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.