Basis vs fair carry
NIFTY futures normally trade above spot by roughly the cost of carry: interest minus dividends until expiry. When the premium runs well above that, traders may be piling into longs; when it shrinks or turns cheap, hedgers may be selling futures. This strategy measures that excess basis daily, compares it with its own 60-day history, and trades the near-month future for five sessions when it is unusually rich or cheap.How it trades
Results
PRE-BUILT · DEFAULTSWhere it made and lost money
In this test the type of day the signal fired on made a large difference. The 10 signals on trend days that closed near the high or low made ₹1,25,707 before costs with an 80% win rate: a rich basis on a strong up day, or a cheap one on a down day, marked positioning that carried on. Signals on 13 quiet sessions lost ₹62,744, as a basis reading without a price move had little to follow. Weekly expiry days were the weak spot, losing ₹75,942 over 17 trades against ₹1,17,293 over 16 trades on other days, perhaps because expiry flows distort the basis. Signals after India VIX closed above 14.5 made ₹61,665.
About this strategy
- At 15:15 each day, estimate spot from the put-call parity of the nearest weekly option that is not the futures contract's own expiry.
- Work out the fair premium of the near-month future: spot × (5.5% interest − 1.2% dividend yield) × days to expiry ÷ 365.
- Excess basis is the actual premium minus that fair premium, measured in basis points of spot.
- Compute its z-score against the previous 60 readings. In trend mode, buy one lot when z is +1.0 or more and sell when it is −1.0 or less.
- Hold until 15:15 on the fifth session after entry, rolling into the next month if the contract expires first.
- No stop and no target; no signal on a futures expiry day; one position at a time.
Why traders use it
The futures basis is a quiet window into positioning. Leveraged buyers bid futures above fair value when they are confident, and hedgers press it below when they are nervous, so an unusual basis can reveal sentiment that price alone does not. Comparing the basis with fair carry removes the part explained by interest and dividends, and a z-score against recent history adjusts for the normal level drifting. Traders can follow the crowd (trend mode) or fade it (contrarian mode).
The year in plain words
On NIFTY from 1 Oct 2025 to 30 Sep 2026 in trend mode, the strategy made 33 trades, counting monthly rolls separately, won 52% and earned ₹41,351 before costs, a profit factor of 1.14. Wins (₹19,578) and losses (₹18,217) were similar, so the edge was thin, and the maximum drawdown reached ₹73,638. Twenty-five trades ended after the five-session hold and seven at a futures roll. June (+₹33,730) and July (+₹24,199) were strongest, while September lost ₹35,853. With one futures lot and few trades, costs were modest: after ₹20 per order and bid-ask slippage the result was ₹34,256.
What the settings do
Risks
- Futures positions held for five sessions with no stop can lose heavily on a sharp move.
- The basis also moves with interest rates, dividends and arbitrage flows that have nothing to do with sentiment.
- Spot is estimated from option prices, so errors in the chain feed straight into the signal.
- Wins and losses are similar in size, so a few bad trades can erase the year's gain.
Who it suits
Experienced futures traders who understand cost of carry and want a positioning-based swing signal, with futures margin and tolerance for week-long holds without a stop.
Questions traders ask
What is the fair value of NIFTY futures?
Fair value is spot plus the cost of carrying the position to expiry: interest on the money minus the dividends the index pays. If spot is 25,000, interest is 5.5% and dividend yield 1.2%, a future with 30 days left should trade about 88 points above spot.
Is the basis versus fair carry strategy profitable?
In this backtest on NIFTY futures from 1 Oct 2025 to 30 Sep 2026 it made ₹41,351 before costs and ₹34,256 after ₹20 per order and bid-ask slippage (statutory charges not included), with a ₹73,638 drawdown before costs. Past results do not guarantee future ones.
What does a rich futures premium tell you?
When futures trade well above fair value, buyers are paying extra for leveraged long exposure, which usually signals bullish positioning. A cheap premium suggests heavy hedging or short selling. The strategy's trend mode follows that signal; contrarian mode bets it will reverse.
Why not trade on futures expiry day?
On the day a contract expires, its price converges to spot, so its basis is close to zero whatever traders think. Reading positioning from it that day would give a meaningless signal.