Basics of Bank Nifty Option Trading

In this Article, we will discuss about OPTIONS TRADING in BANK NIFTY in most simple Language. Nowadays everyone wants to do Options Trading and trust me its very exciting.

Important terms in case of Option Trading:

  • Stock/Index
  • Strike Price
  • Expiry Date
  • Call/Put
  • Premium
  • Lot Size

So, we will understand each of the above Segments one by one and trust me in the end , everything will look very simple.

Segments of Options Trading

Options Trading can be done in Stocks or you can do Options Trading in Index like Nifty & Bank Nifty. In this Article we will take BANK NIFTY Options.

Options Trading in BANK NIFTY Options or BANK NIFTY Option Trading

As the term suggest, in BANK NIFTY Options Trading we are going to trade in BANK NIFTY Options.

Lets take an example now:

For Example: We have a Option like this : BANK NIFTY JULY 35000 CE or BANK NIFTY JULY 35000 PE

Which Stock or Index we are taking about ?

In the above example we are talking about BANK NIFTY Index.

What does JULY means in this example ?

JULY here means that this Option is for July Month.

What do we mean Expiry Date ?

When we say the BANK NIFTY option is of July Month means this Option is going to Expire on the Last Thursday of the July Month, please note which ever Thursday will be the last Thursday will be expiry date of that BANK NIFTY Option and hence BANK NIFTY Options have Monthly Expiry (Please Note: BANK NIFTY Options have Weekly Expiry as well)

What do we mean by Strike Price ?

Now in the above example , if you notice we are talking about BANK NIFTY for July Expiry for the Price of 35000 , so this 35000 is the Strike Price.

What does CE and PE mean here ?

What is this CE at the end of the BANK NIFTY Option: CE means Call and PE means PUT.

What does Call and Put means ?

Call means you want the BANK NIFTY to go up and PUT means you want BANK NIFTY to go down

What we Understood till now ?

So, till here we understood that we have a BANK NIFTY Index Option for July Month for Strike Price 35000 and we either have a CALL or PUT – But what does all that means to me ?

Now, let’s assume you bought BANK NIFTY JULY 35000 CE at Premium of 100 Rs , but hey what is Premium ??

What do we mean by Premium ?

Premium, is the Price you Pay to buy this BANK NIFTY Index Option, its just like for buying Infosys stock you need to pay the price of the stock similarly for buying BANK NIFTY Option you need to pay Premium.

So now Read Carefully, we are Buying BANK NIFTY 35000 CALL Option for July Expiry and we are Paying Premium of 100 Rs . This means now if BANK NIFTY starts moving up you will be making Profit. But how is it calculated and is that so simple ?

What is Lot Size ?

Every Stock Option has its Lot Size. When you buy a Stock you can buy one share or 1 crore shares it depends on your choice , but in case of BANK NIFTY options BANK NIFTY has its own lot size Lot Size of 25 .

How Much Money is Invested to Buy this BANK NIFTY Option ?

You are Paying 100 Rs for each one share of BANK NIFTY option, so total money we need to invest for buying this Option is 100×25= 2500 (this amount can change as well , so you can check margin calculator for the broker you use).

When we will start making Profit – Most Important Question.

For Example, you took the BANK NIFTY July 35000 CE at 100 Premium on 3rd July and last Thursday of the July Month is falling for example on 29th July, now on 29th July BANK NIFTY closed at 36000.

How is the Profit Calculated in the above Case:

Since you took BANK NIFTY Call Option of 35000 Strike and BANK NIFTY Closed at 36000, so you were correct by 1000 points, means you thought BANK NIFTY will go up above 35000 but till where it will go you didn’t know but it went till 36000, so the Premium of BANK NIFTY JULY 35000 CE will become 1000 on expiry day.

How is the Premium Calculated at the Time of Expiry ?

It’s simple the Price it closed on Last Thursday in our case BANK NIFTY Closed at 36000 minus the strike price you choose which in our case was 35000 , so the difference is 1000 and that will be the final Premium.

Still what is my final Profit ?

Premium you Paid for Buying this BANK NIFTY JULY 35000 CE was 100 and now the Premium is 1000 , so you gained 900 Points of Premium .

Nice , so means my profit is just 900 Rs ?

No your profit is the Premium Gained multiplied by the Lot Size which in our case is 50 , so our Profit is 900×25= 22500 Rs.

So, you Paid 2500 Rs and you made Profit 22500 Rs , this is the Power of Options , if you and your view is correct at the end of Expiry you can make a lot of Money.

But what if what if BANK NIFTY Closed below 35000 on Expiry date ?

If BANK NIFTY Closed below 35000 on Expiry date, what will happen to your Option , in this case since your view went wrong and BANK NIFTY closed above 35000 at the expiry day hence your Investment of 2500 becomes 0

What if BANK NIFTY Closed at 35050 on Expiry date ?

What if BANK NIFTY Closed at 35050 on Expiry date, what will happen to your Option, in this case even though your view of BANK NIFTY closing above is correct , but BANK NIFTY just closed 50 points above the strike price you selected which means the Premium at the time of Expiry become 50 Rs but you paid 100 Rs Premium , so here also you made a loss of 50 premium points which means 50×25 = Rs 1250 Loss.

So, it means if BANK NIFTY closed above 35100 you start making Profit.

What if BANK NIFTY moves to 36000 in mid July and comes back below 35000 at the time of Expiry ?

If BANK NIFTY moves to 36000 in mid July and comes back below 35000 at the time of Expiry then also you loose all your investment because at the end of expiry NIFTY closed below 35000

Can we sell BANK NIFTY option before Expiry ?

Can we sell BANK NIFTY option before Expiry for example when it went up till 35300 or 36000 , yes you can sell it anytime you like or when you see Profit or Loss, you can sell before expiry anytime or at expiry.

If you don’t sell at Expiry then automatically the Premium gets settled as discussed above.

This was the basics of BANK NIFTY Options Trading which every trader should know, there are many other Concepts in Options which we will cover in the coming articles, if you want to understand Options in more details watch the below Video:

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