Most people enter the stock market with the expectation of earning large returns in a short period of time. That is why the majority of them are captivated by intraday trading. However, the harsh reality is that the majority of them exit the market after a few months of continuous losses, and only a few of them stick to it and spend time learning the market, and they are the ones who ends up becoming profitable in the market.
Options trading, specifically option buying, is the most dangerous segment of the stock market. Profitability in this domain requires high accuracy and a thorough understanding of price movements. According to SEBI data, only 11% of total Future and Options traders (FnO traders) are profitable in 2021-2022. The road to profitability in options trading is paved with determination and discipline. Most options traders prefer trading indices over stocks because it requires less capital to work with. Nifty50 and BankNifty Options are the most actively traded indices.
Here, in this article, we are going to compare the two major indices Nifty50 and BankNifty in terms of Options trading and by option trading, we mean option buying.
What are Options?
Options are considered derivatives, as they derive their value from an underlying asset. The underlying asset could be a stock, bond or commodity. They are the contracts which give its buyer the right, but not the obligation, to buy or sell an underlying asset at an agreed price in future.
Each option contract comes with an expiration date. For index options such as Nifty 50 and Banknifty etc, there are two expiry one is monthly (last Thursday of the month) and the other one is weekly (Thursday of every week). The stated price on an option is known as the stock price.
There are two types of option contracts
Call Option (CE): A call option gives the holder the right, but not the obligation, to buy an underlying security at the strike price on or before expiration. It will become more valuable as the underlying security rises in price.
Put Option (PE): A put option gives the holder the right, but not the obligation, to sell an underlying security at the strike price on or before expiration. It will become more valuable as the underlying security prices fall.
Also Check: What is CE and PE in Stock Market?
Nifty50 Options and Banknifty Options: Which is better to trade?
Let’s compare these index options on various parameters.
1. Lot Size and Movements
Nifty options are traded in the lot size of 50 units whereas the banknifty options are traded in lot sizes of 25 units. If we compare the rate of movement between the two indices, Nifty bank has faster and consistent movements than nifty options. Therefore, anybody looking to capture large movements for intraday trading then they should look for BankNifty Options.
The other reason why BankNifty has the fast and quick is because it is totally relied upon banking stocks. If there is day when banking stocks are trading high, Banknifty will also follow the movement and will trade high whereas Nifty50 as it is influenced by the working of almost every sector won’t be trading if other sectors are not performing well equivalently.
2. Index Constituents
Nifty50 is made up of top 50 leading companies across various sectors(including Nifty Bank). It serves as a parameter to judge the country’s economic health. Not only this it acts as an indicator to measure the performance of the Indian Stock Market. As Nifty 50 index is highly diversified, as a result it shows slow movements as compared to BankNifty.
On the other hand, BankNifty is wholly composed of companies across the banking sector. The banks which have the higher weightage in forming the index are HDFC bank, SBI, ICICI Bank etc. As Nifty bank has zero diversification than Nifty 50, as a result, it has fast movements as it is wholly dependent on banking stocks for its movements.
As the index Nifty50 is backed by leading companies across various sectors, this makes it a much more stable option to trade than BankNifty as it is only backed by banking stocks. The day when the banking stocks will fail to perform, Nifty Bank will be adversely affected whereas Nifty50 will be least affected as the other sectors might be performing well. This is the reason why Nifty 50 is the more sustainable option to trade than BankNifty..
Scalper are the traders who basically trade for capturing quick points in the market. They generally square off their position in the market within a span of 10-15 minutes of holding it. For scalping Nifty50 options should be preferred as it is less volatile than BankNifty Options. The reason being the high intensity of diversification in Nifty50. It comprises stocks belonging to almost every sector, which make it less volatile and sustainable.
Since trading in options carries a high risk of capital loss, it is advantageous for an option trader to select the best option among the two based on his or her needs. If a person is a scalper, he should trade Nifty50 Options; on the other hand, if a person is a day trader, he should trade BankNifty Options. Both options are popular among beginners because they require a small amount of capital (up to Rs10,000) to trade in both indices.
Apart from being popular among newbies, it is also responsible for a massive capital drain, as many young investors without prior knowledge keep their large capital at risk. As a result, options are boon for those who have mastered it through continuous practice and discipline and it is the dark end for those who lacks knowledge and discipline.