Options trading in India is starting to gain massive momentum and I am asked regularly about option strategies for trading the Nifty Index. I would love to trade options on Nifty stocks and indexes, but unfortunately you need to be an Indian resident to open an account with most brokerages. Hopefully this will change soon, because the time zone is very advantageous.

This week, I’ve done a heap of research into trading options in India and in today’s article, you’re going to learn all about how to trade options on the Nifty Index and its related stocks.

What Is The Nifty Index?

The Nifty 50 is the benchmark Indian stock market index, similar to the S&P 500 or Dow Jones in the United States or the All Ordinaries Index in Australia. The index represents the weighted average of 50 of the largest Indian companies listed on India’s National Stock Exchange. Via this link, you can see the current list of companies in the index, as well as various stock price data.

As of July 20, these are the largest stocks in the Nifty Index by market capitalization:

• Reliance Industries Ltd. 
• Tata Consultancy Services Ltd.
• HDFC Bank Ltd. (HDB)
• Hindustan Unilever Ltd.
• Infosys Ltd. (INFY)
• Housing Development Finance Corporation Ltd.
• Bharti Airtel Ltd.
• Kotak Mahindra Bank Ltd.
• ITC Ltd. (ITC)
• ICICI Bank Ltd. (IBN)

When people refer to the Nifty Index, they are generally referring to the Nifty 50, but there are also many other Nifty Indexes such as:

• Nifty Next 50.
• Nifty Midcap 50.
• Nifty Midcap 150.
• Nifty Smallcap 50.
• Nifty Smallcap 250.
• Nifty MidSmallcap 400.
• Nifty 100.
• Nifty 200.

As well as this, there are many sector-based Nifty Indexes:

• Nifty Auto.
• Nifty Bank.
• Nifty Energy.
• Nifty Financial Services.
• Nifty FMCG.
• Nifty IT.
• Nifty Media.
• Nifty Metal.
• Nifty Pharma.

The list goes on.

Where To Get Nifty Option Data

When looking for option data on the Nifty Indexes, the first place to start would be with a reputable broker. The largest local Indian broker appears to be Zerodha, but I have no experience with or knowledge of them. The next place to look for option data would be the NSE website.

Nifty Option Trading Strategies

If you’re new to trading options, I suggest you first check out this 11,500 word guide on Options Trading 101.

As the Indian option market is still in its infancy, it’s best to stick to highly liquid underlying stocks and indexes because smaller companies will not have enough liquidity in the option chains to make trading worthwhile.

Reliance Industries Ltd. is the biggest stock by market cap, and looking at the options data from the NSE website shows that there is plenty of volume in the options for this stock.

If you’re not sure how to read option chain information, you should refer to this post.

Selling Put Options on Nifty Stocks

Selling put options is a really simple way for Indian traders to get started with options. When a trader sells a put option, they are obliged to take ownership of the stock at the strike price. For taking this obligation, they are paid a premium which is theirs to keep. Let’s look at an example using Reliance Industries Ltd.

RELIANCE INDUSTRIES LTD. CASH SECURE PUT:

• Date: July 20.
• Current Price: 1916.

Trade Set Up:

• Sell 1 RELIANCE August 27, 1800 put @ 46.90.
• Contract Size: 505.
• Premium: 28,734.50 Rs Net Credit.
• Breakeven Price: 1743.10.
• Maximum Profit: 28,734.50 Rs.
• Maximum Loss: 880,265.50 Rs.

The premium is the put sellers to keep no matter what happens, but they will be forced to buy 505 shares of the stock at 1800 if the stock drops below that level.

Of course, if you prefer not to have stock-specific risk, the same thing could be done on the Nifty 50 Index.

NIFTY 50 CASH SECURE PUT:

• Date: July 20.
• Current Price: 11901.70.

Trade Set Up:

• Sell 1 NIFTY August 27, 10500 put @ 171.00.
• Contract Size: 50.
• Premium: 8550 Rs Net Credit.
• Breakeven Price: 10329.
• Maximum Profit: 8550 Rs.
• Maximum Loss: 516,450 Rs.

Conclusion

Option trading in India is increasing in popularity and that trend is likely to continue over the next few years. Stocks in the Nifty 50 and the Nifty Indexes themselves provide the greatest opportunities because they are the most liquid options with the best volume. This makes it easier for traders to enter their trade with a good price.

Option trading provides the ability to trade many different strategies on Nifty stocks, but it is important to understand these strategies in detail first. Before getting started, it is best to paper trade or find a mentor who can guide you on the process.