Beginner’s Guide to Trading Nifty 50 Futures: How It Works and Key Strategies

The Nifty 50 is one of India’s most tracked stock market indices. It represents the weighted average of 50 of the country’s largest and most liquid companies listed on the National Stock Exchange (NSE). Nifty 50 futures offer a way to speculate on or hedge against market movements without directly buying the underlying stocks.

Futures contracts are an essential component of the derivatives market. They are standardised agreements to buy or sell the Nifty 50 index at a predetermined future date and price. Understanding how these contracts function can help you manage risks and optimise your trading strategy.

Nifty 50 futures are derivative contracts based on the Nifty 50 index. The term ‘Nifty 50 futures index’ refers to this actively traded derivative on the NSE.

When you buy a Nifty future, you agree to purchase the index at a fixed price on a future date, expecting it to rise. If you sell, you are expecting the index to fall.

These contracts are cash-settled, meaning you don’t take delivery of the 50 underlying stocks. Any gains or losses are settled in cash upon expiry.

Common uses of Nifty futures:

• Speculation: To profit from expected price movements in the index

• Hedging: To protect your portfolio from index-level volatility

Here are four basic strategies suited to new traders:

1. Directional Trading

If you expect the Nifty 50 index to rise, you can take a long position by buying. If you anticipate a decline, you can take a short position by selling. Traders often use technical indicators like moving averages or support and resistance levels.

2. Breakout and Pullback Trading 

This strategy involves entering trades when the price breaks resistance (breakout) or briefly retraces to support after such a move (pullback). Both strategies depend on clear price movements, helping you reduce uncertainty in your decisions.

3. Hedging

If you hold a large portfolio and expect a short-term market dip, selling Nifty futures can help protect against potential losses. This strategy is commonly used by institutional investors and mutual funds.

4. Spread Trading

This strategy involves taking both long and short positions in Nifty futures with different expiry dates. For example, you can buy a near-month contract and sell a far-month contract. The goal is to profit from the expected narrowing or widening of the price difference between the two.

5. Basis Trading

This refers to the difference between the futures price and the spot price. When futures trade at a premium, you may sell futures and buy spot stocks or Exchange Traded Funds (ETFs). If they trade at a discount, you may do the opposite. This is an advanced strategy used to understand and leverage market structure.

6. Risk Management

• Using stop-loss orders to limit losses

• Avoiding overleveraging to reduce exposure

• Understanding position sizing to balance risk and reward

Successful trading requires managing risk effectively. Key practices include:

Here are the standard contract parameters for Nifty 50 futures as defined by NSE:

Formula to Calculate Nifty 50 Futures Price:

Futures Price = Spot Price × [1 + (Risk-Free Rate – Dividend Yield) × (Time to Expiry / 365)]

Where:

• Spot Price: Current level of the Nifty 50 index

• Risk-Free Rate: Typically, the yield on government securities

• Time to Expiry: Number of days until the futures contract expires

• Dividend Yield: Expected annual dividend yield of the Nifty 50 constituents

The formula reflects the cost of holding the position, factoring in interest rates and expected dividends. Futures may trade at a premium or discount to the spot index depending on these and market sentiment.

Trading Nifty futures requires more than basic stock market knowledge. Here’s how you can get started:

Step 1: Open a Trading and Demat Account

You need to open an account with a SEBI-registered broker that offers access to the NSE derivatives segment. Nifty futures are cash-settled, but having a demat account is still a requirement.

Step 2: Meet the Margin Requirement 

Margins are the portion of your funds blocked by the broker to initiate a futures trade. These include:

• Initial Margin: Required to enter a trade

• Maintenance Margin: Required to keep the position open

Step 3: Choose the Right Contract

You can choose from three contract cycles: near, next, and far month. Beginners often opt for near-month contracts because they have higher liquidity.

Step 4: Place Your Order

Use your trading platform to place an order. Orders can be:

• Market Order: Executes at the current price

• Limit Order: Executes at a specified price or better

Step 5: Monitor and Exit Your Position

You can:

• Square off (close) your position before expiry

• Hold the contract until expiry and have it settled at the final settlement price

You can track Nifty 50 live futures prices on the NSE India website, broker platforms, or financial portals. This live price reflects expectations of the index’s future value based on:

• Interest rate movements

• Time left till expiry

• Expected dividends

Trading Nifty 50 futures carries significant risks. Some of these include:

• Leverage Risk 

Leverage amplifies both profits and losses. A slight market movement can have a significant impact. 

• Market Volatility

The index can experience sharp fluctuations due to economic reports or global news.

• Margin Calls

If the market moves against your position, your broker may issue a margin call. You may then need to deposit additional funds to maintain your trade.

• Liquidity Risk

Some contracts may have low trading volumes, which can affect the ease of entry and exit.

Profits from trading Nifty futures are treated as business income under the Income Tax Act. Consult a tax professional for personalised advice and keep the following in mind:

• Tax is applied at your income slab rate

• A tax audit may be required if turnover exceeds set thresholds

• Advance tax may apply depending on income estimates

Trading in Nifty 50 futures is regulated under SEBI’s Derivatives Framework. Key regulatory features include:

• Daily mark-to-market (MTM) settlement of open positions

• SEBI-mandated margins and open interest limits

• NSE as the centralised trading platform

• Real-time surveillance systems in place to manage volatility

• Real-time surveillance for risk management

These measures are designed to uphold market integrity and safeguard your interests.

Nifty 50 futures provide a structured and efficient means of participating in the Indian equity markets beyond conventional stock investing. Whether used for speculation, hedging, or strategy-driven trading, futures offer both flexibility and market access.

However, they carry inherent risks due to leverage and market volatility. For beginners, a strong understanding of market structure and disciplined trading practices is essential. 

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.