9 Best Bank Nifty Option Trading Strategy

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Is it possible to trade in both directions with BankNifty options? 

Don’t worry after reading this post you will get an answer.

If you buy BankNifty when the price is low and sell them when they are high, then you can make a lot of money. You need to know when Index Will go up in value before they do so that you can make more money.

A bank nifty option trading strategy is a good idea for investors who want to make money in the stock market. It also gives protection if they guess wrong.

What are Bank Nifty options contracts

Bank Nifty Option Trading Strategy

Bank Nifty is an index that tracks the performance of 12 banking companies in India. The value of this index is the total market capitalization of all these 12 companies.

It is simply an options contract on the BANKNIFTY index (the NSE’s bank-stock index).

A banking Nifty Options contract is a contract that gives the buyer the right but not the obligation to buy or sell options at a predetermined price on or before the expiry date.

BankNifty Options contracts allow a trader to buy or sell options at one of the predefined strike prices. There are weekly and monthly expiry options available for trading in Bank Nifty.

In Bank Nifty options there is a lot of 25 meaning that one has to buy or sell 25 shares then only the market move will take place.

Types of Option Contracts

There are two kinds of options contracts that trade on Bank Nifty – 

  • Call Options and 
  • Put Options

You can either buy or sell options (call and put).

Buying a call option means that you expect the price of it to go up. On the other hand, selling or writing a call option means that you want the price of it to go down.

Similarly when you think the market will decrease then you will buy a put option. On the other hand, selling or writing a put option means that you want the price of it to go up.

The buyer of the option pays a premium whereas the seller of options receives the premium.  Selling Options requires more money than Buying Options.

Important: If you want to trade Options, it is better that you have a basic knowledge of how the options market works.

What are trading strategy

A trading strategy is a set of rules in which you specify when to buy, sell or hold an asset.

You can develop your own individualized strategies by making adjustments based on past performance, financial goals and risk tolerance level. You may also use a strategy designed by an investment expert or one that has been successful in the marketplace.

The strategy becomes the framework for your trading activity; it helps you avoid overtrading and keeps emotions out of the trade decisions.

Best Bank Nifty Option Trading Strategy for different market conditions

In general, though, there are three primary types of Bank Nifty Option Trading strategy:

  • Trend-Following Strategies: Trend-following strategies try to capture trends in markets. These include breakout trades (based on technical analysis) or momentum plays (where traders make trades based on how an asset is performing relative to other assets).
Trend-following strategies include: breakout trades momentum plays.
  • Reversal Strategies Reversal strategies look for changes in the trend of an asset that indicate a reversal has occurred, often based on technical analysis.
Reversal strategies include: price/volume action patterns pullbacks                                                                             retracements divergences
  • Cycle Strategies Cycle strategies are based on the predictable patterns of market cycles. This type of strategy is often effective (though difficult to master) and is commonly used in futures and options trading.

Further, some Bullish strategies are:

1. Long Call: When the market moves up, buy a Call option.  The profit is unlimited as long as bank Nifty keeps on increasing.

The maximum loss will occur when the market price moves down and expires near zero. The strategy works well when the investor thinks that the market will move up for a long time. But this strategy needs to be watched closely because of the high risk involved.

2. Calls spread: Call Spread is a bullish strategy and can be used in strong market conditions. When the index is near its all-time highs or increasing strongly, it becomes difficult to buy calls with strikes higher than current levels when you are bullish on the index. To overcome this difficulty traders use long call spreads instead of plain calls.

Call Spread can be traded with buying ITM call option and selling OTM call option with the same expiration.

3. Long Combo:  This means to buy OTM call & sell OTM put of Bank Nifty in same strike price and maturity.

Some bearish strategies are:

1. Long Put: When the market moves up, buy a Put option. The maximum profit will be achieved when the market falls drastically.

In this case, the loss will occur when the market price starts moving up after buying the put option.

2. Puts spread: Put spread is a bearish strategy and can be used in weak market conditions. When the index is near its all-time lows or decreasing strongly, it becomes difficult to sell puts with strikes lower than current levels when you are bearish on the index.

To overcome this difficulty traders use long put spreads instead of plain puts.

Puts Spread can be traded by buying the ITM put option and selling OTM put option with the same expiration.

Some Neutral strategies are :

1. Long Straddle: Long Straddle is defined as a trading strategy in which an investor buys both call and put options of the same strike price and same expiry.

A long straddle is a neutral strategy so that it has no bias to the market direction.

This means that the trader is long on both call and put options. So, if the market goes up, they will make more money from their call options than they will lose on their put options.

If the market goes down, they’ll make more money from their put options but lose some money from their call options.

2. Long Strangle: Long strangle trading strategy is based on buying a slightly OTM call and put option at the same strike price and expiration date.  Long strangle spreads are used to profit from significant moves (up or down) in the underlying instrument.

Long strangle has unlimited profit potential but limited risk i.e., limited to the premium paid for the spread.

Long Strangles are best used when you believe that the underlying stock will have a large move, but is not sure which direction.

Long Strangle can be used to target an expected effect on volatility, where the investor wishes to benefit from a significant increase in implied volatilities without actually having to own the stock.

Traders also use Long Strangles when they believe that the underlying’s price will move sharply over a given time frame.

3. Long Call Butterfly: A long butterfly spread with calls is a three-part strategy that is created by selling two ATM calls and buying one ITM call and buying one OTM call.

The Long Call Butterfly offers the benefits of a Butterfly spread, but only when the price of the underlying stays within a certain range.

In particular, a Long Call Butterfly is a good strategy to employ if you think that the price of an asset will stay in a specific range over the life of an option contract.

Research shows that Long Call Butterflies have performed well compared with other strategies during the last years.

Reasons for using Strategies:

Reasons for using Bank Nifty Option Trading strategy:

  • Strategies can cut losses: Use stop-loss orders to reduce the risk of financial ruin by limiting the amount of money you will lose on any one trade. A trailing stop-loss order is an example of a trading strategy that can be used.
  • Strategies can control your risk: Strategies like position sizing are designed to keep emotion out and prevent you from risking too much in any one trade.
  • Strategies can add predictability to your trades: For example, a strategy based on Fibonacci retracements may be particularly useful because it allows you to make better trade decisions as markets move.
  • Strategies can create a plan for trading specific assets: For instance, if you are bullish on gold, you could develop an overall position size and a profit target for your gold trades.
  • Strategies can make it easier to sustain your trading activity: Strategies can also help you avoid distractions, stay focused and reduce the chance of making irrational trading decisions.

How to Develop trading strategies?

The creation of an appropriate strategy or Bank Nifty Option Trading strategy involves several steps:

  1. Determine your objective
  2. Determine your trading style
  3. Determine strategy triggers
  4. Choose a strategy type
  5. Create entry and exit rules
  6. Capture the benefits of your strategy
  7. Follow-up and review

Tips for trading in bank nifty options

Tips for trading in bank nifty options are:

  • Trade in options based on the trend of BankNifty.
  • When you lose money, work harder and cut your losses when they are small. It is important to let your profits run for best results.
  • Keep a stop-loss for all your options. Never risk more than 2% of your capital on any trade.
  • Work with an option trading strategies that works best for you.
  • Do not be greedy and do not chase profits waiting for unrealistically high returns on option trade . It is a bad idea for new traders especially.
  • Choose an option with strike prices nearest to the current bank nifty price for maximum profit potential.

Understanding the Risks

  • It is very Risky: This is the most important reason why there are many people who doubt trading in options. They are afraid that they will lose too much money when they lose a trade. However, if you know the right way to trade and have a good strategy, risk can be greatly reduced on your trades.
  • Time decay: As time progresses, time decay is bound to eat away a portion of the option premium. This risk can be minimized by proper utilization of “Time Decay” knowledge and using Call/Put options accordingly (by knowing highest possible expiry at which one can consider buy/sell)
  • False confidence: False confidence tends to occur when someone is not experienced enough in using options for hedging purposes. When this happens, a trader will believe that he has seen all potential outcomes of his strategy and that there is nothing left to be learned from it. This can turn out to be costly because the option market never stands still . If you’re not willing to keep learning about your options strategies , there is a good chance that your account will suffer in the long run.
  • You can’t time it: Okay sometimes you might be able to predict the general direction of the market , but you can’t know for certain when the market will move or what direction it will go . This is why so many hedging strategies incorporate options with different time intervals and strike prices. This makes it hard to time your trades but you’ll begin to see patterns in the market and what options are most profitable for you .
  • Loss potential: The biggest disadvantage of trading in options is the loss potential. If the trade goes against you, possible to lose the entire amount invested. That’s why you should never invest more than you can afford to lose and also manage your risk as much as possible. Options are great, but they should be used for hedging purposes only-never just speculating on price action.
  • Not beginner-friendly: Due to how complicated trading in options can be, it’s definitely not for beginners. An individual who is not familiar with the risks involved, as well as the strategies that are available for options trading, should probably stay away from options until they have some experience in other forms of trading.

Advantages of trading BankNifty options 

Advantages of trading in options are:

  • There is a low capital required to trade in options.
  • Trading in options can generate good returns on investments.
  • The potential for high profits also exist, as trading in options has no upper limit, like when trading stocks do have limited amounts.
  • Trading options can be learned and mastered by anyone willing to learn, and it’s not limited to any age or background.
  • Trading in options is a very liquid market, this gives you the flexibility to enter and exit your position.
  • Trading in Options helps you profit from market volatility.

FAQs on trading Bank Nifty options 

There are many questions in the mind of investors who trade on the Bank Nifty Index. Here, this is a list of frequently asked questions and their answers, which can be used as a reference.

Q1: What is the strike price in the option?

A: Strike price refers to the price at which an underlying asset (in this case, Bank Nifty) can be purchased or sold. This is also called Exercise Price or Expiry price.

Q2: What is the expiry date of a BankNifty option contract?

A: Bank Nifty option contract can be traded for weekly and monthly expiry. The expiry date for Bank Nifty weekly options contract is the Thursday of each week and for the monthly options contract is the last Thursday of the month.

Q3: What is an option premium?

A: An option Premium is nothing but the price paid to buy an option.. It is also known as ‘premium’ or ‘exercise price’.

Q4: What happens if an option expires out of the money?

A: If an option expires out of the money, then depending upon whether it is a call or put option, the expiry value will be zero.

Q5: What is In-The-Money (ITM), At-the-money-option (ATM) and Out-of-the-money-option (OTM) in Options?

A: ITM, ATM and OTM in options trading is nothing but a strike price of the options that are available in the market. Let us understand this with an example.

Suppose BankNifty Index spot price is 500 then

Out of the money – The strike price is greater than the spot or current market value. In the above case, OTM will be a strike price of 550.

In-The-Money – The strike price is smaller than the spot or current market value. In the above case, ITM will be a strike price of 450.

At-the-money-option- The strike price is equal to spot or current market value. In the above case, The ATM will be the strike price of 500.

Q6: How to decide on whether should I buy or sell Call or Put options?

A: You can buy a Call option when you feel that the price of a BankNifty is likely to rise. You can buy a Put option when you feel that the price of a Banknifty is likely to fall.

Q7: What are the factors that affect the value of the premium of an Option?

A: There are three major factors that affect the cost of an option premium – Strike price, Expiry Date and Volatility.

Q8: How the premium paid on options is calculated?

A: The premium paid on options is a combination of the intrinsic value and time value.

Conclusion

In this blog post, I have discussed the Bank Nifty options contracts and strategies to trade in different market conditions. 

I have also discussed FAQs on trading bank nifty options that you might find helpful. 

If you’ve ever traded options before (even if it was only once) what were your biggest challenges? Let me know in the comments!

Good luck!

Disclaimer: The information provided in this article is for educational purposes only and does not constitute investment advice. Index market trading involves considerable risk and can result from the loss of your invested capital. Investors should always do their own research before investing to avoid losing their capital.
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