InvestorQ : what fundamentals we should see to buy any bank .. also give little bit explaination about that fundamental..
rahul kothari made post

what fundamentals we should see to buy any bank .. also give little bit explaination about that fundamental..

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preetam lenka answered.
1 year ago
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Seven things you must know about Bank Nifty
TEXT: Ram Sahgal, ET Bureau

Q4 results of banks show the stress on the banking system because of bad loans, or NPAs.

Traders who hold bank shares can hedge themselves by taking contra positions on individual banks on the derivatives segment. Read more…

What is the Bank Nifty?
An index comprising 12 state-owned and private sector banks. Like the Nifty, those bullish on banks can buy Bank Nifty futures comprising 30 shares, or buy a call option on Bank Nifty.

Bears can similarly short or sell Bank Nifty futures or buy a put option on the index.
What is the current level of Bank Nifty?
On Friday, Bank Nifty for May expiry closed lower by 1.4% at 16743.



What is the contract value?
At that level, what’s the contract value and the approximate margin one has to put up to trade?

The basis that level, contract value was Rs 5.02 lakh. The margin to trade could vary from 7-10%.

What’s the risk?
Since these are leveraged positions — one puts up a fraction of the contract value to trade — adverse price movement can cause huge losses to traders. Also, Bank Nifty has a higher beta (is more volatile) than the Nifty futures contract.
Can this be illustrated?
Assume you went long Bank Nifty futures at 16743 by paying a margin of 7% (Rs 35,160). If on Monday, the Bank Nifty closes at 16500, the loss will be Rs 7,290 (243x30).

If one has taken multiple positions, the loss will be even greater.


How to minimize losses?
By putting a stop loss while directing the dealer to execute the trade. Say going long at 16743, if the trader put a stop loss at 16643, the loss would be restricted to Rs 3,000 instead of at Rs 7,290.

Is there another way to do this?
Yes, losses can be minimized by buying calls or puts for May expiry on Bank Nifty. Then the maximum loss will be limited to the premium paid to the seller for the call or put option. For instance, the most active 17000 call option was priced around Rs 151 at Friday closing.

A bull who buys the call would have had to pay a premium of Rs 4,530 — that’s the max he could lose. Similarly, a bear could buy the 16500 put by paying Rs 4980. In options, profit’s unlimited while loss is limited to the premium paid. In futures, a trader can have unlimited profits or unlimited losses, if the stop loss is not placed.

In the case of a call and put option sellers, the profit is limited to the premium received but losses can be unlimited.
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