Budget 2024: Implied volatility expected to rise; Trader recommends calendar spread strategy

On july 18, India Vix was trading at 14.44 percent.

Indian benchmark indices are trading higher and hitting new record highs amid volatility on July 18. Ahead of the Union Budget, the Nifty is trading near the 24,800-mark, indicating continued bullish momentum.

According to Santosh Pasi, a derivatives trader, the market is expected to see heightened volatility as the budget nears. He recommends a Double Calendar Spread strategy for traders positioning for the budget:

"This strategy is to take advantage of increasing volatility. We will be taking the trade now and booking it before the announcement of the budget," said Pasi.

Strategy Recommended by Pasi: Double Calendar Spread
Short Call 24700 for July 25
Long Call 24700 for August 29
Short Put 24400 for July 25
Long Put 24400 for August 29
Maximum Loss Risk: Around Rs 11,500

In case volatility increases, the maximum profit potential will increase and vice-versa.

Also read: Dos and Don’ts for traders to protect from big losses on Budget day

A Double Calendar Spread is an options trading strategy designed to profit from an expected increase in volatility. It involves simultaneously entering two calendar spreads: one using call options and one using put options. The trader sells a near-term call and put option at the same strike prices while buying longer-term call and put options at the same strike prices. This strategy aims to take advantage of time decay differences between the short-term and long-term options, with the potential for increased profitability if market volatility rises. The risk is limited to the net premium paid, while potential profits increase with higher volatility.

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