Conventionally, trading and investing were only done in stocks. But slowly, as the market participants increased and the demand for different instruments rose, the exchanges started offering derivatives segments for indices like Nifty and Bank Nifty. The options contracts were started by the exchange with an intention to facilitate hedging but the traders mostly use index options to initiate speculative positions in the market.
Index trading in Nifty and Bank Nifty is a very common practice amongst traders in India. It is done through derivative instruments like futures and options. In this blog, let us discuss intraday options trading in the Nifty index.
The Nifty is a combination of the words National Stock Exchange and Fifty. It is a list of the top 50 stocks that are actively trading on the NSE. The Nifty50 is one of the two major stock market indices in India. The flagship index is maintained by the National Stock Exchange. It comprises stocks from various sectors and indicates the overall health of the economy and the general sentiments of the market participants.
As we discussed, Nifty is an index in which you can trade and invest using various instruments such as Options, Futures, Exchange Traded Funds, etc.
These are one of the derivative contracts using which you can make intraday or swing positions. Intraday trading is where you buy and sell on the same day whereas swing trading is where you hold the position for a few days or weeks. Nifty options are used for trading and not investing.
A futures contract is an instrument using which a trader can enter into an agreement with another person to buy or sell at a future date at the price prevailing at such date. If the price has increased over the duration of the contract, you can sell it and get a profit. Like Nifty Options, Nifty Futures are also used for trading purposes.
ETFs are baskets of stocks that are covered under the underlying index. For example, in the Nifty ETF, all the fifty stocks in the index shall be covered. When you buy one unit of an ETF, a fraction of the sum is invested in all fifty shares. When the index goes up, the value of the ETF goes up and vice versa. Nifty ETFs are used by investors for long-term investing in the index.
Options trading involves buying and selling options contracts for profit. Options are derivatives contracts that derive their value from the underlying asset. Nifty Options derive their value from the index Nifty50. There are two types of options – call and put. When your view is bullish on the index, you buy Nifty Call Option and when your view is bearish, you buy Nifty Put Option. Options trading is considered risky compared to other forms of instruments but with hedging and stop-loss order in place, you can make the most out of it.
Before you embark on the journey of learning how to do intraday trading in options, you must know the following jargon related to options trading.
As you are aware that there are two types of options, call and put. Both of these options can either be bought or sold. So this leads us to four positions you can make in options intraday trades. Those are:
Let us look at each scenario to know how you can trade in Nifty.
To initiate a bullish position in Nifty, you can buy a call option. When the spot price of Nifty goes up, the premium of the call option increases and you can benefit from it. If the Nifty spot value goes down, the loss will be limited to the premium paid and if the Nifty spot goes up, the profit can be unlimited.
You can sell a call option if your view is bearish. The maximum profit is limited to the premium collected at the time of selling the call option but the potential for loss in this trade is unlimited if the Nifty spot goes up. Normally, option selling is done with an intention to make the most out of time decay.
You can benefit from buying a Nifty put options intraday if the Nifty spot value falls. The profit potential of this trade can be unlimited whereas the loss can only be limited to the extent of the premium paid. However, if the Nifty index value does not fall, there can be a disadvantage of time decay.
Selling a put option gives limited profit but it holds a risk of unlimited loss. You can benefit from time decay by selling a put option if the Nifty spot goes up or at least it does not fall any further. A seller of put options has a bullish view.
So if you have a bullish view, you can either buy a call option or sell a put option. On the contrary, if you have a bearish view, you can either buy a put option or sell a call option. You must also note that buying options comes with a natural disadvantage of time decay if the price does not move in your predicted direction immediately, whereas, selling options naturally has an advantage of time decay as premium erodes with expiry coming closer.
The Bottom Line
Buying options contracts come out as an attractive intraday trading strategy to many traders due to its ability to make unlimited profits with limited loss. But at the same time, it is important to be aware of the time decay that adversely affects options premium. If the expected move does not initiate quickly, option value starts to decay and traders start losing money. As far as option selling is concerned, you must be aware that it involves unlimited loss against limited profit. You must always hedge your position while trading in options. You can make use of many strategies that are available for options trading.
Apart from that, many traders take multiple trades during the day and end up paying high brokerage. TradeSmart provides you a robust platform for intraday Nifty options trading at the lowest brokerage of Rs. 15 per executed order. You can check the price and other features by visiting the TradeSmart website.
To be able to place your trades under the derivatives segment of Nifty, you need to activate the NSE F&O segment on your broker’s platform. A specific amount might be charged by your broker for activation. Please consult your broker for more details.
If your view on the Nifty index is bullish, then you can buy a call option as the premium of the call option will increase with the increase in the value of Nifty.
The value of options premium decays as the expiry comes closer. If your option is still out of the money option on expiry, meaning if the strike price of your option is still away from the spot price, then the premium of that option will become zero.
Options Greeks help you understand the movement of option premium price in relation to various factors like a shift in underlying asset price, impact of news, and other such events on the premium, etc. Therefore, knowing about the Options Greeks adds an advantage to your trading regime. Although, many options traders trade without using Options Greeks.
As per the SEBI guidelines, the margin required across all the brokerage firms is equal. Whether you trade intraday or carry the position, the margin requirement will remain the same. You can check the margin requirement using TradeSmart Margin Calculator.
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Please note that by submitting the above mentioned details, you are authorizing TradeSmart to call and email you and also to send promotional communication even though the contact number may be registered under DND.
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Please note that by submitting the above mentioned details, you are authorizing TradeSmart to call and email you and also to send promotional communication even though the contact number may be registered under DND.