Wednesday, July 7, 2010

Trading Stock Futures - Profitable Even On A Down Day

I have been harping on this power of leverage that Stock Futures enjoy. This power has been evident in Indian markets even today. From the time the Indian markets opened today on 7th July 2010, there has been immense selling pressure. In the first half, Indian markets took cue from weak Asian markets and then got fully hugged by Bears after European markets opened weak in the second half. There was just no escaping the relentless selling by Bears. Nifty gave up all its gains it made yesterday.

In such a scenario, if you were a retail investor there was no room to hide, trading in cash segment. Like it or not, retail investors are perenial Bulls and cannot imagine going short. And in cash segment, today was just not the day for going long. But its a different story if you are trading in Stock Futures. Power of leverage will help you to make reasonable money on the long side by exploiting the intraday volatility. Let me illustrate the point by highlighting the following trades which were squared off today as per my recommendations at :-
  1. Bharti Airtel July Futures :
    Bought at 273.5 and covered at 278.5. Lot size = 1000.
    Investment = Rs 54000/-.
    Profit = 5x1000= Rs 5000/-.
    Remarks : This lot was bought today morning and squared off intraday with reasonable profit of Rs 5000/- for investment of Rs 54000/-. If one had bought the scrip in cash, it would  have been difficult to exit with profit of just Rs 5/- per share. For making Rs 5000/- profit in cash segment, one would have had to invest Rs 2,73,500/- in this scrip.
  2. Cummins India July Futures :
    Bought at 596 and covered at 602. Lot size = 500.
    Investment = Rs 59000/-.
    Profit = 6x500= Rs 3000/-.
    Remarks : Here it would have been even more difficult to exit with a profit of just Rs 6/- per share, if one had traded the scrip in cash segemnt. To achieve a profit of Rs 3000/- you would have had to invest Rs 5,96,000/- in cash segment.
Today's closed trades in Stocks Futures yielded total profit of Rs 8000/- (5000+3000) against a total investment of Rs 1,13,000/- (54000+59000). That means a return of 7.1% on investment in long trades, on a day totally in the grips of Bears. Hope I have made my point amply clear about power of leverage in stock futures trading.