Home/Blogs/5 Tips to Trade on Nifty and Bank Nifty Expiry

5 Tips to Trade on Nifty and Bank Nifty Expiry

28 Jul 2023

Introduction

Nifty and Bank Nifty are two of the most popular and liquid indices in the Indian stock market. They represent the performance of the top 50 and top 12 companies in the banking sector, respectively. Both indices have futures and options (F&O) contracts that allow traders to speculate on their price movements.

However, trading on Nifty and Bank Nifty expiry can be challenging and risky. Here we will talk about some best trading tips to incorporate to overcome challenges associated with them. 

Open Your free Demat Account in just 5 minutes!

What is Nifty and Bank Nifty Expiry?

Expiry is when these indices' futures and options (F&O) contracts expire or become invalid.

The NSE has recently changed the expiry day for Bank Nifty F&O contracts from Thursday to Friday, effective July 7, 2023. This means that the weekly contracts of Bank Nifty will expire each Friday, except for the last week of the month when the monthly contracts will expire on the last Thursday. If Friday is a trading holiday, the previous trading day will become the expiry day.

How to Trade Bank Nifty Expiry?

You may adopt any of the following approaches to succeed in trading on Bank Nifty Expiry.

1. Understand Expiry Dynamics 

Expiry week may increase volatility and unpredictability in Nifty and Bank Nifty. During this period, you need to be aware of several key factors:

  • Time decay: Options contracts lose value rapidly as they approach expiry. That means if you hold options, their value will erode quickly during the last few days before expiry.
  • Roll-over activity: Traders and institutions might engage in roll-over strategies, shifting their positions from the current month's contract to the next month's. This can influence market sentiment and price movements.
  • Max pain theory: The max pain theory suggests that the market tends to move toward the price where the maximum number of options contracts expire worthless. Monitor the "max pain" level as it might impact market behaviour.

2. Use Spread Strategy

Spread strategy is like playing with two bets at once. In a Bull Call Spread, if you believe the market will go up, you buy a cheaper call option and sell a more expensive one. This way, your potential profits are limited, but so are your possible losses. 

On the other hand, in a Bear Put Spread, you do the opposite when you expect the market to go down. You buy a put option and sell another put option at a higher price. The idea is to limit your risks while still having the opportunity to make some gains based on your market predictions.

3. Utilise Technical Analysis

Technical analysis plays a vital role in expiry-day trading. Based on historical price data, identify key support and resistance levels for Nifty and Bank Nifty. These levels act as psychological barriers for traders, often leading to price reversals. Use tools like Fibonacci retracements, pivot points, and trendlines to assist in identifying significant levels. When the price approaches these levels, it could signal potential trading opportunities. Combine this with other technical indicators to effectively confirm your trade decisions and manage risk.

4. Implement Risk Management Strategies

Trading in the stock market involves risks. It is crucial to manage them effectively. Use risk management strategies like stop-loss orders. This strategy automatically triggers a sell order when a stock reaches a predetermined price level. This approach limits potential losses and protects your capital from significant downturns.

Suppose you buy Bank Nifty futures at Rs. 35,000 and set a stop-loss at Rs. 34,500. Your maximum loss will be Rs 500 per contract if the market goes against your trade.

5. Monitor Open Interest

Open Interest (OI) is a common term for options and futures. It represents the total number of outstanding contracts for a particular security (e.g., stock or index) at any given time. 

It is a crucial parameter to gauge market sentiment and potential price direction. Observe changes in OI for different strike prices as expiry approaches. Rising OI in call options could indicate bullishness, while a surge in put options may suggest bearish sentiment. Combine OI analysis with technical indicators for a comprehensive view.

Conclusion

Trading on Nifty and Bank Nifty expiry days can be a rewarding experience if approached with caution and a well-thought-out plan. But since expiry days are known for sharp price movements, trading without precautions can expose you to wild market swings. You can handle turbulence more effectively by preparing for heightened volatility through proper planning and research and following the above tips.

 

Related Articles: 20 things you need to remember when you trade intraday | Best Intraday Trading Tips and Strategy | How to Make Profit in Intraday Trading | How to decide whether a stock is fit for intraday trading 

Checkout more Blogs

You may also like…

Get Exclusive Updates

Be the first to read our new blogs

Intelligent investment insights delivered to your inbox, for Free, daily!

Open Demat Account
I wish to talk in South Indian language
By proceeding you’re agree to our T&C