Indian Stock markets have witnessed high volatility during most Union Budget announcements in the last 10 years.With High volatility, comes risks and opportunities. In this article we will discuss popular Option Strategies traders adopt and how can one manage risks better while maximizing returns.
What are the various Option Strategies to play the Budget?
Long Straddle Strategy : A long straddle is an options strategy that involves purchasing both a long call and a long put on the same underlying and same strike price.We have explained in Details here. The risk is that the market may not react strongly enough to the event or the news it generates. The premium paid becomes your risk.
Short Straddle with Hedge : Traders can short ATM CE AND PE and Hedge with OTM CE and PE. Suppose Nifty opens at 17300 so Traders can short 17300 CE and PE and Hedge with 17800 CE and 16800 PE. For Bank Nifty use 1000 away as an Hedge.
Futures with Hedge traders benefit from 1 delta i.e. increase in futures prices as the price of underlying However, futures trading come with a higher downside risk. One of the simpler ways to hedge Futures contract is with Long options. Suppose you expect markets to rally on budget day. If you go long in Nifty and buy a Nifty Put option 300 Points away from Futures entry price, your position is hedged and your maximum loss will be the strike of put option and price at which you went long in Futures. The margin requirement also comes down significantly. It reduces from nearly Rs 1.1 lacs to Rs 42k and downside becomes limited. If you go Short in Nifty and buy a Nifty CALL option.
Unless you are an expert, it is wise to keep yourself away from the markets.Most of the traders end up losing a lot of money when trading on the budget day. Even when one can expect some good movement in the market with the positive news surrounding the budget 2022, just one bad news can make the markets move against you. So, do your own research while trading on the big day