Cash and Carry Arbitrage: Locking In the Spot-Futures Spread on NSE Stocks

Every stock that trades in the F&O segment has two prices at any moment: the price in the cash market and the price of its futures contract. Most days the gap between them is small and boring. Now and then it gets wide enough to pay for itself. Cash and carry arbitrage is the trade that captures that gap: you buy the shares in the cash market, sell the same quantity in futures, and wait for the two prices to meet at expiry.

It sounds like free money, and that’s exactly why people get it wrong. The spread you see on screen is not the profit you take home. In this guide we’ll work through the pricing logic, run a full example with real charge rates, and then go through the things that quietly eat the spread.

What cash and carry arbitrage actually is

The Investopedia guide to cash-and-carry trading describes it as buying an asset in the spot market and selling a futures contract on the same asset at the same time, to profit from a price difference between the two. It’s one type of arbitrage. The trade works only when the cost of buying and holding the asset is less than the price at which you sold the future.

On NSE, the asset is usually a stock. You hold the shares in your demat account and stay short the futures. Whatever the stock does next, one leg gains roughly what the other loses. What’s left is the gap you locked in on day one, minus costs.

Why does the gap exist at all? Because a futures contract is a deferred purchase. Someone who buys the future instead of the shares keeps their cash working until expiry, so the future normally trades a little above spot. That difference is the cost of carry. We covered how it’s priced in our explainer on cost of carry in futures. The arbitrage begins when the market price of the future runs well ahead of that fair value.

Fair value: the number you compare against

Zerodha Varsity’s chapter on futures pricing gives the working formula most Indian traders use:

Futures fair value = Spot × [1 + r × (x / 365)] − d

• r is the annual risk-free rate. Varsity suggests the RBI’s 91-day Treasury bill rate as a proxy.
• x is the number of days left to expiry.
• d is any dividend expected before expiry.

Varsity also points out that the market price usually differs a little from this fair value because of transaction charges, taxes and margins, and that the gap between fair value and market price tends to widen as days to expiry increase. So a future trading a rupee or two above fair value isn’t an opportunity. It’s normal.

The opportunity is when the future is trading far above fair value. Varsity’s own illustration uses Wipro: with spot at 204.30, a 5.2097% rate and 30 days left, fair value works out to about 205.17. If the future were trading at 212, the spread would be 7.70 points instead of the roughly 0.90 points the formula expects. That’s the kind of gap an arbitrageur goes after.

The two legs of the trade

The rule in any spread trade is to buy the cheaper thing and sell the expensive one. When the future is rich relative to spot, the shares are the cheap side.

1. Buy the shares in the cash market as a delivery trade, in the exact quantity of one futures lot (or a multiple of it).
2. Sell one lot of the same stock’s near-month future at the same time, or as close to it as you can manage.
3. Hold both until the prices converge. On expiry day the futures price and the spot price come together, so the gap you sold disappears.
4. Unwind both legs: sell the shares and buy back the future, ideally in the same few minutes.

Varsity’s Wipro table shows why direction doesn’t matter once you’re in. Whether the stock ends at 198, 208 or 220, the long stock leg and the short futures leg add up to the same +7.70 points. One side bleeds, the other side gains, and the locked-in spread stays put.

You aren’t betting on the stock. You’re betting that two prices for the same shares will meet on a known date, and that the gap between them is bigger than your costs.

A cash and carry arbitrage example with real charges

Let’s build one from scratch. Everything about the stock here is hypothetical: we’ve made up the prices, the lot size and the interest rate to keep the arithmetic clean. The charge rates are real, taken from Zerodha’s published charges page as we checked it in October 2026. Your broker’s rates may differ.

The setup (hypothetical)

• Stock ABC spot price: ₹1,000
• Near-month future: ₹1,012
• Days to expiry: 25
• Lot size: 500 shares
• Assumed annual risk-free rate: 6%

Fair value = 1,000 × [1 + 0.06 × (25/365)] = about ₹1,004.11. The future is trading roughly ₹7.89 above that. The full spot-futures gap is ₹12, and that’s what you lock in: ₹12 × 500 = ₹6,000 gross.

What happens at expiry

Same answer both ways. Now for the part that most “arbitrage is risk-free” posts skip.

The cost of doing it (exit at ₹1,030)

Using the rates on Zerodha’s page: equity delivery STT is 0.1% on both buy and sell, futures STT is 0.05% on the sell side, stamp duty is 0.015% on a delivery buy and 0.002% on a futures buy, NSE transaction charges are 0.00307% on equity and 0.00183% on futures, SEBI charges are ₹10 per crore, delivery brokerage is zero, futures brokerage is the lower of 0.03% or ₹20 per order, and GST is 18% on brokerage plus SEBI and transaction charges.

That’s about ₹2.92 per share, close to a quarter of the ₹12 spread. Net profit comes to roughly ₹4,538, before the depository charge Zerodha levies when shares are sold (₹15.34 per scrip, per its charges page), which takes it to about ₹4,523. On the ₹5 lakh used to buy the shares, that’s about 0.91% over 25 days, or around 13.25% a year on a simple annualised basis.

Looks good against a 6% risk-free rate. But notice where most of the cost sits: STT on the delivery leg. Delivery STT is charged on both the buy and the sell, so the cash leg costs far more to trade than the futures leg. A spread that’s only ₹4 or ₹5 wide on a ₹1,000 stock barely covers the round trip.

The capital you actually tie up

The 13.25% figure flatters the trade, because it only counts the money spent on shares. You also have to post margin on the short future. Varsity’s note on physical settlement explains that futures and short options require margin (SPAN plus exposure) to be maintained in your account.

Then there’s mark-to-market. If the stock rallies hard after you enter, the short future shows a loss that’s settled daily, and you have to keep enough cash to meet it, even though the shares in your demat account have gained by roughly the same amount. The trade is hedged on paper. Your cash balance isn’t. Traders who size this too tightly sometimes get forced out of a perfectly good arbitrage by a margin shortfall.

Add the margin to the denominator and the return drops. How far depends on the stock and on your broker, so run the real numbers before you call anything a bargain.

Expiry dates and why you exit before the bell

NSE’s equity derivatives contract specifications set out the calendar. Stock futures run on a three-month cycle (near, next and far month) and expire on the last Tuesday of the expiry month. If that Tuesday is a trading holiday, expiry moves to the previous trading day. Always count your days to expiry from the actual expiry date, not the end of the month.

There’s a second reason to watch the date. Varsity’s chapter on physical settlement notes that SEBI made physical delivery mandatory for stock F&O contracts through an April 2018 circular, and that from October 2019’s expiry all stock F&O contracts are compulsorily settled physically. A short future left open at expiry becomes an obligation to deliver shares. In a cash and carry trade you’d have the shares, but it’s a slower and messier way out than simply closing both legs yourself, which is what Varsity recommends: square off just before expiry. There’s a cost angle too. Zerodha’s charges page says it charges brokerage of 0.25% of the contract value on contracts where physical delivery happens. On a ₹5 lakh position that’s well over a thousand rupees, against ₹20 for an ordinary futures order.

The spread on your screen is not your profit. Charges, margin and slippage all come out of it before you see a rupee.

Where the trade goes wrong

Legging risk. The two orders rarely fill at the same instant. If the future drops two rupees while your share order is still sitting in the queue, you’ve lost a chunk of the spread before the trade has even started. Use liquid stocks and place the orders close together.

Thin futures. Some stock futures look rich on paper simply because they trade thinly. A wide bid-ask spread on the future can wipe out the apparent gap the moment you try to sell.

Dividends and corporate actions. The pricing formula subtracts expected dividends, and Varsity notes the market may already be pricing one in. If a stock goes ex-dividend during your holding period, check how the future has been adjusted before assuming the spread is genuine. A future can look cheap or rich simply because of a payout you didn’t account for.

The gap can widen first. Convergence is guaranteed only at expiry. Before then the spread can get wider, which means more mark-to-market pressure on the short future. If you have to exit early, you may exit at a worse spread than you entered.

Opportunity cost. Your money is locked in for weeks. If the net return after all costs isn’t clearly better than what a Treasury bill or a liquid fund would pay over the same period, the effort isn’t worth it.

Rolling over and calendar spreads

You don’t always have to unwind at expiry. If the next-month future is again trading rich, some traders keep the shares and sell the next month’s contract, buying back the expiring one. That saves the delivery STT on selling and rebuying the shares, which as we saw is the biggest single cost.

Varsity also describes the calendar spread as a simple extension of this idea: instead of shares against a future, you trade two futures of the same stock with different expiries, selling the one that looks overpriced against its fair value and buying the one that looks fairly priced. It doesn’t need you to buy the shares outright, but you lose the certainty of convergence with spot, so it carries more risk than plain cash and carry arbitrage.

If you’re running pairs of positions like this, it helps to think about risk the same way we do in our pair trading strategy guide: you’re exposed to the relationship between two prices, not the direction of either one.

A quick checklist before you put it on

• Work out fair value with the current 91-day T-bill rate and the actual days to expiry.
• Check the futures bid-ask spread and volume. Skip illiquid contracts.
• Calculate the full round-trip cost with your broker’s real rates. Delivery STT on both legs is the big one.
• Check for dividends, bonuses or other corporate actions before expiry.
• Keep extra cash for margin and daily mark-to-market on the short future.
• Place both orders together, in exactly one lot’s worth of shares.
• Plan to close both legs just before expiry, unless you’re deliberately rolling over.

Arbitrage is a lower-risk trade, not a no-risk one. For the bigger picture on sizing, stops and how much capital to put at work, our guide to risk management in trading is a good next read.

Disclaimer: This article is for educational purposes only and is not investment advice. The stock, prices, lot size and interest rate in the worked example are hypothetical, and the profit and cost figures were calculated by us using the charge rates on Zerodha’s charges page as published in October 2026. Brokerage and statutory charges vary by broker and can change. Trading in stocks and derivatives involves risk of loss. Please do your own research and consult a SEBI-registered investment adviser before making any investment decision.