NSE Introduces Derivatives on Nifty Next 50 Index

In this article, we will discuss

The National Stock Exchange (NSE) has always been a forerunner when it comes to introducing new and innovative financial instruments. Being the largest stock exchange in India in terms of derivative trading volumes, the exchange is now planning to broaden the scope of trading opportunities further with the launch of derivative contracts based on the Nifty Next 50 broad-based market index. 

Through this move, the NSE expects to enhance market depth, provide new hedging opportunities and enable traders to capitalise on the short-term price movements of the broad-based index. In this article, we are going to explore the Nifty Next 50 Index, its constituents and the details of the newly introduced derivative contracts.

What is the Nifty Next 50 Index?

The Nifty Next 50 index is a broad-market index that was introduced on January 1, 1997. The index represents 50 of the largest companies listed on the National Stock Exchange, after the top 50 companies that make up the Nifty 50 index.

The companies constituting the index are usually in their growth phases and could potentially become a part of the Nifty 50 in the future. It is for this reason that most traders and investors often view the Nifty Next 50 index as a step below the Nifty 50.

Understanding the Nifty Next 50 Index

The Nifty Next 50 index represents about 10% of the total free-float market capitalisation of all of the stocks listed on the National Stock Exchange. The index is compiled by excluding Nifty 50 constituents from the Nifty 100 index.

The base date of the Nifty Next 50 is November 4, 1996, and the base value of the index was set at 1,000. Similar to the Nifty 50, the Nifty Next 50 index is also rebalanced semi-annually on January 31 and July 31 each year.

As of April 30, 2024, the index beta and correlation figures as compared with the Nifty 50 index were 0.95 and 0.85, respectively. This essentially means that the Nifty Next 50 is almost as volatile as the Nifty 50 and shares a very close relationship with the broad-based index. For instance, if the Nifty 50 value rose by 1 point, the Nifty Next 50’s value would likely rise by approximately 0.95 points, and vice versa.

What are the Top Sectors and Constituents of the Nifty Next 50 Index?

As an investor, you must know what the Nifty Next 50 index’s top sectors and constituents are. Here is a tabulated overview, including the weight of each sector and constituent.

Top Sectors of the Nifty Next 50 Index

The Nifty Next 50 index consists of 50 companies from 14 different sectors of the Indian stock market, providing traders with a comprehensive overview of the overall market performance.

Tabulated below are the 14 sectors, along with the total number of constituents from each sector and the total weight of each sector. The sectors with greater weightage can significantly influence the movement of the Nifty Next 50 index.

Total

Sector

Number of Constituents

Weightage

1

Financial Services

13

23.78%

2

Capital Goods

4

12.57%

3

Consumer Services

5

11.80%

4

Fast Moving Consumer Goods

6

10.07%

5

Oil, Gas and Consumable Fuels

3

6.48%

6

Power

4

6.26%

7

Automobile and Auto Components

3

5.36%

8

Metals and Mining

2

4.50%

9

Chemicals

2

4.36%

10

Construction Materials

2

3.58%

11

Realty

1

2.96%

12

Services

1

2.93%

13

Consumer Durables

2

2.88%

14

Healthcare

2

2.49%

Total

50

100%

Note: All of the above information is valid as of April 30, 2024.

Top 10 Constituents of the Nifty Next 50 Index

The table below outlines the top 10 companies that make up the Nifty Next 50 index in terms of weight, along with the respective sectors in which they operate.

Company

Sector

Weightage

1

Trent Limited

Consumer Services

5.00%

2

Bharat Electronics Limited

Capital Goods

4.31%

3

Tata Power Company Limited

Power

3.92%

4

Hindustan Aeronautics Limited

Capital Goods

3.80%

5

Power Finance Corporation Limited

Financial Services

3.30%

6

REC Limited

Financial Services

3.23%

7

Indian Oil Corporation Limited

Oil, Gas and Consumable Fuels

3.19%

8

DLF Limited

Realty

2.96%

9

InterGlobe Aviation Limited

Services

2.93%

10

GAIL (India) Limited

Oil, Gas and Consumable Fuels

2.90%

Total

35.54%

Note: All of the above information is valid as of April 30, 2024.

An Introduction to the Derivative Contracts Based on the Nifty Next 50 Index

The National Stock Exchange, through a circular (Circular Ref. No: 44/2024) dated April 18, 2024, announced that it would be launching new derivative contracts, including both futures and options, based on the Nifty Next 50 index. According to the circular, the contracts would be live and made available for trading from April 24, 2024.

The launch of the Nifty Next 50 index derivatives follows the introduction of the Nifty Midcap Select index derivatives in January 2022 and the Nifty Financial Services index in January 2020.

By introducing index derivatives based on the Nifty Next 50, the NSE hopes to bridge the gap between the Nifty 50 index, which represents large-cap companies, and the Nifty Midcap Select, which represents the mid-cap segment of the stock market of India.

Another major reason that prompted the National Stock Exchange to introduce Nifty Next 50 index derivative contracts was the popularity of the index’s constituents. The constituent companies accounted for approximately 12% of the total cash market turnover during FY24. Additionally, the total market capitalisation of the index’s constituents accounted for 18% (Rs. 70 lakh crore) of all listed companies in the exchange as of March 29, 2024.

Using index derivatives, traders can gain short-term exposure to a suite of fast-growing large-cap companies with strong fundamentals. In addition to speculative purposes, traders can also use the derivatives to hedge their existing positions.

Details of the Derivative Contracts Based on the Nifty Next 50 Index

If you are interested in trading in derivatives, you must be aware of the various specifications and details of the various contracts that are available. Here is a comprehensive overview of the contract specifications for the Nifty Next 50 index derivatives.

  • Symbol

The ticker symbol for the Nifty Next 50 index derivative contracts, including both futures and options, is NIFTYNXT50.

  • Tick Size

The tick size is the minimum price movement of a trading instrument. For the Nifty Next 50 index futures and options contracts, the tick size is Rs. 0.05. This essentially means that the contract price can only move up or down by 0.05 points or in multiples of 0.05 points.

  • Contract Size

The contract size, or lot size, is the minimum quantity of the underlying asset you can purchase or sell. It ensures standardisation and facilitates easy trading. The lot size of the Nifty Next 50 index futures and options contracts is 10. This means that you cannot purchase or sell less than 10 units.

On the other hand, if you choose to trade in more quantities, you can only do so in multiples of the lot size. For instance, you cannot purchase or sell 45 units; instead, you can trade either 40 or 50 units.

  • Contract Availability

The National Stock Exchange currently offers three serial monthly contracts - near-month, next-month and far-month contracts - of Nifty Next 50 futures and options. The first-ever expiry cycle of the index derivatives that launched on April 24, 2024, would be as follows:

  • Near-month: May 31, 2024
  • Next month: June 28, 2024
  • Far-month: July 26, 2024
  • Contract Expiration Date

As the name implies, futures and options contracts expire on the contract expiration date. The expiring contracts are settled on this date. After the expiration date, the contract becomes void and is no longer tradable.

The contract expiration date of all futures and options contracts of the Nifty Next 50 index would be the last Friday of the respective contract months. For instance, the August 2024 index derivative contract will expire on August 30, 2024. However, if the last Friday of the expiry month is a holiday, the previous trading day would be the contract expiration date.

  • Strike Prices

The National Stock Exchange offers Nifty Next 50 options contracts at strike intervals of both 500 and 100. The 500-strike interval contracts are reserved for far-out-of-the-money (OTM) options, whereas the 100-strike interval contracts are reserved for near-the-money, at-the-money and in-the-money options.

  • Option Type

All of the Nifty Next 50 options contracts that the NSE offers are of the European type, meaning that the contracts can only be exercised on the expiration date and not on any date before that.

  • Settlement Mechanism

Since the underlying asset is an index and not a stock, all of the Nifty Next 50 derivative contracts are cash-settled. This means that on the expiration date, the difference between the contract price and the underlying asset’s market price is calculated. The parties involved then exchange this difference in cash without actual physical delivery of the asset.

  • Price Band

The price band of the Nifty Next 50 futures contracts is set at 10% of the base price. So, if the base price of the index is 69,000, the price band would be 6,900 points on either side. This means that the price of the futures contract cannot fall below 62,100 (69,000 − 6,900) or rise beyond 75,900 (69,000 + 6,900) in a single trading day.

The price band of the Nifty Next 50 options contracts, on the other hand, is determined for each option contract separately based on its respective delta value.

  • Quantity Freeze Limit

The quantity freeze limit is the maximum quantity you can purchase or sell in a single trade. The quantity freeze limit for Nifty Next 50 index futures and options contracts is 600. If you wish to purchase or sell more than 600 units, you need to resort to using multiple trades.

Things to Keep in Mind When Trading in Nifty Next 50 Index Derivative Contracts

If you are planning to trade in the Nifty Next 50 index derivative contracts, here are a few factors you need to consider.

  • Contract Specifications

Understanding the Nifty Next 50 index and the various details of its derivative contracts is crucial before you start trading. Look into important specifications such as tick size, lot size, expiration dates, settlement procedures, available options strike prices and any other unique features that the new derivative contracts may have.

  • Liquidity

Since the Nifty Next 50 index derivatives were launched very recently, they could have lower trading volumes. Low liquidity can make it challenging to buy and sell contracts easily and may often require you to compromise on the price to execute a trade. Therefore, remember to look at the trading volumes and open interest of the derivative contracts before taking up a position.

  • Volatility

Limited liquidity can often lead to volatility spikes. In addition to this, the index itself may be inherently more volatile compared to more established indices such as the Nifty 50 index due to the nature of the companies it represents. Therefore, it is advisable to be prepared for higher price swings and increased risks when trading in Nifty Next 50 index derivatives.

  • Risk Management

When trading in new derivatives such as the Nifty Next 50 contracts, consider using cautious risk management strategies. Setting strict stop-loss orders and limiting position sizes could help mitigate potential losses due to unexpected market movements.

Conclusion

The introduction of derivatives on the Nifty Next 50 index by the National Stock Exchange marks a significant milestone in the history of the Indian stock market. The new derivative contracts are expected to provide traders with more opportunities to speculate and hedge risks.

That said, before trading in these contracts, you must make sure to consider factors like liquidity and volatility. This can help you effectively navigate the complexities of the Nifty Next 50 index derivative contracts and boost your chances of success.

Disclaimer: INVESTMENT IN SECURITIES MARKET ARE SUBJECT TO MARKET RISKS, READ ALL THE RELATED DOCUMENTS CAREFULLY BEFORE INVESTING. The asset classes and securities quoted in the film are exemplary and are not recommendatory. SAMCO Securities Limited (Formerly known as Samruddhi Stock Brokers Limited): BSE: 935 | NSE: 12135 | MSEI- 31600 | SEBI Reg. No.: INZ000002535 | AMFI Reg. No. 120121 | Depository Participant: CDSL: IN-DP-CDSL-443-2008 CIN No.: U67120MH2004PLC146183 | SAMCO Commodities Limited (Formerly known as Samruddhi Tradecom India Limited) | MCX- 55190 | SEBI Reg. No.: INZ000013932 Registered Address: Samco Securities Limited, 1004 - A, 10th Floor, Naman Midtown - A Wing, Senapati Bapat Marg, Prabhadevi, Mumbai - 400 013, Maharashtra, India. For any complaints Email - grievances@samco.in Research Analysts -SEBI Reg.No.-INHO0O0005847

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