IJRPR7854
IJRPR7854
Facts That One Should Know Before Buying Bank Nifty Options
Naresh Mondal
Assistant Professor, Department of Commerce, Chakdaha College (affiliated to University of Kalyani), Chakdaha, Nadia, West Bengal-741248
Introduction:
An index gives us information about the movement of price of financial instruments or any other markets. A stock market index tells us the overall trend
of equity markets. Basically a stock market index represents the whole market or a particular sector or segment from which stocks are selected to form
that particular index. For example, Bank Nifty Index comprises of banking stocks only because it is a sectoral index.
Bank Nifty, a sectoral index, comprises of most liquid and large capitalized Public Sector Undertakings (PSU) banks and private sector banks. Presently
bank nifty includes 12 public and private sector banks having different weightage according to their free float market capitalization. It has strike price
interval of 100 units. For Example, 41500, 41600, 41700 etc.
Bank Nifty Index is reshuffled after every six months and you can get its value on real time basis during trading hours, which is 9:15 AM to 3:30PM
except Trading Holidays of National Stock Exchange (NSE).
What is Bank Nifty Options: Basically options are derivatives which derive its value from an underlying asset. So Bank Nifty Options derive its value
from Bank Nifty (Spot) Index. It means if Bank Nifty goes up or down, the prices of options will also go up or down.
Types of Options: Basically, there are two types of options. American options and European Options. In India, we trade in European options which are
exercised at the date of expiry. Options are further classified into following two categories:
CE (Call European): Call European popularly known as Call Options are bought when one expects that market will go up at a certain level before expiry
(there are two types of expiry- weekly expiry and monthly expiry).
PE (Put European): Put European popularly known as Put Options are bought when you expects that market will go down at a particular level before
expiry.
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Option Premium: Option premium is nothing but the current trading price of an option. Option premium consists of two things namely intrinsic value
and time value. So,
Intrinsic Value: Intrinsic value is nothing but how much the option is “In The Money (ITM)”.Intrinsic value=Current strike price – (minus) strike price
you have bought. Intrinsic Value can be Zero (0) but it cannot be Negative.
Time Value: Time value is how much the option is “Out of The Money (OTM)”. Time value =Premium- (minus) intrinsic value.
ATM (At The Money): ATM is the current trading price of any option/index. ATM and OTM have no intrinsic value. ATM has the maximum time
value. The concepts of intrinsic value and time value have been explained in the following table with example of Bank Nifty options.
Open Interest (OI): Open interest is the number of contracts currently opened or active between buyers and sellers.
Option Chain: Option chain or OI chain is the combination of active-contracts. It is easily available on https://www.nseindia.com/option-chain website.
In the following table, there are four parts (quadrants). The areas in grey colour background are called in the money (ITM) and areas in white background
are called out of the money (OTM).
Source: https://www.nseindia.com/option-chain
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Types of Market: Depending upon the trend of the market, we can divide it (market) into three categories.
1. Bull Market: When market (Index like Nifty50, Bank Nifty etc.) goes up, it is called bull market or market is in uptrend.
2. Bear Market: When market goes down, it is called bear market or market is in down trend.
3. Sideways Market: When market trades within a certain range, it called sideways market.
Option Greeks: The Greeks or Option Greeks are the key factors which have great influence on the price of option. Option Greeks are denoted by Greek
Alphabets. Followings are the crucial option Greeks:
Source: https://gocharting.com/optionsdesk?underlying=NSE%3ABANKNIFTY
Delta: Delta indicates the change in option’s price/premium if there is one unit change in Index (Spot) price. The value of Delta lies between -1 to +1.
Value of ATM option is around 0.5 (-0.5) and deep in the money (ITM) option is 1 (-1).
Gamma: Gamma measures the change in Delta if there is a change in Index (Spot) price.
Vega: Vega measures the change in the premium of option due to change in volatility in the index/ underlying assets.
Theta: The most dangerous option Greeks for option buyers is Theta. Theta measures how much the price of an option will decline owing to the time
passage of time. So theta indicates value of time decay.
Rho: Rho measures the change in the premium of option for per percentage change in interest rate.
Conclusion:
Stock market is like a deep ocean. There are so many things that an investor or a trader should know before jumping into the market. There are fundamental
analysis, technical analysis and many more. But if you want to be an option buyer you should know the basic things that influence the price of options.
There is a saying “look before you leap”. So give time to yourself and try to watch the live market and take small trade to practice. After all, practice
makes a man perfect. Wait for your right set up to form and do not do over trading. Try to trade when there is momentum in the market because if you
take trade in sideways market premium of your option will decrease rapidly due to theta effects (i.e. time decay). Last but not the least, do not trade by
taking loans and do not put your lifetime savings into stock market.
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Websites’ References:
1. https://www.nseindia.com
2. https://www1.nseindia.com
3. https://gocharting.com
4. https://www.investopedia.com