1. What is Nifty?
- Nifty 50 (NSE Nifty) is the benchmark index of the National Stock Exchange (NSE).
- It tracks the performance of the top 50 companies across 13 major sectors of the Indian economy.
- It is widely used as a barometer of India’s stock market health.
2. What is a Nifty Index Option?
- A Nifty Index Option is a type of derivative contract where the underlying asset is the Nifty 50 index.
- It gives the buyer the right, but not the obligation, to buy or sell the Nifty index at a pre-decided level (called the strike price) on or before the expiry date.
- Traders use it to hedge risk, speculate, or take exposure to the broader Indian market.
3. Key Features
- Underlying asset: Nifty 50 Index (not individual stocks).
- Types of options:
- Call Option (CE): Right to buy → Profits if Nifty goes up.
- Put Option (PE): Right to sell → Profits if Nifty goes down.
- Expiry: Available in weekly and monthly contracts.
- Lot size: Traded in predefined lots (currently 50 units per lot, as per NSE).
- Premium: The price paid by the buyer to the seller for holding the right.
4. Why Trade Nifty Options?
- Hedging: Protects portfolio against market volatility.
- Speculation: Take advantage of short-term market movements.
- Liquidity: Nifty options are among the most traded contracts in India.
- Leverage: Small capital can control a large market exposure.
- Diversification: Exposure to top 50 companies, reducing single-stock risk.
5. Example (Simple)
- Assume Nifty = 22,000 points.
- You buy a Call Option (CE) at strike price 22,200, expiring in 1 week.
- If Nifty rises to 22,600 → You make profit.
- If Nifty falls below 22,200 → Option expires worthless, and you lose only the premium paid.
6. Risks
- Buyer’s risk is limited to the premium paid.
- Seller (option writer) faces unlimited loss potential if the market moves against their position.
- Nifty can be volatile, so knowledge and discipline are required.
📖 References: