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Weekly Bank Nifty options Strategy

07 Sep 2023

Bank Nifty options on a weekly basis were first introduced a few years back and have become quite popular among traders. The idea was to encourage more traders in the Nifty to give greater depth and to ensure that risk is reduced with lower time to maturity. In the last couple of years, the Nifty weekly bank options have been attracting interest from traders and from retail investors as a low-cost method of trading the Bank Nifty options. Let us look at some Bank Nifty trading techniques and how to trade in bank Nifty weekly options. Let us also look at the best bank nifty trading strategy in the current market. Before this, however, it is important to know a little bit about the Bank Nifty and the weekly trading options that you may conduct as a trader. 

What is the Bank Nifty?

The Bank Nifty is an index of the banking sector. The Bank Nifty acts as a benchmark which has the best banks listed on the NSE (National Stock Exchange). These are banking stocks representing the performance of the most prominent banks in India. The Bank Nifty helps investors to track the performance of these stocks and indicates performance in the banking sector, overall. 

Weekly Bank Nifty Options

Investors and traders may get into the trading of the index by purchasing options. This allows indirect investment in the index. It also permits investors to maintain hedge positions to generate substantial returns out of the banking sector. In Bank Nifty option trading, like any other trading in options, an investor has the right to buy or sell the index, but there is no obligation to do so. However, with the weekly options contracts, Bank Nifty options contracts will expire in a week. Except for the reduced time for the expiry of any options contract, there is no change in options contrast regulations. It is interesting to note that these weekly options contracts are only available for some of the indices like that of the Bank Nifty. 

How traders can profit from the use of Weekly Bank Nifty options?

Unlike the normal Bank Nifty options that mature on the last Thursday of every month, the Bank Nifty options have a weekly maturity. Of course, they have a similar lot size for trading consisting of 40 units per lot and the weekly options will mature on the last Thursday of every week. At any point of time, there will 7 weekly options that will be open for trading. Here is how traders can benefit from the use of Weekly Bank Nifty options.

Weekly bank nifty options can be used as a better hedge against short term even risk. Let us understand this point. For example, if there is a Fed meet on Tuesday where the Fed is expected to announce a tapering of its bond buying policy. In that case, the weekly options expiring in that week will react a lot more compared to the monthly option as the context is more immediate. Thus, these weekly bank nifty options give the opportunity to hedge risk in a more immediate perspective.

From an exchange perspective and from the trader’s perspective, the weekly options are likely to increase the volumes of trading in the Bank Nifty. For a very long time, the trading and volumes were concentrated largely on the Nifty alone. This weekly option will give an opportunity to expand the gamut to Bank Nifty options too. That will be an additional hedging tool.

Historically, bank Nifty has seen twice the volatility of the Nifty and hence hedging becomes a little more complicated. Since the Bank Nifty is closely related to the ups and downs of the financial system in India and the world, any news tends to get transmitted rapidly. A weekly option on the Bank Nifty will be able to capture these kinds of volatility much better as the short-term movements will be captured more effectively.

The lower pricing of these options, considering their shorter expiry, will enable traders to profitably create hybrids like bull call spreads, bear put spreads, straddles and strangles. Also, one can create strangles around key events for a short period of time thus reducing the risk and making your position less vulnerable to the vagaries of the market.

Traders looking at calendar spreads can look at much shorter spreads with more precise and granular positioning. Based on event timetable and news flows, one can more precisely define a spread between two bank Nifty weekly contracts to profit from the spread.

Weekly bank nifty options are a big invitation for the retail investors to also profitably participating in selling options. Normally, due to higher margin requirements and higher risk entailed, the retail is out of selling options. That is mostly done by institutions and proprietary desks. Thu retail investors lose out on an opportunity to earn regular income. In bank Nifty options, the risk is much lower and hence writing options can be done with limited risk. This opens a new avenue for them.

Most retail traders had issues with the futures contracts after the minimum lot size was hiked from Rs.2 lakhs to Rs.5 lakhs. Now the index contract value is in the range of Rs.7 lakhs to Rs.10 lakhs. This has led to retail investors preferring options over futures to reduce the margin payable. With weekly options, this advantage gets more underscored.

Options Trading Made Appealing

Weekly Bank Nifty options trading has the appeal of a lesser timeframe to expiry dates and hence, a decreased amount of premium which has to be incurred by traders. For short-term traders, these are options trading systems that work to their advantage and that they can make the most of.

 

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