You can trade options on the Nifty, Bank Nifty, two additional indices, and on approximately 200 stocks. The interesting thing is that most traders only trade options on the Nifty and Bank Nifty while ignoring opportunities elsewhere. Since there are fewer people trading the other optionable securities, there is generally less liquidity with higher bid-ask spreads. Despite this, when you look at the most successful traders, they don’t trade the same underlying with the same option strategy. The best traders vary their strategy based on market trends and target specific underlying securities based on the available opportunity.
For example, companies announce earnings four times per year and the results summarize the last quarter’s financial performance. The company will have a press release disclosing their full financial statements – balance sheet, income statement, and cash flow statement – as well as summary metrics like total revenue, revenue growth, and profit margins. The release of this information can dramatically sway stock prices as traders and investors react to this information. Sometimes, they overreact thus driving the price high or low leading to a correction shortly thereafter. In other instances, the market may underreact leading to price moves in the days following the earnings announcement.
If a stock is optionable, then a F&O trader can potentially take advantage of these events. If a trader only focuses on the Nifty or Bank Nifty, they would completely miss out on these trading opportunities. Below is information on Reliance that will announce earnings soon. If you look at the price of the straddle – the simultaneous purchase of an at-the-money call and put – this tells you what the option market is implying in terms of an up or down price move. Based on this data for Reliance, the implied move is +/- 3.6%. As a trader, if you believe that the release of earnings will drive the price more than 3.6%, then you could buy a straddle.
In conclusion, by expanding your trading plan to include underlying securities outside of the Nifty or Bank Nifty, you can diversify your strategies and trading opportunities.