty Future is trading with premium. The Highest Premium seen in Nifty was 70 points in 28 Feb 2012 expiry when market rose 20% in matter on 2 months.

Premium = Nifty Future Price – Spot Nifty Value

For Eg: Suppose  NIFTY is trading at  9500 and NIFTY FUTURE is trading at  9520 in this case Nifty is trading in Premium of 20 points (9520-9500)

Nifty Discount –If Nifty future is trading lower than nifty spot, then nifty future is trading with Discount.The Highest Discount seen in Nifty was 150 points in March 2020 expiry when nifty saw a fall of 30% in matter on 1 months.

Discount = Spot Nifty Value – Nifty Future Price

For Eg: Suppose  NIFTY is trading at  9500 and NIFTY FUTURE is trading at  9490 in this case Nifty is trading in Discount of 10 points (9500-9490)

What is significance of Discount and Premium availability of NIFTY?

As per Thumb Rule

When discount widens , bearish mood of market is increasing

When premium widens , bullish mood of market is increasing

But at times, things can go the other way round also.

Sometimes bullishness may also lead to widening of the Nifty futures discount, as explained below:

  1. When FII’s are long on the markets, they short Nifty futures as a hedge.Nifty Futures are less volatile than individual stocks. If the stocks move up, the loss in the futures will be relatively less.This selling results in huge discount in Nifty Futures.
  2. Another reason for Discount happens during result season when Companies declares dividends, Large number of index stocks going ex-dividend and it lead to discount in Nifty.

For the June Month we are trading in Discount of almost 100 points below are the possible reason

  • MSCI Buying/ Re balancing Buying with massive volumes can be seen in cash that’s the reason stocks moved in cash but was not moving in Future
  • New margin Policies for Options— Check this NSE circular. This has been a long time coming — margin reduction for positions that hedge each other. SEBI has just put out the new margin framework for cash and F&O (Equity and currency) segments. Check this.

Trades should always note when Nifty trades in Premium excessive of 40 points, its a warning bell small correction is round the corner which will lead to lowering of premium in Nifty.

Premium and Discounts converges to zero at the closing date of future ie on last Thursday of every month.Nifty May future was trading almost 40 points discount on the last day of the expiry and they chopped back and forth and it got neutralized at the last hour.

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10 thoughts on “Understanding Discount in Nifty Futures”

  1. Hello Sir

    I am a regular follower on your YouTube channel for Gann analysis. I have noticed that somedays the Option premium doesn’t rise or fall with the direction. Can you please make a video on this observation ?

    Also, as mentioned by Rajiv Varma sir, I also want to understand if option price follows Spot or Future price.

    Thanks for your knowledge Guruji !!

  2. When nifty is at premium /discount , what dictates the option pricing is it futures or spot

  3. Thanks… I was wondering where to get the clarification. You have visualised this question from your readers as a right Guru. Thanks again…

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