Futures calendar spread arbitrage
A futures fair-value trade between two NIFTY contract months. In theory the next-month future should trade above the near month by roughly the interest cost of holding the index for the extra month. When the actual gap strays more than 0.15% from that fair carry, the strategy sells the expensive month and buys the cheap one, and waits for the gap to return to normal.How it trades
Results
PRE-BUILT · DEFAULTSWhere it made and lost money
With only 7 trades in the year, no market condition can be judged in this test, and every split holds four trades or fewer. Because the trade is long one futures month and short the other, the index's direction mostly cancels out; what matters is how the gap between the two months behaves. Six of the seven spreads never returned to fair value and were closed the session before the near expiry, which is where most of the losses came from. The one spread that did converge made ₹4,414. Read the results as a demonstration of the mechanics rather than evidence about when the idea works.
About this strategy
- Each day at 15:15, read the prices of the near-month and next-month NIFTY futures.
- Work out the fair spread: near price × (6.5% interest minus any dividend yield) × days between the two expiries ÷ 365.
- Mispricing is the actual spread minus the fair spread; the entry threshold is 0.15% of the near future's price.
- If the next month is too expensive, sell it and buy the near month; if too cheap, buy it and sell the near month, one lot each.
- Exit both legs when the mispricing returns to fair value.
- Otherwise close both legs at 15:15 one session before the near-month expiry; only one trade per near-month series.
Why traders use it
Because both legs are NIFTY futures, the position is largely hedged against the index moving up or down. The only bet is on the gap between the months, which is anchored by interest rates and should not stray far from its fair level for long. This is the same logic arbitrage desks use, and it appeals to traders looking for a market-neutral idea that does not rely on predicting direction.
The year in plain words
With default settings on NIFTY from 1 Oct 2025 to 30 Sep 2026, the spread signal fired only 7 times; 3 trades won and 4 lost, for a loss of ₹1,801 before costs. Only one trade, in March, returned to fair value, making ₹4,414; the other six were closed before the near expiry without converging. The edge being chased is a few index points, while each trade pays for four futures orders and their spreads. After ₹20 per order and bid-ask slippage the loss widened to ₹16,479, showing that costs dominate this kind of trade.
What the settings do
Risks
- The edge is a few points per trade, while four futures fills with brokerage and spread cost far more, as the after-costs result shows.
- Fair value depends on an assumed interest rate and dividend yield; if those assumptions are off, the signal is wrong.
- The gap between months can stay away from fair value for weeks, tying up margin without converging.
- Two futures legs need margin, though the exchange gives a calendar-spread benefit until the near expiry day.
Who it suits
Traders interested in market-neutral, arbitrage-style ideas who understand futures pricing and have very low trading costs. With few signals and costs larger than the edge here, it suits study more than routine trading.
Questions traders ask
What is a futures calendar spread?
It is a long position in one futures month and a short position in another month of the same index. The profit or loss comes mostly from the change in the gap between the two prices, not from the index moving up or down.
Is futures calendar spread arbitrage profitable on NIFTY?
Not in this backtest. From 1 Oct 2025 to 30 Sep 2026 it made 7 trades and lost ₹1,801 before costs and ₹16,479 after ₹20 per order and bid-ask slippage, with statutory charges extra. Past results do not guarantee future ones.
How is the fair spread between futures months calculated?
The near-month price is multiplied by the interest rate minus the dividend yield, and by the days between the two expiries divided by 365. With NIFTY at 25,000, a 6.5% rate and 28 days, that is roughly 125 points.
Why is the spread closed before the near expiry?
The exchange's margin benefit for calendar spreads ends on the near contract's expiry day, so holding into it raises margin sharply. Closing a session before avoids that and avoids the expiry settlement of the near leg.