Which Is the Best Strategy for Nifty and Bank Nifty Option Trading?
by Pooja Late so cutWhen 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!
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.
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Created on Sep 14th 2023 08:47. Viewed 122 times.