Trading in Banknifty

How different is trading in Banknifty options ? Can we apply same principles of Nifty trading in Banknifty also ?

To answer these questions , we must first understand the difference between Nifty and Banknifty. Nifty is a broad index representing different sectors like banking, IT , capital goods, pharma , metal, auto etc whereas Banknifty is a sectoral index of 12 large capital banks only. Having a broad base should give Nifty a much more stability because different sectors can behave differently. If one sector is rising, another can be falling and hence balancing each others movement to some extent. But in Banknifty , only differentiation can be private banks or public sector banks. Differentiation is too thin and hence movement can be unidirectional and much more sharp.

So fundamentally, Nifty is broad based but Banknifty is sectoral although it is very stronlgy represented in Nifty Index also. If stability is what we are looking for in our trading strategy, Nifty should be obvious choice. But this is not the case in recent past. It has been observed that percentage movement in Nifty has been equally (if not more) volatile as that of Banknifty.

Another important observation is that Implied volatility in Banknifty options is at least 10 points higher than Nifty options.This means higher premiums and which means higher decay in premiums is possible with similar movements. If we calculate and compare the amount of money invested for Nifty and Banknifty options, we will find percentage returns are rather slightly better in case of Banknifty. Although this should not have been the case , but becuase of extremely low implied volatility but still high movements, Nifty has become a second choice for option writers. Its a matter of time when volumes will also catch up. Till otherers catch up , let us take the benefit of trading in Banknifty options.

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