How Bank Nifty is traded in the stock exchange

Stock Exchange is a marketplace where buyers and sellers meet to trade in different financial securities such as stock, derivatives, and commodities. 

To track the overall market and sectors stock exchanges create different indices, also referred to as index. These indices help market participants to track the overall performance of the market and sectors.

In this article, we will be discussing what NIFTY Bank is, how market participants can trade Bank Nifty and a few important points on trading NIFTY Bank.

Let us first understand What Nifty Bank is.

NIFTY Bank

NIFTY Bank is a sectoral index composed of 12 Indian banking stocks that has the highest market cap and most liquid. It is managed by NSE Indices Limited. 

This index helps market participants as a benchmark to capture the capital market performance of Indian banks. 

In other words, Bank Nifty tracks the performance of the banking sector.

In NSE the symbol of NIFTY Bank index is “Bank Nifty”. Its launch date is September 15, 2003. 

Market participants in India and abroad prefer to call it Bank NIFTY.

NIFTY Bank Index is computed using free float market capitalization method. Its used for a variety of purposes such as benchmarking fund portfolios, launching of index funds, ETFs and structured products.

Composition of Bank NIFTY

Here is the list of 12 banking stocks that is forming part of NIFTY bank index;

Bank NIFTY will move up and down based on how the underlying stocks within it perform in the market. Therefore, weightage of the stocks in Bank NIFTY is an important factor in order to know how the overall market index will perform.

Here are the top constituents of Bank NIFTY by weightage;

Based on the weightage factor, we can say that the performance of Bank Nifty depends on how HDFC, ICICI, Kotak Mahindra, SBI and Axis Bank perform in the market.

If these five major banks are bearish, then most probably bank nifty will be down. Likewise, if these five major banks are bullish, then most likely the bank nifty will go up.

Trading Bank Nifty in the stock exchange

You can not buy the index from the cash market as these are made up of multiple stocks.

One of the ways to trade nifty banks is by buying one or more units of Exchange Traded Funds (ETF) based on Bank Nifty. 

ETFs are like mutual funds in which the fund house collects money from individual investors and invests it together into those stocks that are part of Bank Nifty in proportion to their weightage. 

This means the fund house will copy the composition of NIFTY Bank by investing in the underlying stocks to get a return that exactly or approximately matches to the rate of return of NIFTY Banks.

In India, these ETFs are not highly liquid to trade. Therefore two more options are available in NSE.

They are derivatives such as Options and Futures. It is now heavily traded on the stock market.

Future and option contracts use the NIFTY Bank as an underlying asset.

These options and futures let you take exposure to the Nifty Banks. This means, the price movement of the derivatives is linked to that of the index (NIFTY Bank). Based on the performance of the Bank Nifty, these contracts are heavily traded in stock exchanges.

You can have a look at the option chain maintained by NSE to know how many contacts are traded, the expiry date, and the premium to be paid for buying and selling those contracts.

Here is how different market participants trade futures and options contracts based on NIFTY Bank;

• If market participants have a bearish view on the market, they short-sell the Nifty Bank’s future contract. Instead, if they have a bullish view, they purchase Bank Nifty’s future contracts.
• Instead of future contracts, in case of a bullish view, they buy Nifty Bank Call options. If the trader has a bearish view, expecting the market to fall, then they purchase the put options contract. Based on their strategy they can buy and sell At-The-Money (ATM), Out-Of-The-Money (OTM) and In-the-Money (ITM) call and put option contracts.

Traders can even short sell the call and put option contracts based on their view on the stock market.

Please note, derivatives are significantly riskier to trade and require experience to actively monitor the performance. 

Beginners and Novice traders are suggested to acquire enough knowledge on the topic and experience before getting into trading in the derivative segment.Its always advised to take professional help before getting into trading.

The third and the most popular way for retail investors to invest in NIFTY Bank is through mutual funds. Many mutual funds have created index funds which feature the same portfolio of stocks that feature in NIFTY Bank. The main purpose is to earn exactly the same return that underlying stocks of NIFTY Bank earns each year.

What is Bank Nifty CE and PE

You might be confused with the terms CE and PE. These terms are used in option contracts.

CE means Call European and PE means Put European.

In India, the option contracts are European style.

In european style, an option contract limits execution to its expiry date. This means, the option contract can not be exercised before the expiry date. 

A trader can only choose to exercise (or not) his option on the date of expiration. In other words, investors would not be able to exercise the option early, they have to wait for the expiry date.

All option contracts based on Bank NIFTY are cash settled on the date of expiration.

On the other hand, American options allow traders to exercise their buy or sell an option at any time before the option’s expiration date.

What is the Lot Size of Bank Nifty

In pursuance of SEBI guidelines for periodic revision of lot sizes for derivatives contracts specified in the SEBI circular CIR/MRD/DP/14/2015 dated July 13, 2015, the market lots of derivatives contracts on Indices are revised as follows:

Earlier lot size for NIFTY, Bank Nifty and Nifty Financial services was 75, 25 and 40 respectively.

What is the expiry date of Bank Nifty option contracts

As discussed above, the options contracts in India, are European styled which can be exercised only on the expiration date. 

As the index is not a stock, you can not take delivery of the same on the expiry date of these derivative contracts. Therefore, all the index derivatives are cash-settled in Indian rupees based on the final settlement price on the date of expiry.

In India, index options contracts have weekly expiry, which expire every Thursday.

In case Thursday is a trading holiday, the previous trading day shall be the expiry/last trading day. 

All contracts shall expire at the normal market closing time on the expiry day or such other time as decided by the stock exchange. 

All open positions on expiry date shall be settled on the next working day of the expiry date (T+1).

Bank NIFTY futures contracts expire on the last Thursday of the expiry month. If last Thursday is a trading holiday, the contracts expire on the previous trading day.

Final settlement price for an option contract shall be the closing price of the underlying index in the Normal Market of the Capital Market segment of National Stock Exchange on the last trading day of such futures contract.

BANKNIFTY futures contracts have a maximum of 3-month trading cycle – the near month , the next month and the far month. A new contract is introduced on the trading day following the expiry of the near month contract.

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.