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Tuesday, July 12, 2016

Bank Nifty

 

1. What is Bank Nifty?

An index com prising 12 state owned and pri vate sector banks. Like the Nifty , those bullish on banks can buy Bank Nifty futures compris ing 30 shares, or buy a call option on Bank Nifty. Bears can similar ly short or sell Bank Nifty futures or buy a put option on the index.

2. What is the current level of Bank Nifty ?

On Friday , Bank Nifty for May expiry closed lower by 1.4% at 16743.

3. At that level, what's the contract value and the approximate margin one has to put up to trade?

Basis that level, contract value was `5.02 lakh.

The margin to trade could vary from 7-10%.

4. What's the risk?

Since these are leveraged posi tions -one puts up a fraction of the contract value to trade -adverse price movement can cause huge losses to traders. Also, Bank Nifty has a higher beta (is more volatile) than Nifty futures contract.

5. Can this be illustrated.

Assume you went long Bank Nifty futures at 16743 by paying a margin of 7% (`35,160). If, on Monday , the Bank Nifty closes at 16500, the loss will be `7,290 (243x30). If one has taken multiple positions, the loss will be even greater.

6. How to minimise losses?

By putting a stop loss while di recting the dealer to execute the trade. Say going long at 16743, if the trader put a stop loss at 16643, the loss would be restricted to `3,000 instead of at `7,290.

7. Is there another way to do this?

Yes, losses can be minimised by buying calls or puts for May ex piry on Bank Nifty . Then the maximum loss will be limited to the premium paid to the seller for the call or put option. For instance, the most active 17000 call option was priced around `151 at Friday closing. A bull who buys the call would have had to pay a premium of `4,530 -that's the max he could lose. Similarly , a bear could buy the 16500 put by paying `4980. In options, profit's unlimited while loss is limited to the premium paid. In futures, a trader can have unlimited profits or unlimited losses, if stop loss is not placed. In the case of call and put option sellers, the profit is limited to premium received but losses can be unlimited.

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