Let’s enter into the world of lending

We live in a world of change. The only constant here is change. Systems, methods, processes, approaches, regulations etc. keep changing and we need to adapt to it. As traders this is the most interesting and at times the challenging thing to do.

One such change, starting from the October series is the shift of all the stocks in derivatives segment to physical settlement. This is means that the previous cash settlement mechanism has been dismantled and replaced by physical settlement. So, how does this work? A large part of the positions in the derivatives market get rolled over or squared off near the end of the series. Those positions which were not rolled over would expire and were previously settled via cash, which now shall be stock settled. So, instead of receiving money, you will receive or give stock.

The last half hour on the expiry day used to witness lot of volatility as these futures expiration used to get converted to cash. But trouble goes away now. It can be easily settled in stocks, so there is no need for any such VWAP trades.

This opens gate for the growth of SLB segment. SLB is the stock lending and borrowing platform. Just like we sell or buy stocks on the trading or derivatives board, we can lend or borrow stocks on this board. With physical settlement coming in it will become easy for the SLB players to manage their trades. Generally, borrowing is done in the stocks which are trading at a discount in futures segment. The idea is to benefit from the arbitrage spread. So, the trade is simple, if a stock is quoting at a discount in the futures segment, one can borrow the stock. He can use this borrowed stock to sell it and buy futures against it. This spread will be positive as futures are quoting at a discount, thus locking the gains. On the expiry day he will expire his futures against which he will got stock as he was long futures, which can be returned.

How does this compare to Call writing? In a way it is slightly better as compared to option writing as one does not have to pay margin and the holding need not be as per the lot size to create perfect trade. More importantly there is no risk of being stop out if the stock moves higher do not exist in this case. The process is very simple, you lend the stock and on expiry you get it back. The expiry is the first Thursday of each month.

The only shortcoming is the fact that there may not be any lending opportunity in the stock/s you hold. Also, the opportunities are not consistent, they may exist for a couple of months and then disappear.

Still, for a market which is so volatile and moves in the stocks are so violent, this works as a really good risk free tool to make money out of the smallest holding that one may have. If you would like to understand the concept of VWAP in depth kindly register & attend our FREE Seminars

Happy Trading.

Cheers!!!