What does a speculator on an individual stock do?
A person who has forecasted INFOSYSTCH is not interested in being a speculator on Nifty. He should remove this risk. This is done by selling Nifty futures. The position BUY INFOSYSTCH + SELL NIFTY FUTURES is a focussed position which is only about INFOSYSTCH. This is easily done in practice. Every speculative buy position should be coupled with an equal sell position on Nifty. Every speculative sell position should be coupled with an equal buy position on Nifty. Suppose you are long 100 shares of INFOSYSTCH and the share price is Rs.9,000, when the nearest Nifty futures is at Rs.1500. The position is worth Rs.900,000. Hedging away the Nifty exposure in this requires selling Rs.900,000 of Nifty. Translating this into a position on the index futures market, we have 900000/1500 = 600 nifties. So you would couple your position of “buy 100 shares of Infosys” with a hedging position: “sell 600 nifties”. This hedging reduces the risk involved in stock speculation. It is good for the stock
