The Indian financial markets offer a wide range of instruments for traders to trade and capitalise on market fluctuations. The derivatives market constitutes a large share of this daily trading volume in the Indian stock market. Among them, the Index options are often the preferred choice of Indian investors due to their highly liquid and cash-settled nature.
Different index options cater to different trading purposes, and each of them has its own benefits and risk profile. In this blog, we will explore the two major index option chains that often dominate the derivative trading volumes in India.
What is an index option chain and its structure?
To understand a specific index option chain, it is important to first understand the framework of the index option chain. An index option chain is a comprehensive data matrix offered by official stock exchanges that displays all the available option contracts for a particular index at different price levels.
The middle column shows the strike prices, which are the predetermined levels at which the index options can be traded. On the left are the call options, which traders can buy when they anticipate an upward movement in the market.
While on the right are the put options, which traders can exercise when a downward movement is expected. Let’s explore the two major index option chains that dominate India’s derivatives market.
Nifty 50 Option Chain
When traders trade in the Nifty 50 option chain, they are trading option contracts linked to the Nifty 50 index, which represents the top 50 large-cap companies across multiple sectors. This index is highly diversified, which means that this index tends to exhibit lower volatility compared to sector-specific indices.
The weekly and monthly expiries of Nifty 50 options, combined with cash settlement, make Nifty 50 options an attractive instrument for both short-term and long-term strategies.
Nifty 50 options are often preferred by institutional and retail participants to hedge their portfolios and to gain exposure to the broader market. These contracts offer traders high liquidity, which ensures efficient trade execution with minimal price slippage.
Bank Nifty Option Chain
The Bank Nifty index consists of highly liquid banking stocks, in contrast to the Nifty 50 index, which offers broader market exposure. This industry-specific concentration implies that the Bank Nifty options chain carries a higher beta, which leads to wider and faster price movements compared to the overall market.
Additionally, the high liquidity in the Bank Nifty option chain reduces the slippage during the execution of large orders, which is a crucial evaluation metric for high-volume traders.
Active traders seeking sector-specific exposure to the financial sector often prefer the Bank Nifty option chain over the Nifty 50 option chain or Sensex option chain, as it offers greater exposure to market volatility driven by interest rate changes and economic policies.
Sensex options
Although Nifty 50 and Bank Nifty option chains dominate the Indian derivatives market, the Sensex options chains are rapidly gaining popularity among traders in recent years. It has attracted the attention of both retail and institutional traders through its highly accessible lot sizes (currently fixed at 20) and a convenient weekly and monthly expiry structure.
Today, the option chain Sensex has become a highly relevant instrument for traders seeking an alternative index-derivatives market alongside NSE’s benchmark contracts.
Conclusion
The Nifty 50 and Bank Nifty option chains are the most traded ones in the Indian derivatives market. The Nifty 50 option chain provides exposure to the broader market with relatively lower volatility, as compared to the Bank Nifty option chain, which provides sectoral exposure to the financial sector.
Traders looking for diversification and alternatives to NSE benchmark contracts are also increasingly trading the emerging options chains, like the Sensex option chains.
