As we step into the first week of February, all attention is on the interim budget slated to be announced on the 1st. Traders are often enticed to take positions before the budget. Yet, the recent volatility signals inherent risks that one must heed before engaging in pre-budget trades.
For derivatives traders looking to position themselves ahead of the Budget, here are some key do's and dont's to avoid being caught on the wrong foot:
Keep track of volatility while making strategies: Tina Gadodia
“An iron butterfly, or calendar spread, or put ratio back spread is an ideal safeguard against negative outcomes,” says Tina Gadodia of Quantsapp.
“Going into the budget, I would advise traders to hedge positions. The first recommendation is to avoid trading events. It's not something to be played out for, considering the high volatility. India VIX, for instance, was around 15.5, a few days back, and it came back to 13. These spikes are expected as we move towards the election period,” said Gadodia.
“If someone still wants to trade, an iron butterfly or calendar spread is recommended. However, these strategies should be executed in a limited manner. Normally, people who take positions for the budget are well aware of the event. They hedge positions or implement hedge strategies, like the put ratio back spread, which was popular in earlier budgets. This strategy safeguards against negative outcomes and protects the portfolio," she said.
Gadodia highlights that a prudent trader rarely takes a naked position during budget day. These events are known well in advance, and traders who take positions are aware of the risks. They look for opportunities and use the information to their advantage.
"Look at the implied volatility. It plays a crucial role in determining which type of strategy to use. For example, if the implied volatility of the Nifty is around 15 -15.5, an iron butterfly can be considered. If someone wants to hedge a portfolio, a put ratio back spread can be useful. This strategy involves selling one ATM put and buying two OTM puts. Since the budget is on the first of February and the expiry is on the 29th, the time decay doesn't impact the strategy much. Institutions and HNIs (high net-worth individuals) and those holding large portfolios, prefer using a put ratio back spread to hedge themselves for this event," she added.
Avoid taking over-leveraged positions, Stick to large-cap stocks: Avdhut Bagkar
"It is advisable to avoid taking over-leveraged positions to evade the uncertain volatility that is expected on budget day. Such occasions in the past have dented the confidence levels when resilient swings are noted," Avdhut Bagkar, Derivatives and Technical analyst, StoxBox, said.
“Large-cap stocks are better suited to mitigate risks during volatile sessions and recoup any losses during the following days. While their beta is in correlation with the index momentum, the underlying positive bias aids in making sound decisions,” he said.
Enter during the last hour of the market
Bagkar suggests taking entries during the last hour of the market as it would clear the clouds and provide an insight into the impact of the budget. One can expect the formation of major levels that could dictate the next course of action.
Option writers need to look at proper risk management: Chandan Taparia
“Volatile swings could be seen, so it is better to trade in option strategies. Option writers need to look at proper risk management. Long positions can be hedged for the time being. One can focus on a strong selective sector to generate alpha,” said Chandan Taparia, Vice President and Head of Derivative Research, Motilal Oswal Financial Services.
Avoid naked option writing: Soni Patnaik of JM Financial
Remain hedged with strategies, such as a bear put strategy. Avoid naked option writing as the budget day is a big event and can see volatile swings. Negative triggers could witness one-sided movements, Soni Patnaik, Assistant Vice President, Derivatives Research, at JM Financial, said.
Refrain from aggressive directional strategies: Sameet Chavan, Angel One
Considering the recent developments, it is advisable to refrain from adopting any aggressive directional strategies. A prudent approach would involve implementing a bear put spread in Nifty, which is a moderately bearish strategy with capped potential profit and loss, advises Sameeet Chavan, head, research, technical and derivatives, Angel One Ltd, said.
Also Read: Budget 2024: Pre-budget avoid aggressive directional strategies, says Chavan of Angel One
Trade with discipline, take calculated risks: Shilpa Rout, Prabhudas Lilladher
Budget day, particularly, has always been a day with very high expectations, and we have mostly witnessed very wild swings. So, intra-day traders and small investment players should avoid risks on the particular day. Trading with discipline is the key, so working with a calculated risk appetite is important. Do not pre-empt any trade or listen to any random picks from unauthorised sources. Do your own research before taking positions, advises Rout.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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