The neuro-behavioral science trading edge
Dealing with the 5 lac derivative contract size
- Vijay L Bhambwani Dec 04, 2015


Starting from November 2015 series, the derivatives contract size has been revised upwards from Rs 2 lacs to Rs 5 lacs. Its a change every futures trader has to learn to live with. Talking to friends and fellow traders, who trade for a living like me, I feel the pessimism is overdone. The impact of the contract size revision is profound and arguments listing the challenges thereafter are largely valid. Sample these -

1) Capital requirements just went up 250 % - true
2) Averaging has become so much more difficult & expensive - true
3) Impact costs (jobbing difference between bid / ask spreads between incremental quotes) have shot up - true
4) Price discovery mechanism has become more inefficient - true
5) Scalping for small profits is no more easy - true
6) Volumes are sharply lower - true

Is all lost ? Is trading for a living dead ? I don't think so. With some tweaks in your trading regimen, you can get by and maybe even be slightly better off after a few hiccups. The first thing that I look for as a trader is the ease & ability to exit a trade if something goes wrong. Losing money is not the (only) problem, cutting a losing trade and getting out to stop the blood loss is more important. So you narrow your trading universe to a fewer highly liquid counters. Consider this - there are 162 stocks in the futures list, in a perfect market scenario, the average share of any counter should be 0.62% of the total futures turnover in the stocks segment. We will keep Nifty & Bank Nifty out as their liquidity and price discovery is hardly impacted in stark comparison to stock futures. The first thing we did, after trial& error throughout November was to avoid any stock futures that contributed less than 1.5% of the total stock futures turnover. That left us with well traded counters. Any stock reporting over 2.50% of the total turnover went like a breeze in trading. Entries and exits were seamless and trading was painless. The second thing we did was focus on the upper most quartile of the high beta stock futures, which showed bigger price moves as compared to the broader markets. We then sorted out those stocks which were common to both lists - 1.5% turnover and high beta lists. We focused on these counters and started maintaining a database of the composite analysis of both lists and started noticing a correlation between the two lists. Macros were created to start the weeding process as soon as EOD (end of the day) data was received. The job was automated. Then came the human intelligence part - what should be the cut off and data sample size for these lists. For the 1.50% list, we maintained data for 3 sessions and high beta composition, we fixed a sample size of 5 sessions. Any stock future not meeting these criteria was dropped.

Our universe of tradable counters is now narrower and you are now highly focused. You have lased your target and "painted" it with your infra red sight. What's left is to squeeze the trigger and assess your wins / losses. Ready, aim, fire !   

Have a profitable trade

Vijay L Bhambwani