Effective BANKNIFTY Options Strategies for Traders

Considering how risky options trading is, traders are advised to avoid naked options trading - particularly naked options selling. The alternative of using tried and tested profitable options trading strategies is always a better solution. This is especially true if you are trading in volatile underlying assets like the Nifty Bank index.

If you have this index on your radar, check out the details of its options derivative and see how you can use BANKNIFTY options strategies to leverage the index price movements.

An Overview of the Nifty Bank Index Options Contract

The Nifty Bank options contract is a derivative instrument with the Nifty Bank index as the underlying asset. This index was launched in September 2003 and is rebalanced semi-annually. It is composed of the largest and the most liquid banking stocks in India. The free float market capitalisation method is used to compute this index, which can have a maximum of 12 stocks.

Check out the key details of the BANKNIFTY options contracts.

• Expiration Day

The last Wednesday of the expiry period is the expiration date for these options. In case the said Wednesday is a trading holiday, the expiration date will be moved forward to the previous trading day.

• Trading Cycle

The options contracts based on the BANKNIFTY can be weekly or monthly derivatives. The weekly contracts have 4 expiries per week. The monthly contracts have a maximum trading cycle of 3 months - namely, the near-month, next-month and far-month limits. Furthermore, Nifty Bank index options also have three quarterly expiration dates.

• Lot Size

The lot size for the Bank Nifty options contract is 15.

BANKNIFTY Options Strategies

Now that you know the expiry dates and trading cycles for this derivative, let us explore some effective BANKNIFTY options strategies that can be useful in different market scenarios.

1. Bullish Nifty Bank Options Strategies

These techniques can be profitable options trading strategies if the Nifty Bank index rises in value by the options expiry date. Some common strategies in this category include the following:

• Bull Call Spread:

This strategy may be suitable if you expect the index to rise moderately by expiry. So, you purchase an in-the-money (ITM) call option with a strike price lower than the current asset price and sell an out-of-the-money (OTM) call option with a strike price higher than the asset price.

The maximum profit from this trade will be the difference between the two strike prices, reduced by the net premium paid. The maximum loss will be the net premium paid to set up the trade.

• Bull Put Spread:

The bull put spread may also be ideal when you expect the BANKNIFTY to increase moderately in value. To set up this strategy, you need to purchase an OTM put option with a lower strike price than the asset price. Then, sell an ITM put option with a higher strike price.

If the index rises in value, this could become a profitable options trading strategy. The maximum profit possible is limited to the net premium received. However, the maximum loss is the difference between the strike prices, reduced by the net premium. In other words, the outcomes here are the exact opposite of the bull call spread.

• Call Ratio Backspread:

In this strategy, you buy and sell call options with the index as the underlying asset and the same expiry date. However, strike prices are different. You begin by choosing a ratio like 1:2, 1:3 or any other convenient ratio and then sell and buy call options accordingly.

Since this is a call ratio backspread, you will have more long calls than short calls. For instance, say you choose a 2:1 ratio. This means you will purchase two out-of-the-money (OTM) call options, each with a higher strike price, and sell one in-the-money (ITM) with a lower strike price.

2. Bearish Nifty Bank Options Strategies

If you expect the Nifty Bank index to fall and are looking for some potentially profitable options trading strategies for this scenario, the following trade setups may be suitable.

• Bear Put Spread:

To execute this BANKNIFTY options strategy, you must purchase one in-the-money put option with a higher strike price and sell one out-of-the-money put option with a lower strike price. The difference between these two strike prices is the spread. Both the options must have the same expiry.

The maximum profit in this case will be the difference between the spread and the net premium. The maximum loss, on the other hand, is limited to the net premium paid.

• Bear Call Spread:

To set up a bear call spread, you need to sell an in-the-money call option and simultaneously purchase an out-of-the-money (OTM) call option. Both the options should have the same expiration date.

The maximum profit from this strategy will be limited to the net premium received. The maximum loss, however, will be the difference between the two strike prices, reduced by the net premium.

• Bear Butterfly Spread:

The bear butterfly spread is a four-legged BANKNIFTY options strategy that involves four different positions. You buy one in-the-money (ITM) put option with a higher strike price, sell two at-the-money (ATM) put options with a slightly lower strike price and then buy another put option with an even lower strike price. The middle strike price (for the two short puts) should be right in between the upper and lower strike prices.

The maximum profit from this trade is limited to the net premiums received. The maximum loss, however, is the difference between the lower and the middle strike prices, adjusted for the net premium.

3. Neutral Nifty Bank Options Strategies

A neutral market is one where there is no clear indication of whether the asset price may increase or decrease. Sometimes, you may expect significant price changes in the index in the period till expiry, but may not be sure of the direction of such changes. Otherwise, you may expect the BANKNIFTY to be relatively stable and non-volatile, with minor price movements within a specified range. In such neutral scenarios, you could consider potentially profitable options trading strategies like the following:

• Iron Condor:

The iron condor is suitable if you expect the BANKNIFTY to remain within a certain range by expiry. To construct this strategy, you need to execute the following four trades:

i. Purchase an OTM put option whose strike is well below the asset price
ii. Sell an OTM or ATM put option whose strike is nearer to but below the asset price
iii. Sell an OTM or ATM call option whose strike is nearer to but above the asset price
iv. Purchase an OTM call option whose strike is well above the asset price

The maximum profit from an iron condor setup is limited to the net premium received. The maximum loss is the difference between the strike prices of the long call and the short call (or the long put and the short put), adjusted for the net premium received.

• Short Straddle:

This could be a profitable options trading strategy if the volatility in the index is limited. Here, you sell a call option as well as a put option - both with the same expiration date and strike price. The strike price is typically chosen so both the options are at-the-money contracts. However, if you have a bullish or bearish bias, you could adjust the strike price accordingly.

The maximum profit from this trade is limited to the net premium received, while the maximum loss is unlimited.

• Long Strangle:

In a long strangle, you purchase an OTM call option and an OTM put option - both with the same expiry date. The maximum profit in this case will be the gain from the long call (if the index rises) or the gain from the long put (if the index falls), adjusted for the premium paid. The maximum loss is limited to the total premium paid.

Note: Readers should keep in mind that the margin requirements need to be accounted for in each trade.

BANKNIFTY Options Strategies Made Easier with Samco Securities Limited

The BANKNIFTY options strategies outlined above are only some of the 1,000+ trading techniques available for F&O traders. Given the wide range of choices, it can be challenging to identify the winning strategy for a potential market scenario, analyse it thoroughly and implement it without any delay, before the market conditions change. As a result, the vast majority of traders are forced to abandon such profitable options trading strategies and instead rely on highly risky naked options trades.

To address this issue, Samco Securities Limited has introduced Options B.R.O - an advanced, industry-first options strategy builder that filters out the top three strategies for traders with conservative, moderate or aggressive risk profiles. All you need to do is input three essential details - namely, the options contract (which is BANKNIFTY in this case), the expiry and your market outlook.

Based on these inputs, Options B.R.O from Samco Securities Limited offers the top three strategies. Additionally, you can also analyse these top strategies as well as hundreds of others that align with your requirements. This way, you can assess the maximum profit and loss, probability of profit, risk-reward ratio and other key metrics for different BANKNIFTY options strategies before choosing and implementing one of them.

Conclusion

Ultimately, you will find that different options trading strategies are profitable in different market conditions. To make the most of the changes in the Nifty Bank value, you need to assess the market conditions and form an informed opinion on how the index may move before the expiry. This will make it easier for you to filter out the trading strategies that may be successful.

Samco Securities Limited has made the process of options strategy selection and analysis easier and more effective for options traders in the country - thanks to Options B.R.O. To access this state-of-the-art options strategy-building feature for free in the Samco trading app, simply sign up for a Samco demat and trading account.