Bank Nifty or the Nifty Bank Index is a stock market index – it is basically a combination of the stock prices of 12 of the biggest banks in India, with each bank’s stock performance contributing to the index’s overall performance. The index consists of stocks of the following major banks with the highest market cap and liquidity in India:
- HDFC Bank
- ICICI Bank
- Kotak Mahindra Bank
- SBIN
- Axis Bank
- IndusInd Bank
- Bank of Baroda
- PNB
- AU Small Finance Bank
- IDFC First Bank
- Bandhan Bank
- Federal Bank
Of these, HDFC Bank has the highest weightage in the index at around 30.31%, while PNB has the lowest weightage at approximately 0.63% (as of 25th May 2023). Traders often use Bank Nifty as an underlying asset for trading derivatives such as futures and options. Let us give you some tips in the coming paragraphs on how to trade options on Bank Nifty successfully.
Bank Nifty Options: Essential Strategies for Maximizing Returns
Bank Nifty is a fairly volatile index – it may be either good or bad for the trader, depending on the trader’s position. It is up to the trader to navigate their options strategy through this volatility.
Here are some of the strategies that Bank Nifty traders may use.
- Long call or short put – If you think the Bank Nifty is going to rise, then go long on a call option at a strike price you think the index will go above. The value at risk will be the premium, but gains can be unlimited. You can also go short on a put option, in which case, you gain the premium, even though potential losses may be unlimited.
- Short call or long put – If you think the Bank Nifty is going to fall, then you can short a call option at a strike price you think the index will not be above. The value at risk will be unlimited and your gains will be limited to the premium received. You can also buy a put option, in which case your potential profit will be unlimited but you will definitely have to pay the premium.
- Bull call spread and bull put spread – If you want to have limited returns in exchange for limited losses, then you can use a call spread. A bull call spread involves buying an at-the-money call option and selling an out-of-the-money call option at a higher strike price. Both strategies produce a profit when there is an adequate rise in prices.
- Bear call spread and bear put spread – If you think Bank Nifty is going to fall, then you can deploy a bear call spread by selling a call option and then buying a call option at a higher strike price (for a cheaper premium).
- Covered call – This involves buying a unit of the Bank Nifty but also selling a call option on Bank Nifty so that you can be more protected against a fall in the stock price.
- Long straddle and long strangle – These strategies are deployed when you think the Bank Nifty will stay within a particular range. Both involve buying a call and a put option. However, while the strike price is the same for both in the case of the straddle, the call is bought at a higher strike price than the put-in strangle.
Tips for trading Bank Nifty Options
Regardless of what option strategy you use, there are certain factors that you need to consider when choosing your option strategy
- Check Option Greeks – One of the most used options Greeks is the delta, which gives the rate of change in the price of the option due to the change in the price of the underlying asset, i.e. Bank Nifty. If the delta is high, then there is a higher chance of the option turning in the money.
- Check the Implied Volatility – Implied volatility is the predicted volatility that the option price is expected to have in the near future. An option with high volatility is more likely to see adequate movement in the underlying asset’s price.
- Check the technical analysis – It will help you predict whether the stock price will increase or decrease and to what degree.
- Check the open interest – Quite often, we can spot which are the top options that are attracting the most buyers/sellers by checking the open interest of that option. For example, if the number of open call options is high at a particular strike price, the spot price will likely fall to or below that level.
- Have patience – Options take time to mature, but they can be traded even before maturity. It is thus important to have the patience to let the index run its course rather than make hasty decisions.
