HOW TO TRADE NIFTY OPTIONS INTRADAY?

 

How to trade nifty options intraday: a detailed guide

 

   Nifty options are one of the most popular instruments in the Indian financial markets for intraday trading. The National Stock Exchange (NSE) offers options on the Nifty 50 index, which represents the top 50 companies in India. Intraday trading of Nifty options can be highly profitable due to leverage, but it also comes with significant risks. Below is a comprehensive guide on how to trade Nifty options intraday.

 

Understanding nifty options

 

Nifty options are derivative instruments whose value is based on the Nifty 50 index. The two main types of options are:

 

Call options (CE):  These give you the right (but not the obligation) to buy the Nifty 50 index at a predetermined strike price.

 

Put options (PE):  These give you the right (but not the obligation) to sell the Nifty 50 index at a predetermined strike price.

 

   Both call and put options are available with various strike prices and expiry dates, giving traders a wide array of choices.

 

Basic terminologies in nifty options

 

Strike price:  The price at which the option can be exercised.

 

Premium:  The price of the option contract.

 

Lot size:  Nifty options are traded in lots. As of 2024, one lot of Nifty options contains 50 units of the Nifty 50 index.

Expiry:  Nifty options expire on the last Thursday of each month. Weekly options also expire every Thursday.

 

In-the-money (ITM):  A call option is ITM if the strike price is below the current Nifty index, and a put option is ITM if the strike price is above the current index.

 

Out-of-the-money (OTM):  A call option is OTM if the strike price is above the Nifty index, and a put option is OTM if the strike price is below the current index.

 

Steps for trading nifty options intraday

 

1. Identify market sentiment

 

Before initiating an intraday trade, you need to understand the market sentiment, i.e., whether the market is bullish, bearish, or range-bound. Various tools can help identify sentiment:

 

News and global cues:  Market trends often correlate with global events, economic reports, and corporate announcements. Watch for pre-market reports and global markets to get a sense of how the market might open.

 

Market breadth:  Check the performance of other indices like Bank Nifty or Midcap indices for clues about overall market sentiment.

 

2. Use technical analysis

 

Technical analysis is crucial for identifying entry and exit points. Some of the popular indicators and tools include:

 

Moving averages (MA):  Simple Moving Averages (SMA) and Exponential Moving Averages (EMA) help identify trends. For intraday, shorter time frames like the 5-minute or 15-minute chart are preferred. Crossovers between short and long-term MAs often indicate buy or sell signals.

 

Relative strength index (RSI):  RSI helps identify overbought or oversold conditions. An RSI above 70 indicates an overbought market (a potential selling opportunity), while an RSI below 30 indicates oversold conditions (a potential buying opportunity).

 

MACD (Moving Average Convergence Divergence):  This indicator helps spot changes in momentum and trend reversals.

 

Support and resistance levels:  Use pivot points, Fibonacci retracement levels, and historical price data to identify key support and resistance zones.

 

3. Choose the right pption strike price

 

For intraday trading, it’s crucial to select the right strike price. Here’s how you can approach it:

 

At-the-money (ATM) options:  These are the closest strike prices to the current Nifty index level. They generally have the highest liquidity and are ideal for intraday trading due to smaller premiums and quick price movement.

 

In-the-money (ITM) options:  These are slightly more expensive but tend to move more in sync with the Nifty index, making them a safer bet in highly volatile markets.

 

Out-of-the-money (OTM) options:  While cheaper, OTM options are riskier because they only gain value if the Nifty makes a substantial move in your favor.

 

4. Manage risk with stop loss

 

Intraday trading in Nifty options is volatile, and the market can move quickly against your position. Always trade with a well-defined stop loss to protect your capital. For instance:

 

Fixed stop loss:  Set a stop loss at a certain percentage (e.g., 1% or 2%) below or above your entry price, depending on whether you are buying or selling the option.

 

Trailing stop loss:  As the trade moves in your favor, adjust the stop loss to lock in gains while limiting losses if the market reverses.

 

5. Time your entry and exit

 

   The most critical aspect of intraday trading is timing. For Nifty options, the first 30 minutes after the market opens (9:15 AM - 9:45 AM) and the last hour of trading (2:30 PM - 3:30 PM) generally see the highest volatility. Many traders prefer to enter during these periods.

 

Morning trades:  These are more speculative as traders react to overnight news and global markets.

 

Afternoon trades:  These tend to be more informed as the market has settled, and options move closer to their real value.

 

6. Consider theta (Time Decay)

 

Options lose value as they approach expiration due to time decay (Theta). This works against option buyers but benefits option sellers. For intraday traders:

 

Option buyers:  Avoid holding options for too long as their value erodes with time. Quick entries and exits are essential.

 

Option sellers:  Time decay works in your favor. If you believe the market will remain range-bound, you can sell options to profit from Theta.

 

7. Use option strategies

 

Certain option strategies are particularly effective for intraday trading. Some popular ones include:

 

Straddle:  Buy both a call and put option at the same strike price. This strategy works well in highly volatile markets where you expect a large move but are unsure of the direction.

 

Strangle:  Similar to the straddle but involves buying OTM call and put options. This strategy requires less capital but is riskier as both options must move significantly for profit.

 

Covered call:  If you own a Nifty ETF or shares correlated with Nifty, you can sell a call option on your holdings to generate extra income.

 

8. Monitor market volatility

 

   Volatility plays a significant role in intraday Nifty option trading. The India VIX (Volatility Index) is an excellent tool to gauge market volatility. A high VIX indicates a volatile market, which is good for intraday traders seeking quick price movements. Low VIX suggests a stable market, which might be better for option sellers rather than buyers.

 

9. Control your emotions

 

Intraday trading in options can be emotionally taxing due to the rapid price movements. It’s essential to remain disciplined and stick to your trading plan. Common emotional pitfalls include:

 

Overtrading:  Entering trades without proper setups or just to "make back" losses.

 

Fear of missing out (FOMO):  Chasing a trade after a big move has already occurred, leading to poor entry points.

 

Revenge trading:  Trying to recover losses by taking riskier trades, often leading to more losses.

 

Conclusion

 

   Intraday trading in Nifty options can be a rewarding but risky endeavor. Success in this field requires thorough knowledge of technical analysis, market sentiment, and option strategies. Managing risk through proper position sizing, stop-loss orders, and understanding of time decay (Theta) are essential components of a successful intraday trading strategy.

 

   While profits can be substantial, intraday traders must also prepare for the risks of losses, as the market's volatile nature can work against you. Therefore, maintaining discipline, emotional control, and sticking to a well-defined strategy is key to becoming a profitable Nifty options intraday trader.