Get Set Ready For Weekly Options Contracts On Bank Nifty

To add more spices in the market, NSE is coming up with a new concept. Our Research Team brings this report for you:

During last one year we witnessed lot of actions in Indian banking space with news related to regulations, policies, financial performance pouring in concerning both the private sector and public sector banks.

Bank Nifty has all these while remained highly active and one of the highly volatile indexes of the National Stock Exchange (NSE). Active professional traders are meant to make huge money from trading activities and that is only possible while trading in highly active scrips. Volatility of the individual scrips in certain sectors is low when we compare the same with the index especially Bank Nifty. There are few institutional traders who only trade in Bank Nifty and make a handsome amount of money but then that is their choice.

However, now NSE is all set to introduce weekly options contracts on Bank Nifty index from May 27, by the time you get to read this edition of DSIJ. NSE has already secured approval from market regulator Securities and Exchange Board of India (SEBI). The weekly options will be used for hedging purposes against event risks. The product will also boost liquidity in F&O segment. The weekly expiry will also increase volatility in this space. Bank Nifty contracts will expire on every Thursday as per the new rules.

Relevant information from the investors’ perspective about the weekly options contracts are cited below:

Expiry: The new contract will expire every Thursday of the week. In case the Thursday is a trading holiday, the expiry will happen on the previous trading day or on the last trading day before the Thursday of the said week. All contracts shall expire at the normal market closing time on the expiry day or such other time as decided by NSE.

Contract cycle: The cycle will have seven weekly expiry contracts, excluding the expiry week of a monthly contract. A new serial weekly options contract shall be introduced after the expiry of the respective week’s contract.

Contract size: There will be a lot of 30 units or contracts for all expiries in June 2016 while there will be 40 units for all expiries effective from July 2016.

Future versus Option:

A futures contract is a forward contract, which is traded on a stock exchange, while an option contract gives a person the right but not the obligation to buy or sell something. An option is a contract between two parties wherein the buyer receives a privilege for which he pays a fee (premium) and the seller accepts an obligation for which he receives a fee.

The biggest difference between options and futures is that if you are a buyer in the futures market, there is no limit on the profit that you make. At the same time, there is no limit on the loss that you make as well. A futures contract carries unlimited profit and loss potential whereas the buyer of a Call or Put Option's loss is limited, but the profit potential is unlimited. Futures are the favourites with speculators whereas options are widely used by the hedgers. Over all many investors find trading options contracts less risky and more flexible than trading futures contracts.

Advantage of weekly options contract

Flexibility: Now a weekly option contract would provide them to play with lesser premium and lesser investment compared to monthly options contracts. One of the main benefits of the trading weekly option instrument is the flexibility of multiple expiration dates. This allows short-term traders to tweak their option choices by effectively harmonising the expiry of the option with the time frame needed for the stock to move.

High gamma: In weekly option contract we have surely seen higher gamma which allows weekly options to benefit more from small movements of the underlying than standard options. This is key for investors with a short-term directional bias.

The Delta of an option tells a trader how much the price of an option will change for every rupee move in the stock/index whereas the Gamma of an option tells the trader how much the Delta is going to change for every rupee move in the stock/index.

When short-term volatility is high you can buy a straddle using weekly options and this is a good strategy to implement if an investor believes there is going to be a big move in the price of a stock, but is not sure in which direction. Short-term straddles and strangles may also be created surrounding specific events such as earnings reports, pending economic news or interest rate announcements. This is beneficial to the non-directional, volatility-prone traders.

Apart from various benefits, there are certain disadvantages as well. Liquidity will be lower in the beginning and a trade may raise the risk of a spread between bid and ask prices which may make execution difficult. Therefore, this product is more helpful at the time of major domestic or global event dominating the happenings in the markets.