The broker said NSE now plans to remove the IOC condition and make such orders “through the day”. Its use is expected to pick up after the modification.
However, the traders are asking for more. They’d rather have calendar spreads trade as a separate security than just be a facility to place orders.
“There has been a longstanding demand from foreign players to introduce rollover contracts,” said C.K. Narayan, head of derivatives at ICICI Securities Ltd. “This contract is widely used in other markets, especially those in South-East Asia.”
Meanwhile, the same broker said that NSE’s move to change the calendar spread order facility could be a precursor to introducing trading itself on calendar spreads, or what Narayan refers to as rollover contracts.
Let’s assume the Nifty August series is trading at 4,300 around the time of expiry and that the September series is trading at 4,325. Also, consider a trader who has a long Nifty position in the current August series and who wants to carry forward his position to the September series. Under the existing framework, a trader has to sell his August contract and simultaneously buy the September contract, and shell out the difference (in this case, Rs25). Similarly, a trader who had a short Nifty position would have to sell his August contract and simultaneously buy the September contract, resulting in a net income of Rs25.
With rollover contracts, the person with the long position would buy the rollover contract and the trader with the short position would sell the contract. In the above example, the trader with the long position will buy the August/September rollover, which is essentially the buy-September and sell-August contracts rolled into one. For this, he’ll have to pay the difference of Rs25. The trader with the short position will be on the other side of the trade and will receive Rs25.
The payout and receipt of both traders is identical to that in the existing framework except that traders now pay commissions on both transactions. With rollover contracts, they’ll be executing just one trade and will save commission on one leg of the transaction.
There are times when the near-month contract is trading at a higher price compared to the far month contracts. For instance, the August contract could be trading at 4325, while the September contracts trades at 4300. In such a scenario, the trader doing a long rollover will receive Rs25 as net income and the trader with a short position and wants to rollover will have to pay Rs25, exactly the reverse of the first example.
Once the rollover transaction is executed, the existing position in the August series will be cancelled, and the trader will be left with only an outstanding position in the September series.
According to brokers, institutional clients pay between three and seven basis points as commission for derivative trades. One basis point is one hundredth of a percentage point. For high-volume traders, 50% reduction in the commission for rolling over their positions is a big benefit.