BankNifty weightage cpr strategy

BankNifty weightage cpr strategy

The NIFTY Bank Index includes the most liquid and significant banking firms in India. It serves as a benchmark for investors and market intermediaries, capturing the capital market performance of Indian banks. The Index includes a maximum of 12 companies that are publicly traded on the National Stock Exchange of India (NSE).
The free float market capitalization approach is used to calculate the NIFTY Bank or BankNifty Index.

As on December 31, 2021 Constituents and Weightage

         Company’s Name                               Weight(%) 

1. HDFC Bank Ltd.                                           27.80
2. ICICI Bank Ltd.                                           22.62
3. Kotak Mahindra Bank Ltd.                         11.61
4. Axis Bank Ltd.                                              11.52
5. State Bank of India                                      11.45
6. IndusInd Bank Ltd.                                      5.91

Above six stocks are the main CONSTIUENTS of banknifty Total weightage to around 90% and the banknifty follows them which has more weightage first.

Now what is the strategy here

Before we start, we use three things here

1. cpr which is the value area concept and it being narrow or wide decide the behaviour of the stock.

2. CCI Index for momentum

3. RSI overbought and oversold areas

 

Strategy 1

When the banknifty constituents  are wide range cpr on atleast 70% weightage out of above 6 (90%) and volatility high that is above 20-22 (vix) go for short iron butterfly strategy (buy selling 2 ATM’s at same strike and buying 2 OTM’s) where expectation is that we have limited risk/reward and we are sellers and we take time decay to our advantage which bank nifty is in range bound.  The volatility has to fall for us to make good returns quickly as with time decay. Note : Rsi must not be oversold or overbought.

Strategy 2

When narrow cpr on atleast 70% weightage and volatility is low below 15(vix) and we can employ Long iron condor strategy  (Buy 2 near OTM’s and sell two farther OTM’s ) where we expect movement on either side for making money. We are on buyers side on this trade and looking for making money on movement on in any direction as long as it moves. Volatility must rise to make even better returns. Rsi can be in oversold or overbought.

Strategy 3

Straddle and strangle can also work for range bound movements expectation on banknifty with wide range cpr and cci index between middle points. Rsi must not be oversold or overbought. Here we sell ATM’s on both sides at same strike  for straddle and near OTM’s and wait for time decay to give us money. IV drop normally benefits this strategy as well as premiums fall as IV Falls

 

Note: The combined weightage of the top three stocks in BankNifty constituents must not exceed 62 % which is a main rule. We use that to our advantage by putting our strategies around that.

Additional Checks

1.Check on Sensibull

Check option chain data on sensibull to see if sellers are betting on puts or calls. If sellers are having more positions on put side then expect market to go up and vice versa.

https://web.sensibull.com/option-chain/?expiry=2021-12-30&tradingsymbol=NIFTY

2.Check for Option chain data on NSE

Check NSE Site for PCR Ratio https://www.nseindia.com/option-chain

Check PCR Ratio in Nifty option chain on weekly expiry

To trade based on PCR first we will first need to collect historic PCR to know the extreme ends it can reach.

a. If PCR is below 1, it would mean that more calls are being traded and since more calls are being traded by the retail traders (option buyers) this could mean that the markets might do the opposite which is go down. Lower than 1 the PCR is, higher the chances of the market coming down.

b. If PCR is above 1, it would mean that more puts are being traded and since more puts are being traded by the retail traders (option buyers) this could mean that markets might do the opposite which is go up. Higher than 1 the PCR is, higher the chances of the market going up.

Now historically or previous PCR range is noted if it is crossing that range than its believed to go up or down. Say if historical is in range of 0.8 to 1.2, at 1.2 PCR the chances of market going up will be the highest.

https://www.indiainfoline.com/markets/derivatives/put-call-ratio

For BankNifty is 0.80 PCR Ratio for OI Data which is also less than 1 slightly, so moderately bearish

If the ratio is high in a falling market, it reflects how bearish the sentiment is. But a rise in the ratio in a rising market is considered a bullish signal.

3.Check the view on futures data

https://www.indiainfoline.com/markets/derivatives/futures

here long unwinding means sellers are exiting the long positions which means they are anticipating a up move.

4.Check major indexes for positive or negative sentiments in market

Mainly major indexes, asian indexes, american indexes etc..

https://www.moneycontrol.com/markets/global-indices/

https://www.indiainfoline.com/markets/global-indices/major-indices

 

 

5. Look for IV percentile or IVP for going sell or buy

IV percentile (IVP) is a relative measure of Implied Volatility that compares current IV of a stock to its own Implied Volatility in the past. Put simply, IVP tells you the percentage of time that the IV in the past has been lower than current IV. It is a percentile number, so it varies between 0 and 100. A high IVP number, typically above 80, says that IV is high, and a low IVP, typically below 20, says that IV is low.

High IVP go for sell side like bull pull spread or bear call spread instead of bull call spread or bear put spread. Basically net credit strategies rather than net debit strategies. 

Here any IV drop can benefit the sellers by premium values falling very quickly.

https://opstra.definedge.com/strategy-builder

 

6. Use the strategy builder to check POP, Max profit, Max loss etc…

7.How to make a Trade on Options based on Trading day

Highest decay in Option premiums happen closer to the expiry.

For weekly options

1. On Start of weekly options say Friday and Monday you can look for buy strategies with limited risk and limited reward using the Option strategies like Bull Call spread etc.. based on market outlook. Or even long iron condor if you anticipate a huge movement on any side.  Long straddle and Long straddle can also be used.
2. On Towards end of Week that is Wednesday and Thursdays, time decay is on your side if you are going for Selling side. That said its better to go with limited risk and limited reward trading strategies like short iron condor, short iron butterfly.
3. Tuesdays in morning parts can be opted for buying strategies and towards end if needed only Sell side strategies.

Theta decay is less on Friday and Monday are good opportunities to be on buy side like Bull call spreads or Bear Put spreads with limited profit and limited loss. Here the risk is defined.

With time decay aggressive towards weekend its better for Sell side strategies like short iron condor or short iron butterfly to gain from theta decay which can even compensate for any Delta loss due to price movements.

 

BankNifty Index Rebalancing:

The index is rebalanced every two years. The deadlines for semi-annual reviews are January 31 and July 31 of each year.

The average data for the six months preceding the cut-off date is used to calculate the indices. Market is provided four weeks’ notice from the date of the modification.

 

Please back test the strategy either manually or using tools. Do not blindly follow any strategy listed. The articles are just for educational purposes only.