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Cash future arbitrage is basically an opportunity to earn risk-free profit from an unusual difference between cash and future prices in the stock market. There is normally an appreciable and exploitable difference between the Cash price and future price, especially at the beginning of the month. This difference is known as basis (basis = cash price - future price). Smart investors having investible sum in the range of 3 to 5 lakhs can earn risk free profit using cash future arbitrage. In a cash-futures arbitrage, a trader sells the futures that are quoting at a premium (or buys the future that is quoting at a discount) to the stock, and buys (or sells) an equivalent quantity of the underlying shares, the difference between the two being his profit. Closer to the derivative expiry when both future and spot prices almost coincide, the trader squares of his positions in both segments - buying futures and selling shares or selling future and buying shares. This strategy yields the best returns when the futures are quoting at a significant premium or discount to the spot price. To help investors benefit from cash and future arbitrage, Equityfriend prepares the list of all the arbitrage opportunity available in NSE FnO section every end of day. 

But before you use the data to open arbitrage positions, it's important to understand the behavior of futures premium and discounts - an interesting phenomenon observed regularly by traders in the FnO market. Let's try to turn this observation to insight backed by some real life data so as to tap on arbitrage opportunities popping up every now and then in the FnO market. So to begin with, here are some facts that we will slice and dice later and see where we reach:

1. Futures tend to trade at a premium to the spot market (Contango), but sometimes they also trade at a discount (Backwardation)

2. Generally speaking, the primary reason for Bacwardation is declaration of dividend by the companies

3. Widening Discount is indicative of Bearish market whereas widening Premium is indicative of Bullish market

Fact no 1 above naturally makes us curious to identify on which side of the fence the overall market stands at the moment. Is it in Contango or Backwardation? Here are two simple charts to establish that. First chart displays the absolute number of stocks which are in contango and bacwardation for near and next month expiry. We have left the far month expiry intentionally as they are not very liquid.

Here is another way to look at data while drawing the same inference about the broader market. The chart below plots the average of % basis of all stocks for all the three expiry i.e. current (near), next and far month. Just in case you want to know what % basis is, here is one line definition :

% Basis is defined as the % difference between the spot price and future price

Hold on for a moment and digest what we are plotting on the graph below. We take the date wise average of % difference of spot price and future price of all FnO stocks for each expiry (current, next and far month) and then plot the three lines below - one for each expiry. If far month expiry line is above next month expiry line and next month expiry line is above current month expiry line and current month expiry line is above 0 then we are in ideal contango market. Similarly, if far month expiry line is below next month expiry line and next month expiry line is below current month expiry line and current month expiry line is below 0 then we are in ideal backwardation market. Sorry for putting in so many and conditions :-). However, once you have wrapped your head round this, you can clearly tell if current month, next month and far month futures on an average are trading at premium or discount to spot prices.


Average of % Difference of Spot Price & Future Price Chart (All FnO stocks): Current, Next and Far Month Expiry

If these charts have got you thinking, let me jump straight to the question which we ultimately want an answer to? Where is the money honey? The answer to this question lies in answer to another question which is can you spot the crossover and divergence in the charts above and do you really understand why it's happening?

In stock market, money is most of the time hidden in divergence and crossovers. Train your eyes to spot them early.

The one who spots them early and deciphers them correctly will be among the last men standing - remember the most unsubstantiated, but apparently true saying i.e. 95% of people lose money in the stock market. Especially for this case you must look for narrowing and widening of the lines (divergence) plus markets turning from contango to backwardation and vice versa (crossovers). if you have successfully spotted them, it's the right time to figure out if there exists a real arbitrage opportunity which can be exploited to make money. Needless to say, the inferences we have drawn till now is not tradable. We have to get one level down to index and stocks as these are the instruments which we can actually trade. So apt time to peek at index data get the list of other target stocks where the arbitrage opportunity lurks? Click below to get the index data.


Getting to the stocks level, here are the stocks which are showing appreciable premium and discounts for the three expiry.You can click on each bar to get a detail view of particular stock:

That's all good dude, but won't it be better if you also give a list of stocks doing the crossover from premium to discount and vice versa. If this is what you are thinking then let me satiate your neurons. Here is the desired list of all the crossovers happening today. You can click on each row to get a detail view of particular stock.


As we have the complete target list where the real action is happening, lets get back to answering the tougher part of the question which is do we really understand the reason of extreme behavior with respect to divergence and crossover? Plus is the gap in the premiums going to be filled on expiry (a real trading opportunity) or they are going to sustain till the very end (a normal dividend declaration kind of scenario where gap would't fill even on expiry day). We have two cases to analyse:

  1. Are we slipping from contango to bacwardation (bearish)
  2. Are we jumping from backwardation to contango (bullish)

Let's pick up case 1 where your target stock or index has suddenly slipped from contango (normally futures always trade at premium to spot) to backwardation or the premiums have narrowed for consecutive expiry even though we are still in contango status? In this scenario, we need to slice and dice fact no 2 above i.e. the dividend story. In one line, we just have to do a comparative analysis of the amount of dividend being declared on year on year basis for particular stock to establish if dividend has all ready been declared or impending. In both the cases, premiums will turn to discount and the gap with spot will most probably not get filled on expiry.  If the declared dividend or impending dividend is expected to be consistent with last year data then futures will surely go from premium to discount. The amount of discount will be roughly equal to the dividend amount. So far all normal and no trading opportunity. However, if there is no dividend declaration in sight and yet futures went into abnormal backwardation then there is something fishy and here lies the opportunity. You can do quick dividend analysis by selecting your stock of interest below. But before you do that, just for completion sake, one additional point - let's say dividend analysis does not indicate any unusual behavior. So what could be the other reason for such abrupt change in premiums. Hear this:

Besides dividend declaration, stocks can also slip to sudden backwardation because of heavy selling in the future market

And if this is the case then their surely lies a trade worthy opportunity. I can hear you thinking loud. How to establish if pure shorting is happening in the futures market? Let me answer this and then you can begin your second level analysis. To ascertain that heavy shorts are getting built in a particular counter, start with dividend analysis, then check the futures open interest/volume and security wise delivery trend. If future price is going down with increase in OI and volume along with no substantial activity with respect to delivery percentage, volume and number of trades in cash segment, then this clearly indicates that action is only happening in the futures market. Now you are fully loaded. So go on and select the stock of interest and hopefully charts appearing below will enlighten you further:

Now what about case 2 where futures are suddenly turning from discounts to premium? This analysis is easier than the previous one. The whole and sole reason for this price behavior is traders are expecting the price to rise in future hence the sudden rise in premiums. Having said that, this backwardation to contango movement is also observed once dividend declaration news has been fully digested i.e. after the current month expiry. All in all, analysing dividend history is a key step in the whole process of identifying profitable arbitrage trade. Key to Success: 

Before entering any arbitrage trade, figure out if current discount reflects dividend expectation or not

Just in case you have an urge to explore other stocks which are not in the charts and lists above, here is the complete list of all stocks trading currently in backwardation i.e. at discount and contango i.e. at premium. You can click on any row to get more details about particular stock: 

Finally a little bit on types of Arbitrage Strategy:

There are basically two types of cash and future arbitrage strategy:

Day Strategy – In this strategy, the arbitrager tends to square up on the same day when the difference between cash and future price shrinks. For example, say the Reliance share cash price is Rs 950 and the futures price is Rs 960. Since the markets are at times very choppy, the cost of carry between the futures and spot varies. Supposing one initiates a trade at a cost of carry of Rs 10. Whenever the difference shrinks to Rs 5 to 6 in the same day, the arbitrager reverses the position.

Monthly Strategy – In this strategy, the arbitrager enters the arbitrage position at the beginning of the month and holds it till the expiry day. On the expiry day, when the cash and future prices converge, he closes both the positions pocketing the price difference at the beginning of the month as the profit. For example, say the Reliance spot price is Rs 950 and futures is at Rs 960, with 28 days to expiry of the futures contract. Arbitrager will keep this arbitrage position open till the expiry day when the spot and futures start trading at parity. Once the prices converge, he will close both the positions and keep Rs 10 – Transaction charges as risk free profit.

Things to keep in mind before taking Arbitrage Position:

1. Transaction charges and brokerage eats away the majority of arbitrage profit. Investors should always account for them before taking the arbitrage position.

2. Sometimes spot price and future price do not converge on expiry date. To reiterate:

As soon as a company announces a dividend, the stock futures accounts for it by going ex-dividend, even before the stock becomes ex-dividend. In such a scenario, spot price and future price will not converge on expiry date leading to very less (which will be eaten away by transaction charges) or zero arbitrage profit. Hence, whenever the future price is trading at significant discount to the spot price, investors must double check the reason before taking the arbitrage position.

Finally, if you are feeling overwhelmed with data, no need to worry because it's surely too much data to digest at one go. We suggest that you start spending some time with this data on daily basis and within a week or two everything will start making sense.


Disclaimer* - The data on this page comes from what we have in our database and is not complete plus there might be inaccuracy in the numbers shown in the tables and charts above. So use this data for analysis purpose only and do not treat it as any recommendation to trade or invest. Also do a second level check for data accuracy from direct sources like NSE and BSE websites.

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