Weekly Bank Nifty Options change the trading game: open new profit avenues

Summary:

Weekly Bank Nifty options are attracting traders seeking greater profits in a limited period of time. They offer several advantages over monthly options such as lower transaction costs, higher liquidity, and faster rate of time decay. With the right options strategies in place, traders have the opportunity to scale up profit through weekly Bank Nifty options.

Bank Nifty is an index composed of 12 stocks from public and private banks. The primary function of this index is tracking the performance of India’s banking sector. The top constituents of Bank Nifty are Axis Bank, HDFC Bank, State Bank of India, ICICI Bank, and Kotak Mahindra Bank. These banking majors leverage the index to gain a capital market performance benchmark of the Indian banking sector.

For traders, Bank Nifty options are of particular significance. These derivative contracts allow the buyer the right, but not the obligation to buy or sell the underlying index at specified price and specified date. Their weekly Bank Nifty options suite differs from other options in terms of their expiration dates. This blog will unfold the impact of weekly options on trading and how traders can mobilize them to boost profitability.

Some of the Options strategies traders can leverage

Traders can benefit substantially from the weekly Bank Nifty options, given they are equipped with the right trading strategies and tactics. Let’s take a look into some of the strategies that traders can use:

• Directional trading strategies:

A directional trading strategy has two facets –

• Buying Call Option – where if a trader predicts a bullish trend (an upward trend in the stock prices) in the Bank Nifty, they purchase call options.

• Buying Put Options - If a trader anticipates a bearish trend (a downward trend in the stock prices), the trader can buy put options. This allows traders to profit from downward price movements.

• Non-directional trading strategies:

There are two types of non-directional trading strategies –

• Straddle – This strategy allows traders to buy a call as well as a put option with the same strike price and expiration date. It is a profitable tactic to gain from price movements in either direction.
• Strangle - Fairly similar to the straddle technique except it involves buying of out-of-the-money (OTM) options. This strategy is mainly used when a trader expects tremendous price volatility, however is not sure about the direction.

Note: OTM refers to an option contract that has no intrinsic value. OTM call options have a strike price that exceeds the current value of underlying securities, whereas for put options that are OTM it is the opposite. They ensure higher percentage gain, lower costs, and calculated risk.

• Credit spread strategies:

Traders can leverage the following credit strategies-

• Credit put spread – Here, traders can sell an OTM put option and buy a further OTM put option with the same expiration date. This strategy is particularly useful if a trader anticipates a limited downside movement.
• Credit call spread – In a credit call spread strategy, a trader can sell an OTM call option and buy a further OTM call option with the same expiration date. It's used a trader expects limited upside movement.

• Iron condor:

An iron condor strategy entails selling both a call and a put option with the same expiration date, however different strike prices. The gap between the two strike prices helps realize the potential profit as well as risk. Traders can generate income from the premium received after the selling the options.

• Covered calls and protective puts:

A trader withholding Bank Nifty shares can generate surplus income by selling covered calls or protecting downside risk with the help of protective puts.

• Selling covered calls – This strategy involves selling call options against shares of an underlying asset and generating income from the premium received. If the underlying asset remains below the strike price of the call option, it expires worthless leaving the investor with the premium. Whereas if the underlying asset exceeds the strike price, the investor may have to sell the shares at the same price, limiting potential gains.
• Selling cash-secured puts – Similar to the above strategy, except here a trader deals with a put option instead of a call option. Here, the premium is retained by the investor if the underlying asset remains above the strike price and the option expires worthless. On the other hand, if the asset falls below the strike price, the investor is compelled to buy it from the put option buyer.

In Conclusion

Now that you are armed with the information, let us summarize the key points in the blog. Weekly options are particularly useful for trading volatility itself and earnings reports from banks within the Nifty bank Index provide valuable insights into potential price movements. While weekly options are suitable for day trading due to the short expiration periods, irrespective of the strategy employed, risk management by diversifying trade and position sizing is essential. And ultimately, it will be upon you to staying updated of economic events, financial news affecting the banking sector. It will help build your understanding of their potential impact on the prices of Bank Nifty options.

It is extremely crucial that traders recognize the risks involved in trading and develop a well-thought-out trading plan and a risk management strategy. In case of challenges or if you lack the confidence, seeking advice from a financial advisor or an expert can help you prevent loss of investment.