Every stock exchange has their own index to track how the overall market is performing. From the US to India, we have many indexes created based on stocks and sectors. In this article, you will learn what is Bank nifty and how is it traded in the Indian stock market?
Similarly we have Nifty 50 which tracks 50 listed large cap listed stocks in NSE.
What is Bank Nifty?
Bank nifty (SYMBOL: BANKNIFTY) is a sectoral index which is specifically designed to track the performance of the 12 stocks listed in National Stock Exchange (NSE) from the Indian banking sector. Bank Nifty index was created in 2003.
Performance of Bank Nifty will basically tells you how the overall banking sector is performing in NSE.
We have following 12 banking stocks in Bank nifty index;
- HDFC Bank
- ICICI Bank
- SBI
- Axis Bank
- Kotak Mahindra Bank
- IndusInd Bank
- PNB
- Bank of Baroda
- IDFC First Bank
- Bandhan Bank
- AU Small Finance Bank
- Federal Bank
Out of the above list, HDFC, ICICI and SBI have more weightage in the bank nifty index.
Bank nifty is also referred as Nifty Bank.
Nifty Bank is used as a benchmark by mutual funds, portfolio managers and institutional investors who match their own fund’s annual return with the return of the index.
What impacts bank nifty?
Bank nifty performance depends on the underlying 12 bank stocks. Here are the major factors that can impact bank nifty price;
- Performance of 12 individual banking stocks which are part of bank nifty. Out of these HDFC, ICICI and SBI have more weightage, therefore their performance has a larger impact on the performance of nifty bank index.
- Earning report and corporate decisions of these 12 underlying stocks.
- Performance of Indian rupees against other currencies especially USD.
- Inflation and other economical event announcements
- Political decisions
- Reserve Bank Of India (RBI)’s monetary policy decisions
- War
- Global economy
- Crude Oil price
Products to trade Bank Nifty
Like in the case of Nifty 50, Bank Nifty can be traded two ways: futures and options.
If someone is bullish on Bank Nifty, then they can buy Nifty Bank futures or call option contracts available at different strike price based on the strategy they follow. Similarly in a bearish scenario, one can short nifty bank futures or buy put option contracts.
Bank Nifty Futures
Bank nifty future contracts are based on the index Bank Nifty. Therefore the underlying asset is the Bank Nifty index.
The National stock exchange (NSE) defines the characteristics of the contract. They specify the underlying asset, market lot, expiry date of the future contract.
Bank nifty future contracts come with a 3 month trading cycle.
Current month contracts are terms as the near month, contracts that expire on the next month are known as mid month or the next month and the contract that expires next to next month is known as the far month.
Bank nifty futures contracts expire on the last Thursday of the expiry month.
Currently the lot size for future contracts on bank nifty is 15.
Bank Nifty Options
In the bank nifty option, we have two types: call and put.
Call options will be mentioned as CE, which is Call European style. Put option will be mentioned as PE, which is Put European style.
An option is a derivative contract which gives the buyer the right but not the obligation to buy or sell the underlying asset. Buyer pays a premium for the right and the seller receives the premium.
Premium keeps changing based on supply and demand dynamics of the contract.
In India, option contracts are cash settled based on the price of the bank nifty index.
In bank nifty options, we have three different types of expiry: weekly, monthly and quarterly.
BANKNIFTY monthly option contracts come with a 3 month trading cycle. The contract which expires on the last Thursday of the current month is termed as the near month, the contract that expires next month last Thursday is known as the mid month or the next month and the contract that expires on the last Thursday of next to next month is referred to as the far month contract.
On the expiry of the near month contract, new contracts are introduced for both call and put options at new strike prices. New contracts are introduced for 3 month duration on the trading day following the expiry of the near month contracts.
In weekly option contracts, we have 4 weekly expiries excluding the expiry week of monthly contract. New weekly contract is introduced after the expiry of respective weekly contracts.
We have 3 Quarterly expiry contracts for quarter ending March, June, September and December.
To avoid erroneous order entry by trading members, the operating range of +/- 10% is fixed.
Lot size of nifty bank option contract is 15. Which means, when you place a buy or sell order, you have to trade 15 units per lots or in multiplication of 15.
Trading option contracts is highly risky due to its volatility and time decay. Many investors interested in bank nifty prefer to invest in exchange traded funds (ETF) that are based on bank nifty. These ETFs are also traded in the national stock exchange (NSE).
If you are planning to trade bank nifty futures and option contracts, then we suggest you first learn technical analysis, candlesticks, trading signals and chart patterns. After getting knowledge, find the best strategy that best suits your trading style.
We have four different types of trading style: day trading, scalping, swing trading and position trading.
You are also required to follow relevant news and announcements in order to understand the impact on the stock market.
Disclaimer: In addition to the disclaimer below, please note, this article is not intended to provide investing or trading advice. Trading in the stock market and in other securities entails varying degrees of risk, and can result in loss of capital. Most investors and traders lose money. Readers seeking to engage in trading and/or investing should seek out extensive education on the topic and help of professionals.
