Indian Union Budget will be presented on 29 Feb 2016 , and as discussed in previous post Nifty remains in a wide range so there is an opportunity to trade in Nifty Options And the opportunity could turn out to be quite promising.
Which will be market direction post budget we do not know so its best we take a position that is completely independent of the direction of the market and possibly make money out of it.
Though we don’t have an idea of the direction, historically, the maximum change in Nifty from the budget date to the next expiry date is quite decent in either direction. So, we can fairly assume that the move post budget is going to be big as it always is. So lets discuss the Option Strategy
Long Straddle strategy
A long straddle strategy is when you buy a Put Option and a Call Option of the same expiry and at the same strike. As most of retail investor will prefer trading the Option Route to trade ( They should not trade but still they cannot resist the temptation of not trading ).Yeah, offcourse, there could be a loss. There is nothing called ‘100% probability of profit’ in stock market. But, definitely we can identify strategies with bear minimum losses and with a good potential of profit.
The above depicts the Vitality and Range Expansion Nifty has witnessed in past 18 Budget session.Just by going at the sheer number its looks mind boggling. So Stop Losses are must for traders on Budget day. Traders who are weak heart and cannot digest the bout of volatility you are going to witness just stay away from market.
So Following Option Strategy can be used to play the Budget day:
A long straddle is the best of both worlds, since the Call Options gives you profit if Nifty goes up and the Put Options gives you Profit if Nifty goes down at a particular strike price . But those rights don’t come cheap, because as the Budget day come nearer Implied Volatility of Nifty Options will rise which in turn will increase the price of Options.
As soon as the event is over the IV will come down drastically and there will be huge fall in Option Premium.
The goal is to profit if the stock moves in either direction. Typically, a straddle will be constructed with the call and put at-the-money ie. Suppose Nifty is trading at 7000 so trader will eye on 7100 Call and 7100 Put . Buying both a call and a put increases the cost of your position, especially for a volatile stock. So you’ll need a fairly significant price swing just to break even.
By having long positions in both call and put options, straddles can achieve large profits no matter which way the underlying stock price heads, provided the move is strong enough.
Profit Calculation:
- Price of Underlying – Strike Price of Long Call – Net Premium Paid
- Strike Price of Long Put – Price of Underlying – Net Premium Paid
Loss Calculation:
- Max Loss = Net Premium Paid + Commissions Paid
- Max Loss Occurs When Price of Underlying = Strike Price of Long Call/Put
Breakeven Points
- Upper Breakeven Point = Strike Price of Long Call + Net Premium Paid
- Lower Breakeven Point = Strike Price of Long Put – Net Premium Paid
Lets discuss with an Example
Suppose Nifty is trading at 7000 . An options trader enters a long straddle by buying a March 7100 PE for Rs 185 and a March 7100 CE for Rs 146. The net debit for the trader is 331+ Commissions (185 +146 ), This is the maximum loss for the trader per lot. The position will be profitable if Nifty changes by more than 5% at expiry date.
- Nifty is trading at 6700 on expiration in March, the March 7100 Call will expire worthless but the March 7100 Put expires in the money and has an intrinsic value of Rs 400 . Subtracting the initial debit of 280, the long straddle trader’s profit comes to Rs 69, thats a profit of 20% on capital employed.
- Nifty is trading at 7450 on expiration in March, the March 7100 Call will expire in the money and has an intrinsic value of Rs 350 but the March 7100 Put expire worthless . Subtracting the initial debit of 331, the long straddle trader’s profit comes to Rs 19.
- On expiration in March if Nifty is still trading at 7100, both the March 7100 put and the March 7100 call expire worthless and the long straddle trader suffers a maximum loss which is equal to the initial debit of Rs 331 taken to enter the trade.
For a traders their is no Thumb rule that he need to keep position till Expiry even before expiry if trader is seeing profit in the position can exit the trade.As IV’s of PE is very high so once Budget speech is over, traders can build position at that point of time.
sold strangle of Nifty 7200 CE and 6800 pe to capture heightened volatility.. Shall square off same day
GOOD JAMWAL ! IN ADDITION TO STRANGLE I COMBINE LONG OF 7800 call and 6200 put AS INSURANCE
Here I beg to differ this time. The IVs are not going to crash by that much this time as this is a long expiry on 31st March and we will still be in Februrary month on budget day. OTM options might not give you much returns but ITM options will still give good returns. VIX may not drop below 20 as we are in a massively volatile global situation with Europe going up 2-3% and DOW still closing in red. We have too many events lined up even after budget like gyan sangam on banks with RBI, China & G20 outcomes. So options selling if not done properly could backfire this time. My view only. A different perspective.
THanks all for sharing their views.. Will update blog readers..
Index option premium will decrese after bgt day.. so take sufficient care of your money. call put buyers must take trade on next day of major event. Coz on major event day premiums will be black market prise. Call put writers are king of market. Wait for direction of mkt after event day then take trade.
Great input Sir! What is your thought on Option Writing.
You said “As IV’s of PE is very high so once Budget speech is over, traders can build position at that point of time.”
Do you mean high IV shows the direction of market? Please guide.
Make your trade with 7800 call and 6200 put. U will get min loss and max.profit. Don’t go for short term profit trade.
So, this is what happens on event-driven days: Nifty 7000 call and put are quoting at 177 each. With the spike in Nifty intraday, the put option falls by at least 50% and the call would hardly make an upmove. And when Nifty falls, calls die. The day would end with a total call and put premium of, say, 250 (from 354). Who loses? Option buyers.
Please wait out the news. Build your positions only EOD.
All the best!
Thank you. I think a strangle will work better here. Buying out of the money put and call as nifty will likely make a 5% move post the budget. My bias is still down but you never know.
A better strategy is to short nifty one lot and buy 7500CE at 25 (1000 qty),if it increases u will get profit,if it decreases there is no profit/loss…assuming nifty will go 200 points up/down.
MOST IMPORTANT POINT OF THIS ARTICLE IS : “Trade with only 1-2% of your trading capital with this strategy”
TRADING ON BUDGET DAY IS WALKING ON FIRE.
ENTER ONLY IF U HAVE DISCIPLINE AS FIRE JACKET
THANKS BRAMESHJI FOR THE ARTICLE THAT INSISTS ON CAPITAL PROTECTION.
Thanks sir