February Returns on the NSE Derivatives Market

February Returns on the NSE Derivatives Market

February produced price movement across all 19 contracts on the NSE Derivatives Market. Banking stocks recorded price changes ranging from 6% to 14%, with the major indices advancing between 9% and 12%. Britam Holdings posted the largest price move at 29.2%, followed by Kenya Re at 23.7% and Kenya Power and Lighting at 19.6%. East African Breweries and NCBA Group were the only two to close lower.

Because positions in the derivatives market are held using margin rather than full capital, these price movements translated into significantly higher percentage returns. Britam’s 29.2% price move returned 208% on margin. Put simply, a trader who posted KES 137.50 in margin on a Britam contract walked away with KES 286 in profit. The NSE Banking Sector Index returned 236% on a margin of KES 110, meaning a KES 110 deposit produced KES 260 in profit. The full returns for all 19 contracts are in the table below

Trading Both Directions
The derivatives market allows a position to be taken on either side of a price move. A long position profits when a price rises. A short position profits when a price falls. Both are available on every contract, and the margin requirement is the same regardless of direction.
In the equity market, benefiting from a falling price requires selling shares already held. In the derivatives market, a short position can be opened without prior ownership of the underlying shares. The leveraged return column in the table uses the absolute value of the price movement for this reason: a move of any direction generates a return, provided the position was taken accordingly.

Equity Market vs. Derivatives Market

The same trade, run through two different markets, produces two different outcomes on capital. The price move is identical. What changes is how much money was required to hold the position.

Safaricom opened February at KES 29.36 and closed at KES 32.85, a rise of KES 3.49 per share. An investor who bought 100 Safaricom shares on the equity market at the start of the month paid KES 2,936. By month end those shares were worth KES 3,285. The profit was KES 349, a return of 11.9% on the money committed.

A trader holding one Safaricom derivatives contract had exposure to the same 100 shares and the same price move. The profit was the same KES 349. The difference is what was posted upfront. The margin requirement for one Safaricom contract is KES 440. KES 349 profit on a KES 440 deposit is a return of 79.3%.

Same profit. Same price move. The equity investor committed KES 2,936 and earned 11.9%. The derivatives trader committed KES 440 and earned 79.3%.

Index Derivatives

For traders who prefer exposure to the broader market rather than a single stock, the NSE offers index-based contracts. Instead of tracking one company, these contracts track a basket of stocks.

The NSE 25 Index, which covers the 25 largest stocks on the exchange, gained 10.3% in February. A trader holding one Mini NSE 25 contract, the smaller version of the same index, posted a contract value movement of KES 5,510 on a margin of KES 2,970, a leveraged return of 185.5%.