Union Budget for the financial year 2018-19 will be presented by the Finance Minister on February 01, 2018.
Budget days generally see bigger movements of Index compared to other days. Market reacts to each and every announcement as the news flow comes in and then decides the final direction. Sometime the impact continues for few days and at other time it fizzles out and markets are back to doing their own things.
For traders, specially Option Traders such volatility has serious implications.
High Premiums: As the traders expect higher volatility on budget day and a trend to emerge and continue as a result of the budget presentation, the option premiums are higher than usual. This is additional cost for the option buyers.
The volatility will decline after the event and a significant part of the premium would be lost.
Option buyer would need a sustained move in one direction to make a profit.
Whipsaw Effect : Markets can move both ways in a fast move. That would make option prices hit highs and low quite a few times during the day. There is a chance of stop loss getting hit in both directions before the market decides on the final direction.
Let us look at what happened on previous Budget Days.
February 28, 2015 ( Saturday ) :
The budget was presented on the last day of February 2015. After lot of deliberations it was decided to keep the markets open for trading on Saturday.
NIFTY opened at 8913, went to a low of 8751 , touched a high of 8941 before ending the day at 8901.
A difference of 190 points between the high and low.
Four days later on March 04, 2015, NIFTY touched the then all time high of 9119 and went into decline from the same day. That decline continued almost till the budget day of the year 2016.
February 29, 2016 ( Monday ) :
Like I said earlier, it was all downhill for the markets after the budget in 2015.
On the Budget day on February 2016, NIFTY opened at 7050 and as the presentation began, it tanked to a low of 6825. Then recovered smartly to end the day at 6987, lower than the open but significantly higher than the lowest point.
Since that day, markets have been in a one way up move with only occasional breather.
February 01, 2017 :
From year 2017, the date was changed to first day of February.
The markets had recovered almost the entire one year decline of previous year and the strong trend continued.
There was a very slight dip and NIFTY closed near the high at 8716. The difference between low and high was about 185 points.
Remember , we were at 8901 on budget day in 2015.
In essence, in two years markets went nowhere.
Now the Budget 2018 :
We closed at 11069 on Friday, January 25, 2018.
Budget is exactly 7 days away.
From last year, we are already 2353 points higher ( 26.9% ).
Looking at the past trend, we should be expecting around 200-250 points move between high and low on the day.
Trading for Budget Volatility :
Such moves in a day can hurt the trades.
Already it is noticed that premiums are high.
NIFTY 11000 CALL is at Rs. 235 and 11100 PUT at 221 for February 22 Expiry.
To go for a STRADDLE at 11000 or 11100 would become a costly proposition and unless there is a big move, there may be nothing to gain.
I would go for BUY 11000 CALL @ 235 and SELL 1 Lot of 11100 Call at 182 and 1 Lot of 11400 call at 70.
This combination would give a cash flow of Rs. 17 at setup.
If NIFTY goes down below 11000, nothing is lost.
If it moves to 11500, it becomes a losing trade. I shall exit as and when NIFTY touches 11400.
Same thing can be done through PUTS also.
I would BUY 11100 PUT @ 221 and SELL 11000 and 10700 PUTS at 178 and 86 respectively.
Cash flow at setup is Rs. 45.
If NIFTY stays above 11100, I lose nothing and get to keep Rs. 45.
Loss starts below 10600. I plan to exit before NIFTY hits 10600 if it takes that direction.
With both the setups in place, if NIFTY stays in the range 10700 to 11400, there is a sure gain of Rs. 100 plus the gain at setup of Rs. 17 and Rs. 45 making it a total of Rs. 162.
Or I cut my losses and run when it goes to either 11400 or 10700.
On budget day, it would be a safe trade.
Disclaimer: The data is from NSE website as of January 25, 2018. This example is an explanation of strategy for safe trade in uncertain market and should not be taken as investment/ trading advice to trade in Futures and Options . Seek advice from certified professional advisers before taking investment/trading decisions.
Comments
B January 29, 2018 at 6:54 pm
this shit called ration spread.
Replynothing new.
admin January 30, 2018 at 4:14 pm
Thanks for expressing your insights in a colorful language.
ReplyI never stated it was something new. People who read here have varying knowledge of the option terminology and hence the elaborate answer. The post was about trading the budget volatility safely and not about naming the option strategies which can be found in any standard book or other web resources.
Once again, thanks for your comment.
Venkat January 30, 2018 at 6:32 pm
Hi sir
Premiums have changed now… any revised suggestion for entering on 31st Jan?
ReplyLAKSHMINARASIMA R January 30, 2018 at 8:17 pm
Sir thank you very much for sharing your thoughts on budget 2018 option strategy. Am already a student of yours by keenly reading your thoughts expressed in simple way in quora from past few months.
With regards
ReplyLakshminarasima R
Mdazhar January 30, 2018 at 8:37 pm
Great strategy. Does margins requirement increase to Sell Call/Put on budget day ?
ReplyVenkat January 31, 2018 at 2:14 pm
Important update – Margin requirements for Budget day 2018
The announcement of the Union Budget 2018 is scheduled for Thursday, February 1, 2018. In anticipation of the increased volatility, intraday leverage for the MIS product type will be lower than usual for Equity, F&O, and Currency segments.
Intraday margins for the Commodity segment will remain the same. While the budget session is live, bracket (BO) and cover (CO) orders will not be available. Margin requirements will reset to normal as soon as the volatility subsides.
Please ensure you maintain adequate margins throughout the day to ensure your positions do not get squared off. Check the margin requirements on the Zerodha Margin Calculator: https://zerodha.com/margin-calculator/. Keep track of all the live updates here.
ReplyVijay January 31, 2018 at 10:50 am
Sir,
ReplyI had asked in another mail also for guidance on avoiding the pitfalls of losses in Call & Put prices simultaneously, i.e. CALL also went into loss along with Put in Banknifty and Maruti. I was slightly trading on OTM strategy. Yet, the Put also gave losses.
Please give your valuable advice on that or some strategy to be profitable (of course, presently my budget cannot support the Sell strategies i.e. credit strategies. Will have to manage with buying Call & Put trades.
Regards.
admin January 31, 2018 at 11:01 am
Dear Vijay,
ReplyOption buyers are helpless in such situations. Just wait for the volatility to return due to whatever reasons. That is why this post was written. Volatility goes down after the event like results in case of Maruti.
Chirag Patel January 31, 2018 at 8:48 pm
Thanks for you valuable insights….I tried this startegy in the past with put options (ofcourse after learning from one your article in quora) and had fair sucess….its good….low risk strategy…we just need to make sure we close positiion if nifty crossed the 2nd short position…..otherwise everything remains fair……….its good to learn practical trades from you…..Thanks….
ReplyKallol Bhowmick February 6, 2018 at 11:27 pm
Dear Sir,
ReplyHad been reading your blog and Quora answers for quite some time. For Volatility on nifty, u can have it from India VIX. But for volitility on different stock options , how will you determine it ? Implied Volatility ?? If so how will u determine if the IV at that point for the strike is more or less ??
Regards,
Kallol
Bharat February 11, 2018 at 1:12 am
Dear pramod sir can we use this option strategy when market will stable also
Replyadmin February 18, 2018 at 12:36 pm
Dear Bharat,
This strategy works best in stable market conditions. Basically it is about gaining time decay premium from the two sold options and giving up in one ( In the Money option ) where time premium is low.
Regards
Replydev June 2, 2018 at 11:53 am
sir
Replyis it always better to square off in profit at slightly otm option or let it be exercised on expiry day?
in later case there are losses as
-stt will be much higher (.125% of underlying price..)
-it can expire worthless_
-slight ITM can generate less profit then the previous case
admin June 2, 2018 at 12:54 pm
Dear Dev,
I think you will get your answer if you read my recent answers. One does not make money by booking small profits though they look good when we take them. Ultimately big losses wipe them out. Yes, we know that Options can expire worthless. I get my money from those which come into the money. Because of booking small profits only Option Buyers seldom end up in profits.
Thanks for reading.
Reply