Nifty futures, arbitrage from point of view of investors.

Nifty June futures discounted by almost 0.5%
This is how rolling over is done :)
People talk about positive cost of carry and premium and what not. thats not how the professionals roll over. They will bash up nifty slightly so they can conduct their rollover at discounts.

Imagine u have 1 crore rs to invest into a group because u believe in the india story and want to invest for 2 years
u can buy 1 crore of A group shares in nifty weights (very tough to manage)
you will get 1.8% dividend per year
And you will get capital gains
Lets imagine that at the end of 2 years the index is up 20% (conservative case, ideal case would be up 40%)
since you own nifty shares in the right ratio u made 20%+dividend yield 1.8%- the cost of transactions = 21.8% - 2% = 19.8%

Now imagine that you decided to think for yourself.
Lets also imagine that you decided to study what a futures contract is and what cost of carry is.

You would soon realize the following
cost of carry is the premium the futures buyer pays to the cash holder for the privelige of paying low margin
effectively the person buying futures is paying 10-20% margin on one contract.
(varies by contract/sebi mood etc). So effectively the person who is long futures is borrowing money from the market @ coc and the person short futures is lending money @ coc

Lets assume for now
we have 1 crore
we put 80 lakhs in the bank , fixed deposit and earn 9% interest per year
remaining 20 lakhs we keep to buy 1 crore worth of nifty.

We use the clever strategy of rolling over our positions only when cost of carry is negative.
so At end of the one year
we have paid either 0 charges for rolling over
or maybe even made 3-4% per year during rollover process
for instance right now if i am long nifty may @ 4238 i can buy nifty june for 4228
which means cost of carry, annualized is negative (0.25% ^ 12) = negative 3%
meaning market is paying me 3% per year to take the risk of holding nifty futures rather than holding nifty spot.

the transaction cost for nifty, lets say we do 4 rollovers
i.e we use far month series for rolling over instead of trying to hold near series
Every time we rollover the cost is negative around lets say 10 pts
those 10 pts can be used to pay off the comissions

So in 2 years
I have held nifty long thru futures. 1crore worth
imagine nifty is up 20% after 2 years
Nifty futures are trading @ par on a certain day or @ premium on a day that a new 52 week high is made
I cover the rolled over nifty futures
my net gain??

i made 18.81% on the 80 lakhs fixed deposit = 15 lakhs
Also on the 1 crore worth of nifty i made 20% = 20 lakhs
Total gain on one crore = 35 lakhs or 35 % in 2 years
Vs the average joe who used an index fund or invested in a group shares and made 19.2%

Now i know this is the perfect scenario.
You might have to break the fixed deposit if nifty crashes by > 10% since u would be recieving a margin call.
so this strategy is best initiated near 200 sma of nifty from where the drawdown is usually not greater than 5-10%
Or initiate the strategy after atleast a 5-10% correction in nifty spot...
(so far in this cycle degree max dip has been roughly 30% and 200 sma has been the mother of all supports)
If you initiate the strategy at 52 week high odds are u will have to break that fixed deposit and pay up more margin as nifty corrects.

Now imagine a person who knows all this and yet doesn't execute this strategy :)
Thats me.
Knowledge = power but only for those who wield it with confidence.