What Is Expiry?
In the Indian stock market, “expiry” typically refers to the expiration date of a derivative contract. Derivatives are financial contracts that derive their value from an underlying asset, such as a stock, commodity, or currency.
In India, two of the most commonly traded derivatives are futures and options. Futures contracts are agreements to buy or sell an underlying asset at a specified price and date in the future. Options contracts give the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price and date in the future.
Talking further about options, we have Stock options and Index options, popularly- Bank Nifty and Nifty. The number of weekly expiry contracts for Bank Nifty has been reduced from multiple to just one per month. This means that instead of having weekly options expiring every Thursday, there will be only one monthly expiry.
Bank Nifty option buying strategy
Following SEBI’s new regulations, now occur on a monthly basis for Bank Nifty, settling on the last Wednesday of each month. This setup takes advantage of potential one-directional moves as traders close out positions ahead of the expiry.
- Timing and entry: Buy at-the-money (ATM) call (CE) and put (PE) options around 2:20 PM on the last Wednesday of the month, just before expiry. Ensure that the premiums for both options are as close to equal as possible.
- Market move expectation: Look out for a strong, one-directional move at this time, driven by traders adjusting their positions near monthly expiry. A significant move can result in one option gaining enough to cover the loss on the other, potentially resulting in net gains.
- Risk management: Set stop-loss (SL) and target levels based on your personal risk tolerance and management rules.
- Impact of SEBI regulations: The reduction in weekly expiry contracts and the shift to monthly expiries might impact the volatility and trading opportunities. It’s crucial to analyse historical data to understand the new volatility patterns.
- Testing the strategy: With Bank Nifty shifting to monthly expiries on Wednesdays, it’s crucial to backtest this approach in the current setup. Customise, forward-test, paper trade, and build confidence in the strategy before deploying real capital.
Conclusion
Now that you have learned about this buying strategy, do consider trying it out for real. Open a Demat account with Angel One if you do not have one already and start building your wealth.
Disclaimer: This article is only for educational purposes. The strategies and securities mentioned are only examples and not recommendations.
