Bank NIFTY Intraday Options Trading: Steps, Strategies & Tips

Whether you are a new trader just beginning your journey or an experienced trader with a successful trading career, one thing is most likely common, i.e. you must have heard about Bank Nifty at some point. Every trader wishes to capture the dynamic move of Bank Nifty in a strategic and profitable way through Bank Nifty’s intraday option trading strategies.

In this blog, we will discuss intraday strategies an individual can use to make profits by trading the Bank Nifty options. Let’s understand its mechanism, strategies, and steps involved in it.

Introduction

Options trading in Bank Nifty has been getting traction from traders recently. Before discussing the trading strategies, let’s understand intraday trading, options and the Bank Nifty index in detail:

• Intraday trading: Intraday trading refers to a trading approach where traders don’t take an overnight position but square it off within the same day. They buy and sell on the same day and hold the position for a few minutes to a few hours within the intraday window. Although it is a bit risky, intraday trading is a quick way of making a profit from the stock market especially on a highly volatile day.
• Options: Options give the buyer of the options the right to buy or sell the asset at the strike price. If the option buyer exercises the option, then the seller must follow the terms of the contract. 
• Bank Nifty: Bank Nifty is a benchmark index that measures the market performance of the Indian Banking Sector. It is a sectoral index that comprises a group of stocks from the banking sector that are highly liquid and have large market capitalizations. These stocks are traded on the National Stock Exchange.  

What is NIFTY?

One should have a good understanding of indices and exchanges in order to understand how the stock market works. These are the most important pillars that support the stock market and keep it functional.

Nifty is one of the major indices in India which tracks the major companies listed on the NSE (National Stock Exchange). The Nifty 50 is a diversified index comprised of 50 stocks and accounting for 13 sectors of the economy. Nifty serves as a benchmark for the overall performance of the Indian equity market. It is used for a variety of purposes by investors, mutual funds, and portfolio managers to gauge market conditions or as a reference point for comparing portfolio performance. It’s considered a reliable indicator of the Indian equity market.

Nifty is a free-float market capitalization-weighted index, which means that companies with a higher market capitalization have more weightage on the index, but only the shares available for trading are considered. 

How to Invest in Bank Nifty?

Bank Nifty consists of 12 stocks and, being a sectoral index covers only the Indian Banking sector. There are several ways to invest in Bank Nifty, they are as follows:

1. Investing via Bank Nifty Futures: Bank Nifty futures are derivative contracts that allow us to buy or sell the Bank Nifty index at a predefined price at a future date. You don’t own the underlying stocks of the index; just speculate on the movement of the Bank Nifty index. It is a highly leveraged product, as you can pay a small premium to enter the position. Leverage can amplify both profits and losses. Investors must also be cautious that futures contracts have an expiration date, so either one has to roll over or square off the position.

2. Investing via Bank Nifty Options: Options are derivative contracts that give the buyer the right, but not the obligation, to buy or sell an option of the Bank Nifty index at a specific price (strike price) on or before a fixed date. The advantage of buying options is limited risk and a potential for large gains with small capital if Bank Nifty moves significantly. The risks associated with options are time decay (Theta) for option buyers and unlimited loss profile for option sellers.

3. Investing Via Mutual Funds and ETFs: Some mutual funds focus on the banking and financial sector and offer a diversified way to gain exposure to Bank Nifty stocks. They are professionally managed funds and charge a fee. On the other hand, ETFs are funds that aim to replicate the performance of Bank Nifty; they are also professionally managed and charge lower fees than a Mutual Fund. 

4. Direct Investment in Bank Nifty Stocks: An investor can replicate the performance of the Bank Nifty index by buying individual securities in the Bank Nifty index like HDFC Bank, ICICI Bank, SBI, Axis Bank, Kotak Mahindra Bank, etc. The advantage of direct investment is the direct ownership of the stock and one can build a customized portfolio. However, this approach requires more active management.

Key Factors for Bank NIFTY Intraday Trading

An investor must consider the following factors before trading:

• Do Market sentiments and Trend Analysis:  Understand the overall market sentiments and do the trend analysis. One can use technical indicators like RSI, MACD, Moving Averages, etc. or any other studies for precision.
• Check Support and Resistance Levels: Manually check the price charts to find the support and resistance levels or one can also use the Fibonacci retracement and Pivot Points study as well.
• Read Derivative Data: One should be able to interpret FIIs and DIIs data, Open Interest (OI) and Option chain data to gauge what other investors are doing in the market.
• Understand the Basics of Option Greeks: Understanding option Greeks is very important. For example, Theta or time decay is very important near expiries. 
• Check Volatility Levels: Check the Implied Volatility (IV) and India VIX levels to gauge market volatility. High volatility means higher risks but more trading opportunities.
• Select the appropriate Strike Price: Selecting the right strike price from OTM, ATM, and ITM is crucial for success. ITM and ATM options are highly sensitive to price movements. ITM options are more expensive out of two because of their intrinsic value, whereas OTM options are cheaper but more risky.
• Check Sector Specific and Economic News: Check for economic events, data releases, results, and major policy announcements, as Bank nifty is highly sensitive to RBI Policies and interest rate scenarios. Check sector-specific data like overall results of the Banking sector, NPA, provisions, etc.
• Position Sizing and Risk Management: Don’t over-trade or over-leverage your position. Only use a small percentage of your capital, and if you have a large position, always hedge it and keep a logical stop loss to manage downside risk. 

Bank Nifty Option Strategy

There are many strategies available to trade Bank Nifty options like directional (buy a call option if your view is bullish or buy a put option if your view is bearish) and non-directional strategies, which is a volatility play to capture a big move in either direction. An example of one such strategy is given below for intraday options trading in Bank Nifty:

Scenario: Bank Nifty opens at 50,000 and breaks the 50,200 resistance level with strong volume.

• Action: You buy a 50,200 ATM Call Option, expecting the bullish momentum to continue.
• Stop Loss: Place a stop loss at 30-50% of the premium paid as per your risk appetite.
• Exit: When Bank Nifty reaches the next resistance level (say 50,500), book profits or when the option premium increases by 30-50%.

Alternatively, if you expect a volatile day, you could use a straddle by buying both a 50,200 Call and a 50,200 Put, benefiting from a big move in either direction.

Intraday Trading in Stock Options 

You can use similar directional and non-directional option strategies on Bank Nifty stocks rather than betting on the index. Some of the strategies are listed below:

• Directional Strategies:

Buy a Call Option when you expect Bank Nifty index stock to rise.

Buy a Put Option when you expect Bank Nifty index stock to fall.

• Non-Directional Strategies:

Straddle: Buy both a call and a put option of the same strike price (ATM) to profit from big moves.

Strangle: Buy OTM calls and put options to take advantage of high volatility.

Conclusion

Intraday Options trading is very popular among traders, especially in Bank Nifty, because of its volatile nature. As per the latest update, the weekly expiries of the Bank Nifty options will discontinue by November end. Bank Nifty’s options trading strategy isn’t as simple as it looks because to capture the price movements of Bank Nifty, an individual must have a good understanding of the market, Option Greeks, and, most importantly, risk management. Hence, it is very important to understand the characteristics of options, trade setup, risk management and various option strategies before trading the Bank Nifty; in this way, traders and investors can make informed decisions and improve their chances of success in the markets. It is advised to consult a financial advisor before investing.

Frequently Asked Questions (FAQs)