Trading in Bank Nifty options has become very popular among traders in India. The high volatility and liquidity in Bank Nifty makes it an attractive market to trade for short-term gains. However, trading Bank Nifty options also comes with its own set of risks and challenges. One common mistake traders make is not analyzing the option chain carefully before taking a position. In this blog post, we will discuss some of the key mistakes to avoid when choosing bank nifty option chain so you can trade them profitably.
Using Only Basic Filters
When screening the Bank Nifty options chain for trading opportunities, many traders apply only basic filters like volume, open interest and volatility. While these parameters are important, just using them to identify trades can lead to mistakes. For example, high volume and volatility may seem attractive but can also indicate excessive speculation in out-of-the-money options. Traders should analyze additional factors like emerging support/resistance levels, PCR, IV rank, option Greeks like delta and gamma before taking a directional bet. Applying multiple lenses ensures you choose options with a favorable risk-reward setup.
Ignoring Expiry Dates
Bank Nifty options have 3 different expiry dates in a month – weekly, monthly and quarterly. Each expiry behaves differently due to the time left for expiry. For example, weekly options experience fast time decay and need quick directional moves. Monthly options see accelerating time decay in the last week. Quarterly options have longer term alignments and different support resistances. Not matching your directional view and expected holding period to the right expiry can lead to losses. Always check the expiry date before you choose your strike and lot size.
Not Checking Implied Volatility
Implied volatility is a key factor determining option premiums. In Bank Nifty options, IV tends to be elevated due to high uncertainty in banking stocks. If you buy options when IV is very high, you run the risk of IV collapsing after you enter your trade. This can lead to losses even if Bank Nifty moves in your favor. So check the absolute IV level, IV rank and IV percentile before initiating any option trade. Avoid strikes with elevated IV unless you have a strong directional view.
Ignoring Open Interest Distribution
The open interest distribution in the Bank Nifty option chain provides valuable insights. Strikes with disproportionately high OI indicate strong alignment of positions by traders. Watch out for strikes with OI clustering or a steep OI buildup relative to other strikes as it signals heightened consensus. initiate range bound trades around those congestion points instead of directional bets. Analyzing OI distribution avoids choosing crowded options with limited upside.
Not Checking Price Action Around Strikes
Bank Nifty index has been oscillating within a broad range for many months. This has led to creation of support and resistance zones. Before you pick strike prices on either call or put side, check recent price action around those strikes. For example, if 36450-36500 has acted as resistance multiple times, it is best to avoid buying call strikes in that zone. Conversely, zone between 35500-35600 has become a support area making it riskier to buy put strikes in that range. Observing price action saves you from picking flawed strikes.
Trading Bank Nifty calls and puts via 5paisa can be rewarding due to the high volatility and liquidity. However, you need to avoid common mistakes like using basic filters, ignoring expiry dates, not analyzing IV, OI distribution and price action. Use a multi-factor approach, match expiry to your view, analyze IV, identify crowded zones and observe support-resistance. This will help you identify high probability options with attractive risk-reward payoff. Avoiding mistakes outlined above will make your Bank Nifty options trading profitable in the long run.