Because Bank Nifty options have changed from weekly expiries to monthly expiries, it may be harder for traders to find opportunities. However, options on stocks still continue to trade at a monthly cadence, I wanted to explore a bit and see how this market is performing.
This is data from last Friday (14 Feb). I’m listing the Nifty (for 2 expiries), Bank Nifty, and Top 15 companies that have the most liquid stock options. I’m defining liquidity as a small bid-ask spread (see “Spread” column). I’ve also listed the underlying LTP, ATM strike, minimum lot size, call bid price, call ask price, and cost to enter into this contract at the ask.
As you can see, these stock options are comparably liquid to the nearest expiries of the options on the major indices. In addition to this, the stock option cost is comparable or lower to the index options.
Of course, a lot of traders want to trade closer to expiry – whether it is due to the lower entry cost, potential for higher ROI, or increased volatility. The drawback of stock options is that margin costs increase during the week of expiry. As we saw previously, when it is 2 weeks from expiry, the entry cost of stock options is generally less than the entry cost of index options. But what if you compare stock options 2 weeks out (or less) vs. index options that are during the week of expiry?
I modeled this using the Black-Scholes formula. If you compare the top 10 stocks trading 2 weeks until expiry, the entry cost – assuming the stock’s minimum lot size – is comparable to the Nifty and Bank Nifty on Monday prior to expiry. This is seen in the column ‘Entry Cost’. I’ve also added a modeled ‘Loss’ column. This assumes that the underlying moves 1% against you on the day that you are holding this contract. The loss for the index options is higher, both in terms of amount and percentage of cost, than for the stock options. This is because of the larger impact of time value as you approach expiry.
Would be interested to know your thoughts on this. Has anyone added stock options to their portfolio of strategies in the last couple of months?