Nifty options are financial contracts that give you the right, but not the obligation, to purchase or sell the Nifty 50 index at a set price on or before a specific date. The National Stock Exchange (NSE) hosts the trading of Nifty options.
The NSE stands as India’s primary platform for equity and derivative trading. Trading options can lead to high profits, but it’s essential to grasp the fundamentals first. Let’s check out some strategies you can use to trade Nifty options like a pro even if you’re a beginner in the game.
Basics of Nifty Options Trading
Here are some trading basics for Nifty Options.
Understand the Option Chain
An option chain provides a snapshot of all the available Nifty options contracts at different strike prices, including data on premiums, volumes, and open interest.
Beginners need to understand an option chain. You can check out the Nifty option chain on the dhan.co website for free, where you’ll find the data you need to make smart choices. You can access an option chain via your option trading app.
Choosing the Right Expiry
Nifty options come with three expiry types: weekly, monthly, and quarterly. As a beginner, you can start with monthly expiry options because they’re less volatile than weekly options. Monthly options also give you more time to get an understanding of market movements before they expire.
Watch Implied Volatility
Implied Volatility (IV) has a significant impact on option pricing. High volatility can also often provide better option premiums. Beginners can lower their risks by trading during times of moderate volatility. You can find the IV of Nifty options on NSE’s website.
Popular Nifty Options Strategies for Beginners
Here are the strategies you should know.
Long Call and Long Put
Buying a call option stands out as the simplest strategy for beginners who expect the Nifty index to rise. Buying a put option works well for those who expect the index to fall.
It’s a straightforward way to start as it limits your losses to the premium paid while still allowing for substantial potential gains.
Covered Call Strategy
If you own Nifty-based exchange-traded funds (ETFs), you can apply a covered call strategy. This involves selling call options for the Nifty index against your holdings. This strategy allows you to gain the premium on the options, which serves as extra income, while still profiting if the Nifty rises within a certain limit.
Protective Put
If you have an existing position in the Nifty index and you’re worried about a short-term market decline, you can use a protective put. It works like an insurance policy, where you buy a put option to protect your holdings against a price drop, limiting your losses to a certain level.
Risk Management Techniques for Nifty Options
Options trading can be risky, especially for beginners. Here are some risk management tips:
Set a Budget
Don’t invest money you can’t afford to lose. Start with a small portion of your overall portfolio—maybe 5-10%—in options trading, and stick to that budget.
Use Stop Loss Orders
A stop-loss order can help limit your losses. It automatically closes your position when the Nifty index reaches a predetermined level. For beginners, using stop-loss orders can reduce the stress of constantly watching your positions.
Avoid Holding Until Expiry (Unless Necessary)
Holding options till expiry can put you at high risk because of time decay. The value of an option drops as its expiration date gets closer, and if it runs out of money, you lose the premium you paid for it. It’s smarter to close your positions once you’ve made a reasonable profit.
Conclusion
Trading Nifty options can pay off if you grasp the basics and follow a strict approach. Start with easy strategies, use practice tools to get better, and always think about managing your risk. Keep in mind that success isn’t about making big profits on every trade, but about learning and building up your skills.
