What does the new NSE Financial Services Index offer to traders?

The National Stock Exchange (NSE) on December 10 announced that derivatives on NSE Financial Services Index will be launched on January 11, 2021. Apart from the Nifty 50 Index and the Nifty Bank Index, this will be the third index on the NSE with derivatives contracts.

The Nifty 50 Index and the Nifty Bank Index have options contracts, with both weekly and monthly expiration whereas currently futures contracts do not have weekly expiry. But the Financial Services Index will have weekly and monthly expiry in both futures as well as options contracts.

Traders’ perspective

Even though the Financial Services Index includes stocks in addition to banking sector, it is closely related to the Nifty Bank Index with 98 per cent correlation. Out of the top five stocks based on their weight, four stocks are common in both the indices.

From the perspective of trading, the Financial Services Index, compared to the Nifty Bank Index, can be more suitable to traders with lower risk tolerance, especially futures. This is because, in the past, its standard deviation – a measure of volatility – has been lower than the Nifty Bank Index for the same level of beta – 1.2 against the Nifty 50 Index. The one-year standard deviation of Financial Services Index (as on November 27, 2020) stood at 40.8whereas standard deviation of Nifty Bank Index was at 42.7.

However, option traders and traders with higher risk tolerance can find Nifty Bank Index better because of higher volatility. But prudent risk management is very important. Notably, the return per unit risk of Financial Services Index, at 0.65 per cent is higher than 0.45 per cent of the Nifty Bank Index providing more safety.