Guide for Stocks and Index Futures
Understanding open interest along with price data gives an accurate understanding of stocks futures and index futures rates. In the derivative segment, open interest provides a more accurate picture.
The crystal ball of the financial markets is the stock index. Based on a stock index, they are cash-settled futures contract. Market sentiment can be strongly indicated by the index futures. Speculators like position traders, day traders, swing traders and hedgers trade in stocks and index futures. Price action and volumes generated in the stock or index is the base of any prediction.
A futures contract is an agreement to buy or sell the value of the underlying asset at a particular price or date in future. A futures instrument gets its value from its respective underlying along with moving in sync with it.
Open interest and price data influence stocks futures and index futures rate. In the derivative segment, open interest provides a more accurate picture of trading activity. A rise in both open interest and price shows that new or additional money is coming into the market indicating a bullish trend. However, a rise in open interest while fall in price indicates a bearish trend. A rise in price and a steady open interest shows that the market has reached the top. When a sharp price drop is followed by a low rise in open interest, it indicates trend reversal and formation of a bottom. Little or no open interest is a sign of no open positions or that all the positions have been closed. High open interest means many contracts are still open. This proves that change in trend is indicated well by the open interest.
Basis gap, or the difference between future and spot prices, is another important parameter. Usually, the basis gap of a stock is positive in the absence of corporate action. Bullishness is indicated by a positive basis gap while bearishness is indicated by negative. Tracking a stock using basis gap is useful- whether intraday or positional trade. The cost of carry can be checked further by splitting the basis gap. Factors like risk-free interest rate and time to expiry in calculation are included in this.
Corporate action may lead to the high cost of carry in stock. Though, a stock having a high cost of carry without any event indicates that strong-hand players are looking forward to a good movement in the stock. On the expiry day, long rollover is indicated by a positive cost of carry while short rollover is indicated by negative. Reading them with the open interest generates insights into the activity going on in the counter.
A stock with higher rollover and higher cost of carry has more chances of upside while one with higher rollover but a lower cost of carry has more chances of downside. Retailers can use these efficient tools to make wise day-to-day trading decisions in stocks or indexes.
Market risk is there while trading in stocks futures and index futures rates. While caution is required here, proper trading can earn well. Investors can be enabled to take larger positions in this type of instrument as investors can have certain leverage. However, huge losses can have to be incurred if the market doesn’t go in somebody’s favor.