What is Bank Nifty?
An index including 12 state-owned and private sector banks. Same the Nifty, those bullish on banks can purchase Bank Nifty futures including 30 shares, or purchase a call option on Bank Nifty.
Bears can likewise short or sell Bank Nifty futures or purchase a put option on the index.
What is the Contract price ?
At that level, what’s the contract price and the estimated margin one has to put up to trade?
The basis that level, contract value was Rs 5.02 lakh. The boundary to trade could vary from 7-10%.
What’s the risk?
Since these are leveraged positions — one puts up a fraction of the contract value to trade — unfavorable price movement can produce huge losses to traders. Also, Bank Nifty has a higher beta (is more liquid ) than the Nifty futures contract.
Can this be explained?
Suppose you went long Bank Nifty futures at 16743 by giving a margin of 7% (Rs 35,160). If on Monday, the Bank Nifty ends at 16500, the loss will be Rs 7,290 (243×30).
If one has held multiple positions, the loss will be even higher.
How to minimize losses?
By placing a stop loss while delivering the dealer to complete the trade. Say going long at 16743, if the trader set a stop loss at 16643, the loss would be limited to Rs 3,000 rather of at Rs 7,290.
Is there a different method to do this?
Yes, losses can be minimized by purchasing calls or puts for May expiry on Bank Nifty. Then the maximum loss will be limited to the premium paid to the seller for the call or put option. For example, the most effective 17000 call option was valued around Rs 151 at Friday closing.
A bull who purchases the call would have had to spend a premium of Rs 4,530 — that’s the max he could lose. Similarly, a bear could buy the 16500 put by paying Rs 4980. In options, profit’s immense while loss is limited to the premium paid. In futures, a trader can have immense profits or immense losses, if a stop loss is not set.
In the case of a call and put option sellers, the profit is limited to the premium received but losses can be immense.
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