Why is NSE introducing weekly contracts for Bank Nifty options?

General
1

Can someone tell me why only Bank Nifty was chosen for weekly contracts or why weekly contracts were introduced at all? Also more details on how it will work.

2 Likes
2

Find below a snapshot on what NSE is saying about Banknifty weekly options.  You can also click here to download the below document. 

NSE announces the launch of weekly option contracts on Nifty Bank Index second largest traded index derivatives contract on the Exchange with effect from 27th May 2016. These weekly contracts will be introduced in addition to the existing monthly option contracts.

Key features of Nifty Bank weekly options

  •  Available for trading starting  from 27th May 2016
  • 7 weekly expiries in addition to the existing 3 monthly option contracts
  • Symbol, strike price, lot size will be same as monthly options contract
  • Contact size of 30 units for all expires of the month of June 2016 & 40 units for all expires from the month of July 2016
  • Weekly contracts shall expire every Thursday of the week
  • All the 12 stock components of the index have derivatives on them.

The following weekly expiries would be available from 27th May 2016.

Instrument

Symbol

Expiry Date

OPTIDX

BANKNIFTY

02-Jun-16

OPTIDX

BANKNIFTY

09-Jun-16

OPTIDX

BANKNIFTY

16-Jun-16

OPTIDX

BANKNIFTY

23-Jun-16

OPTIDX

BANKNIFTY

07-Jul-16

OPTIDX

BANKNIFTY

14-Jul-16

OPTIDX

BANKNIFTY

21-Jul-16

Benefits of trading weekly contracts:

  • Better and low cost hedging: Weekly options can be used effectively for short term portfolio protection as they tend to be cheaper compared to monthly contracts.
  • Flexibility and precision: Weekly options offer flexibility to market participants to trade and hedge precisely the market movements stemming from economic data releases, RBI announcements, economic events, etc.
  • Experience a new trading cycle: More number of expiries to provide more number of options trading opportunities.

Option volumes on Nifty Bank have grown at 190% CAGR in last 5 years.

image      image

About the Nifty Bank Index:

Bank Nifty Index has 12 most liquid and large capitalised stocks from the banking sector and represents 93% of the free float capitalisation of the banking sector universe. The index consists of both private and nationalised banks. 8 stocks of Nifty Bank are part of Nifty50

Constitutions of Nifty Bank:

Company Name

Mcap(Rs. Cr.)*

Weights (%)*

HDFC Bank Ltd.

223113

32.4

ICICI Bank Ltd.

137740

20.0

Axis Bank Ltd.

78719

11.4

Kotak Mahindra Bank Ltd

73624

10.7

State Bank of India

58687

8.5

IndusInd Bank Ltd

51148

7.4

Yes Bank Ltd.

30887

4.5

Bank of Baroda

14917

2.2

Federal Bank Ltd.

7885

1.2

Punjab National Bank

6488

0.9

Canara Bank

2908

0.4

Bank of India

2253

0.3

* As on 29th Apr 2016

Also read circular number 32329 and 32338. 

Short note on contract description

Field Name

Descriptor

Value for monthly expiring option contract

Value for weekly expiring option contract

Stock Name

Security Name

SymbolYYMONStrikeOptionType

		<p>Example (for monthly contract expiring in June 2016)</p>

		<p>BANKNIFTY16JUN15300CE</p>
		</td>
		<td style="vertical-align:top; width:378px">
		<p>SymbolYYMDDStrikeOptionType</p>

		<p>Example (for contract expiring on&nbsp;09 June 2016)</p>

		<p>BANKNIFTY1660915300CE</p>

		<p><strong>Note:</strong>&nbsp;The value of “M” above &nbsp;shall be :</p>

		<p style="margin-left:18pt">-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For months January to September; it shall be the month number, i.e. 1 to 9 respectively</p>

		<p style="margin-left:18pt">-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For months October, November and December it shall be O, N and D respectively.</p>

				</td>
	</tr>
</tbody>
3 Likes
3
  • weekly options beneficial for short term hedging as premium will be very less(1/3 rd of monthly premium).
4

Compared to Nifty, BankNifty is considered a more volatile one and also the current scenario is the banking stocks are being in attention for the most. There are so many news and information coming out regarding banking sector and this makes BankNifty more volatile. Weekly contracts will help in traders to exploit the volatility to their advantage and will also be able to hedge their positions for any important or policy news etc…

5

As a product, Bank Nifty Options was competing with Nifty Options. i.e., they were probably catering to same segment of hedgers, shorters & traders. This is probably why nseindia converted BNF options into weekly, thus creating a separate space for BNF options.

6

Hi.

There are various benefits for this:-

  1. Low Cost Trades - Now traders who would like to take positions in Bank Nifty can do so by buying calls or puts at a price lower than what was available with monthly options.
     
  2. Better Control on Trades
    1. It will help reduce a lot of ambiguity with the reduce time gap to expiry. As with monthly options, a lot of aligning of positions were required to be done within the month. As it is more convenient and possible to predict the moves for 5 trading days than 20+ trading days.
    2. As most of the big traders use options for writing and pocketing in the value of time decay. So, these weeklies will help them to have a better control on their trades as now they have to foresee the market for 5 trading days and not more than what will happen in the next 20 days.
       
  3. Opportunity to Trade as per market moves 4 times a month - Now time decay opportunities will be available 4 times in a month as compared to once every month. Traders get active during the last few days of the expiry to write OTM call and put options. So, now they can do so by trading every Week.
     
  4. Trade Major Events with Less Risk - Weeklies will help traders to take positions for big events like RBI policy, Brexit, Election Results and that too with very less risk.
    1. Trading on these days requires you to take positions on both directions of the market as we are expecting momentum but not sure of the direction. So, call and puts which will be available at very cheap cost can be bought to take the benefit of the volatility.
       
    2. Hedging for these events - weeklies can be specifically used to hedge your portfolio to any unbiased correction for short term. Like what happened on the day of brexit. Bank Nifty crashed from 18000 to 17000 and returned back to follow its current up trend. So, portfolio hedging can be done by buying weekly puts at low cost.
       
  5. Opportunity for Small Traders - Just like trading an event, small traders can trade these weeklies to hedge their portfolios, write Out Of The Money (OTM) options to take the benefit of time decay which was difficult to do with high cost monthly options.
     
  6. Reduced Spread between Bid & Ask Prices - This will help increase participation from all variety traders so there will be less gap between bid and ask prices. So a quick entry or exit can be done without worrying.
     
  7. Increased Commissions & Income to Exchange, Brokers - And yes, lastly increased participation will leads to more income to exchanges and brokers.
     
  8. Keep in Sync with developed Markets - In other developed nations, weekly options are available for trading on index as well as stocks to help traders hedge and take short positions on according to market conditions. Also, apart from weeklies, there are long term options on index and stocks are also available for trading to take big time positions by paying loss cost. 

A Win-Win Situation for Every One.

Hopefully, we are going to see more weeklies on Stocks and other Indexes. Get get on with our shoes and get ready to design ideas, strategies to make money from these weeklies.

Also, you can visit How to Turn Bank Nifty Weekly Options into a Regular Income-Driving Machine?via JustTrading.in to get more on how to plan, trade and make money from these bank nifty weekly options.

Happy Trading...

7

Some free Nifty F&O strategies
http://tradingqna.com/47172/any-free-nifty-index-options-intraday-strategies

8

Some free Nifty F&O strategies
http://tradingqna.com/47172/any-free-nifty-index-options-intraday-strategies

9

Thanks Nithin Sir!