Budget 2023: Trading opportunities, three rules to follow, according to Manu Bhatia

Manu Bhatia learnt the importance of position sizing in 2019 Budget. (Illustration: Suneesh Kalarickal)

Budget Day can be tricky for a trader. It offers opportunities, but with the volatility that can strike during the finance minister’s speech, there is high risk too.

In an interview with Moneycontrol, veteran trader Manu Bhatia shares how he strategises for Budget Day. Edited excerpts:

What are the trading opportunities around Union Budget Day?

Markets will not give a very big move a day before the budget because of the uncertainty (of what will unfold). Generally, we will not get a directional move on the previous day and there are no real trading opportunities from an options perspective.

Budget Day itself can be divided into two parts. During the first half, till the speech starts, we generally see the market moving in both directions. So, there is an opportunity to trade non-directional strategies, short volatility trades such as straddles or strangles. In the second half, after the speech and after all the information is out, then there is a trending move (and there are opportunities for directional trades).

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What about the day after the budget?

This time, the budget speech will be on a Wednesday so there will be a good premium decay. So, there will be two things at play. One, as we move closer to the expiry in any week, the theta decay (the value of options coming down over time) usually intensifies. Second, post the event, the VIX or volatility also crashes, so that will accelerate the decay in the premium. So that will be good for a delta-neutral strategy like a straddle or a strangle.

Also, if there is a good trending move on Budget Day and it (index) closes at one percent or more for the day, then it opens with a gap in that direction. So, if there is a nice good green candle seen on a chart, there is an opportunity to do BTST (buy today, sell tomorrow) trade.

Which sectors generally offer the most opportunities on Budget Day?

I look mostly at the indices. Going stock specific does not work for me because then you have to focus on multiple sectors and within that multiple stocks. Also, stocks are very volatile and slippages are high on Budget Day, so I think it is better to stick to indices on that day.

Which indices are more sensitive and therefore give a clearer directional move in the second half of Budget Day?

Generally, Bank Nifty gives a better trending move because it is based on one sector only. So, if there is an announcement related to banks, then you either get an up or down move. On the other hand, the Nifty is based on multiple sectors, so if there is good news in one sector and the sentiment is bullish but there is bad news in another sector causing a not-so-bullish trend there, then the two cancel each other out (and you don’t get a definitive trend).

How do you strategise for Budget Day?

There are a few dos and don’ts. I usually avoid trading if I don’t have a concrete plan in place, which includes the level at which I would take the trade and the risk management in terms of the position sizing, stop-loss and so on. This is because it will be extremely difficult to make trading decisions during market hours on Budget Day. I try to plan it in a manner that all the possible outcomes (from budget announcements) are covered and I just have to react to that (the outcomes).

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You have all these ready on the system and, according to the announcements, you fire them. Is that the strategy?

Yes. Two things that are really important are the time when the speech starts and the time when the speech is about to end. I do not respond to specific announcements but would generally wait till there are a few minutes for the speech to end. Towards the end of the speech is when you see the maximum decay and you want to trail your profits.

After the speech is done and the event converts into information, then it ends (the trading opportunity is over because everyone has that information). I also avoid trading in stock (options) because the volatility there will be much higher than what you would see in the indices. The more the volatility, the more difficult it will be to take decisions during a live market session.

In dos, always have a risk-management plan on how much capital you are willing to let go. For me, it is generally between 1-1.5 percent on Budget Day.

So overall, go with and stick to a plan, have risk management in place, and avoid stocks.

Did you make any mistakes on previous Budget Days and what did you learn from them?

In 2019, I did not get the position sizing right. I realised that instead of risking 1 percent of the capital, I was risking 3-4 percent of the capital. Though I did not end up in a loss that time, from then on I made sure that I had the position sizing in place.

Also, on such days, premiums are elevated because of event expectations. Therefore, I would not recommend taking the same position sizing that you take generally on other days. It is better to bring it down. I bring my position sizing down by 30 percent on Budget Day.