“Why trade a single stock when you can trade the entire market?”
After understanding how Forex trading allows us to speculate on currency movements across the globe (as explained in our previous article), let’s now turn our focus back to the Indian market. If you want to trade the pulse of the Indian economy, trading indices like NIFTY and BANKNIFTY using derivatives can be one of the most powerful ways to do it.
🧲 What Are Market Indices?
A market index is a basket of selected stocks that represent a particular segment of the market.
- NIFTY 50 – Represents the top 50 large-cap companies on NSE.
- BANKNIFTY – Represents the top 12 banking sector stocks in NSE.
| Index | Represents | Examples of Components |
|---|---|---|
| NIFTY 50 | 50 large-cap stocks across sectors | Reliance, TCS, Infosys, HDFC Bank |
| BANKNIFTY | 12 major banking stocks | SBI, ICICI Bank, HDFC Bank, Kotak Bank |
💼 Why Trade Indices Instead of Stocks?
- ✅ Diversification – Risk is spread across multiple companies.
- 📊 Lower Volatility than individual stocks (in general).
- ⏱️ Quick reaction to economic and political news – NIFTY moves reflect the overall market mood.
- 🔁 High Liquidity – Easy entry and exit with low slippage.
- 📈 Better for trend-based and option-selling strategies.
🔁 How to Trade Indices Using Derivatives
You can’t buy NIFTY like a stock. Instead, you trade its Futures and Options (F&O) contracts.
▶️ 1. Index Futures
Agreement to buy or sell an index at a future date at a pre-decided price.
No delivery involved — it’s cash settled.
NIFTY trading at 22,500.
You buy 1 lot of NIFTY Futures (Lot Size = 50).
If NIFTY rises to 22,700, you make:
₹200 x 50 = ₹10,000 profit (ignoring brokerage and taxes).
▶️ 2. Index Options
Options give you the right, but not the obligation to buy/sell the index.
| Option Type | Direction | Example |
|---|---|---|
| Call Option | Bullish | Buy 22,500 CE if you expect NIFTY to rise |
| Put Option | Bearish | Buy 22,500 PE if you expect NIFTY to fall |
You can also sell options (more advanced) to earn from time decay (Theta).
🧠 Popular Index Derivatives in India
| Instrument | Expiry Type | Lot Size | Margin Requirement |
|---|---|---|---|
| NIFTY Futures | Weekly & Monthly | 50 | ~15-20% of contract |
| BANKNIFTY Call/Put Options | Weekly & Monthly | 15 | Depends on volatility |
| Sensex | Weekly & Monthly | Varies | Similar to above |
💹 Example: Intraday Index Option Trade (BANKNIFTY)
You expect an intraday upside after a breakout.
You buy 48,100 CE at ₹200.
Exit at ₹260.
Profit per lot: (₹60 x 15 = ₹900).
👉 This is just one of many strategies traders use.
🛡️ Index Option Selling – Safer for Sideways Markets
Sell far Out-of-the-Money (OTM) Calls and Puts. Earn premium as time passes.
Popular strategy: Iron Condor on NIFTY.
| Legs | Strike | Action |
|---|---|---|
| Call Sell | 23,000 CE | ✅ |
| Put Sell | 22,000 PE | ✅ |
| Call Buy | 23,100 CE | ✅ Hedge |
| Put Buy | 21,900 PE | ✅ Hedge |
🧩 Things to Remember While Trading Indices
- 📉 Always track India VIX – high VIX means higher premiums but also higher risk.
- 🧠 Use technical indicators like Supertrend, VWAP, RSI for confirmation.
- ⏳ Time your entry near breakout/breakdown or reversal zones.
- 💰 Always use Stop Loss – indices move fast.
📚 Summary
| Feature | NIFTY | BANKNIFTY |
|---|---|---|
| Sector | Multiple (Diversified) | Banking Sector Only |
| Lot Size | 50 | 15 |
| Volatility | Medium | High |
| Suitable For | Positional + Intraday | Fast Intraday Traders |
Trading NIFTY and BANKNIFTY gives you the purest exposure to the market sentiment. Whether you’re a newbie or a seasoned trader, mastering index derivatives can give your strategy an edge that stock trading alone often can’t.