Budget Day can provide a great opportunity for option sellers, who can profit from the change in volatility over the first and second halves of the day. Saketh Ramakrishna, founding partner of Optionables Fintech, shares with Moneycontrol the strategy they have been following for the past few years. Edited excerpts from the interview.
Which day usually gives more trading opportunities around the budget? The day before, on the day or the day after?
Being an option seller, it will definitely be on the budget day. On the budget day, after the speech is over, the IV (implied volatility) of the options start to crash. Historically, on the day, the market moves 2.6-2.7 percent on average. That daily volatility starts to come down (after the speech) and along with that the option premiums start to drop drastically. Therefore, as an option seller, Budget Day gives a great opportunity.
Could you explain your strategy?
Ahead of the budget, because there is so much uncertainty, the premium of options would have gone up. Therefore, the premiums won’t decay much the day before the budget. On the day of the budget, in the morning, if you do a short straddle or a short strangle, then the premiums of the options you have shorted will decay a lot (by evening after the speech) because the IV will crash. (Then you reverse the positions and pocket the difference.) The premiums start to drop by around 11.30-12 noon.
For example, if you have shorted (or sold) a 40,000 Bank Nifty call option at Rs 300 and shorted a put option at Rs 300 at 9.30 am, by 1.30 or 2 pm, after the speech is done and assuming that the market is trading at around 40,000 itself, then your short straddle premium would have crashed to around Rs 180 each. When you are buying the options back at Rs 180 each, you have made around Rs 120 in profit. Therefore, you get a very good opportunity to make money in case the market remains in the range of 200 to 300 points.
What is the risk associated with it?
It is all good if the market does not move much. But the real problem happens if there is a 1,000-point or 1,500-point move in the Bank Nifty. If the underlying has fallen or risen by such a range, then the premium for either the put or the call option will shoot up. In the example, you are only covered for a 600-point move. If the Bank Nifty moves in any direction by more than the 600 points, then (the risk isn’t covered). I am not going to make money.
How do you manage this risk?
You can simply place a stop-loss for both the call and put options at 50 percent higher than the premium. In the above example, the stop-loss would be at Rs 450. If one of the options goes and hits the stop-loss at Rs 450, then most likely, with theta and vega (ratios that measure the action of time and volatility on optin premiums) acting on the options, the other option will be trading at Rs 100 or Rs 90. Therefore, you would have lost Rs 150 on the first option and made around Rs 200 or Rs 210 in the second option and net you would have made a gain of around 60 points (Rs 60).
We have been following this strategy now for the past three or four budgets. We start creating short straddles in the Bank Nifty during the budget speech at various points—9.30, 10.30, 11.30 and 12.30—and put a plain stop-loss at 50 percent higher. If there is a positive announcement and there is a jump, then we take a short straddle, if another announcement causes a dip, then we take another short straddle and so on (whenever there is a spike in volatility). Once the budget is over, theta and vega will crush premiums across the option chain.
What is the approximate return you make from this strategy?
We have been using this for two years now and this will be the third year. On an average, this has given us 1-1.5 percent on Budget Day alone.
Also watch: How to read the Budget| Fiscal deficits, revenue expenditure and receipts explained
Are there any mistakes you have made on Day? What are the lessons you have learnt?
There were missed opportunities, for example, in capturing the big moves. The week after the 2021 budget, the Bank Nifty went up by nearly 7 percent. It was a great opportunity to catch the trend and make a killing. But with this strategy (the one described above) your profit is also limited (you can’t ride the trend). Even then (after the 2021 budget), it was clear to us that the market is going up and that it had broken important levels, but because we are non-directional traders, we could not participate in that.
Did you think of changing your strategy then?
We are comfortable doing non-directional trading, with straddles and strangles. You do feel bad about missing an opportunity but it is better not to trade something you don’t know. For example, if we had entered it (directional trade) and something had gone wrong, then we may not know how to manage it. So it is better to stick to your strengths.
Maybe there is a scope for working on our directional trade. We could start small, gain confidence in that and then build on that.
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