As per the recent NSE Circular, we hope you are aware that NSE is launching weekly options contracts on Nifty Bank (Bank Nifty). NSE wants to use Bank Nifty which is the second highest traded instrument on the exchange to improve the liquidity and volumes. These weekly contracts will be listed with effect from 27th May 2016. The monthly options contracts will continue to exist as usual.
Key features of Nifty Bank (Bank Nifty) weekly options:
• There will be 7 weekly expiries in addition to the existing 3 monthly weekly option contracts.
• Symbol, strike price and lot size will be the same as monthly contracts.
• Contract size will be 30 units for all expiries for June 2016 and 40 units for all expiries from the July 2016 onwards.
• Weekly contracts shall expire every Thursday of the week.
• All the 12 components of Bank Nifty have derivatives on them.
The following weekly options expiries would be available from 27th May 2016.
According to NSE, the benefits of trading weekly contracts are:
• Low cost hedging: Weekly options can be used effectively for short-term portfolio protection as they tend to be cheaper in comparison to monthly contracts.
• Flexibility: Weekly options offer more flexibility to hedge ahead of economic data releases, RBI announcements, economic events etc.
• New trading cycle: gives more number of option trading opportunities.
Trading volumes of bank nifty options have grown at 190% CAGR in the last 5 years since 2010!
In comparison, Nifty Bank (Bank Nifty) grew much lesser as shown below.
About Nifty Bank (Bank Nifty) Index:
Bank Nifty Index has 12 most liquid and large capitalized stocks from the banking sector and represents 93% of the free float market capitalization of the banking sector universe. The index consists of both private and nationalised banks. Eight stocks of Bank Nifty are part of Nifty 50.
The component stocks are:
1. HDFC Bank
2. ICICI Bank
3. Axis Bank
4. Kotak Mahindra Bank
5. State Bank of India
6. IndusInd Bank
7. Yes Bank
8. Bank of Baroda
9. Federal Bank
10. Punjab National Bank
11. Canara Bank
12. Bank of India
This list is as of 26th May 2016.
Refer to these circulars for more information: 32329 & 32338.
What this development could mean:
• Spreads could get narrower in the near month contracts.
• The action may shift into weekly contracts from monthly contracts.
• The premiums will become cheaper.
• If it succeeds, we could see options being introduced for other indices too.