Which Is the Best Strategy for Nifty and Bank Nifty Option Trading?

In this article, we will discuss

• Best Strategies for Trading NIFTY and Bank NIFTY Options
• Ace the Index With the All-New Samco App
• Conclusion
• FAQs

When it comes to gaining maximum exposure from a single position, trading index derivatives can be the most suitable investment. In this regard, NIFTY and Bank NIFTY option trading is what passive traders can resort to. NIFTY gives investors exposure to the leading sectors in the Indian economy, while Bank NIFTY is more sector-specific, dealing with the top 12 banking stocks. However, to make sustainable profits from trading these index options contracts, it is essential for you to know the best strategies. Find out their names along with their methods of implementation by reading this article.

Best Strategies for Trading NIFTY and Bank NIFTY Options

Here are some of the best Bank NIFTY option trading strategies for conducting profitable trades:

1. Sell Trades and Buy Trades

This is a two-part strategy which involves both selling and buying trade orders:

• Sell Trades

As per experts, when the markets open with a gap down, that is, the opening asset value is lesser than the previous day's closing price, there are high chances of a further price drop. In such situations, you must use a candlestick chart and wait for the gap to fill up. Then, place a sell order in order to reduce losses in case the price drops further.

• Buy Trades

Alternatively, when the market opens with a gap up, that is, the opening price is more than yesterday’s closing value, experts predict chances of further price appreciation. Under such circumstances, use a candlestick chart and wait till the gap is filled. Hereafter, place a buy order. By doing so, you can profit from the rise in asset value. However, you must remember that the price gaps do not always fill up within a day. In such scenarios, experts always recommend waiting for a few days and allowing the gap to fill up before placing orders for a new trade.

2. 5-minute Candlestick Chart

This strategy is suitable for intraday trading using NIFTY and Bank NIFTY options. To do this, you need to use a 5-minute candlestick chart and find a moment in the chart where the first two candles are showing either a bearish or a bullish trend. In case both show a positive market sentiment, you need to place a buy order as the asset price reaches the second candle’s high. Then, after the price triggers, place a stop-loss order as it reaches its low. Alternatively, if both candles indicate a bearish trend, place a buy order at the second candle’s low position. After it triggers, you need to place a stop-loss order on the same candle’s high position.

3. Short Straddle

When it comes to trading in a market with low volatility, short straddle is the best strategy for NIFTY and Bank NIFTY options. To implement it, sell a call and a put option having the same strike price and date of expiry. In this case, your upper breakeven point will be equal to the sum of the net premiums you received and short call’s strike price. On the other hand, you can find the lower breakeven point by adding net premiums received and the short put’s strike value. You can gain the maximum profit from this strategy when both the call and put remain unexercised. The total premiums received will serve as the profit amount. Furthermore, maximum loss is undefined in case of this strategy. Thus, there is no need to use a stop-loss order.

4. Long Straddle

In case you are expecting high volatility in the market, a long straddle can be a very effective strategy. In order to use it, you need to buy a call and a put option having the same strike prices and expiration dates. Under such circumstances, your upper breakeven point will be the summation of the call option strikes and its premium amount. Inversely, you can calculate the lower breakeven point by adding the put option strike value and premium amount paid. Based on asset price movements, you can choose to exercise either of the options. Profit potential on both sides is unlimited. Maximum loss, in this case, will be equal to the sum of the premiums in case both options remain unexercised.

5. Iron Condor

When you are expecting asset prices to remain within range, iron condor can be an excellent strategy. To execute it, you need to sell a call option and a put option having the same date of expiry but different strike prices. Now, the difference between the strike prices of these two options will determine your profit as well as risk. In this case, premiums gained from selling the options will serve as your income. Now, if the underlying security’s price remains within the range of the two strike prices, both options will expire worthless, enabling you to keep the premium as a profit. However, if the asset price moves beyond the range of either strike price, it will result in a loss.

6. Long Call Butterfly

This Bank Nifty option trading tactic is fit for use during those times when you anticipate very low volatility in the market. It is a three-part strategy involving which is actually the combination of a bull call spread and a bear call spread. To execute it, you need to buy an ITM and an OTM call option and sell two call options which are ATM. Now, all your call options must have strike prices which are equally distant from their current market values. Your maximum profit in this regard will be equal to the difference between the adjacent strike values after subtracting the net premium paid. Inversely, maximum loss will be the sum of the premiums which you pay.

7. Bull Call Spread

In times when the market conditions make you feel moderately bullish, the bull call spread strategy can come in handy. To perform this tactic, you need to buy a call option which is At The Money (ATM) and sell a call option which is Out of The Money (OTM), both having the same date of expiry. Doing so creates a range which reduces your losses but will put a threshold on your profits as well. Your maximum loss will be the difference between the premiums paid for the two call options.

8. Bear Call Spread

When the market shows mild bearish sentiments, bear call spread can be an effective strategy. To execute it, you need to sell an In The Money (ITM) call option and buy an OTM call option. The latter will act as a hedge against an unexpected rise in asset value. Your profits will be equal to the net premium you receive from selling the call option. Whereas your loss will be the difference in strike prices after deducting the net premium.

9. Bull Put Spread

For times when you estimate a moderate rise in the index value, using bull put spread can be very effective. To implement this strategy, you need to purchase one OTM put option and sell an ITM Put option. Like the bull call spread strategy, maximum profits will be limited. Maximum loss, in this case, will be the difference between the put strike prices after subtracting your received net premiums.

10. Naked Calls or Puts

When you anticipate a significant rise or fall in Bank NIFTY prices, using naked calls or puts can be the best choice. When the index starts appreciating in value, you can purchase a naked call to book profits. Alternatively, when asset prices start depreciating, buying a naked put will help secure profits. For both cases, it is mandatory for you to use a stop-loss order. It will act as a safeguard in case there is a sudden price reversal. Maximum loss, in this case, will be the total premium amount that you paid.

Ace the Index With the All-New Samco App

Now, profiting from NIFTY and Bank Nifty option trading will require you to use several technical analysis tools for analysing asset price movements. Thus, choosing a brokerage platform which can provide you with seamless access to in-depth analysis is essential. In this regard, downloading the New-Gen Samco App is the solution. The app offers a wide range of charts and analytics tools which can help you track the index and outperform it. What's more, you can use Samco’s Options Value Calculator to get an estimation of the change in value of options prices with respect to time, volatility and the underlying asset’s price movements. Additionally, Samco provides 20X margin for options contracts while charging flat ₹20 brokerage for every executed order. So, open a Demat account with Samco today and get ready to ace the index!  

Conclusion

These were some of the best tactics you can use for NIFTY and Bank Nifty option trading. However, only knowing these strategies will not do. You need to actively keep tabs on news releases, major policy changes, announcements by major corporations, etc., regarding the banking sector and all other sectors which are represented in the NIFTY index. Additionally, you must set realistic expectations and develop a trading plan by assessing your investment objectives, horizon and risk tolerance levels.

FAQs

• What is the current lot size for trading Bank NIFTY options?

Ans. As per a circular released by the National Stock Exchange, the market lot size for Bank NIFTY futures and options has been reduced to 15 from 25. It will be effective from the July 2023 contracts.

• What are the best indicators for NIFTY and Bank NIFTY options trading?

Ans. The best indicators for trading NIFTY and Bank NIFTY options are Relative Strength Index (RSI), Elliot Wave Pattern, Bollinger Bands and Rate-of-Change (ROC).

• What are the factors affecting Bank NIFTY options returns?

Ans. Returns of Bank NIFTY options mainly depend upon the banking sector’s performance. Additionally, factors like strike price, time left till contract expiry and volatility play a major role.

• How long do Bank NIFTY options contracts last?

Ans. Bank NIFTY monthly options have a maximum trading cycle of 3 months. Traders can also opt for Bank NIFTY weekly options, which have a trade duration of 7 days.

• What are the risks associated with trading Bank NIFTY options?

Ans. Some of the risks associated with Bank NIFTY options are high volatility, the need for accurately predicting price movements and chances of losing the entire invested capital. Thus, Bank NIFTY options trading is only recommended for experts.