The Sensex, which rose around 5 percent in November, has lost almost 2 percent so far in December due to weak global cues and uncertainty around the results of the five state elections currently underway, which are slated to be announced on Tuesday, December 11.
The results of state elections in Chhattisgarh, Madhya Pradesh and Rajasthan, where BJP is the incumbent political party, will be keenly watched by market participants.
Opinion polls suggest a win for BJP in Chhattisgarh, a loss for it in Rajasthan and a close contest in Madhya Pradesh. The market expects BJP to retain Chhattisgarh and Madhya Pradesh, but lose Rajasthan.
Kotak Institutional Equities said in a note that a 3-0 score for BJP may extend the market's current rally, whereas a 0-3 or 1-2 loss (Madhya Pradesh and Rajasthan) for it may result in a sharp correction.
The one thing that will certainly happen over the next couple of days is an increase in volatility. But there is a way you can make money from the wild swings.
“As a play on volatility, the trade is still difference gauged between current implied volatility and future realized volatility. If the implied volatility is higher, then sell both Call & Put with protection i.e. simultaneous longs in higher Call and lower Put. Otherwise, go long on options just for the event,” Shubham Agarwal, CEO and Head of Research at Quantsapp, told Moneycontrol.
“As far as the directional trade go, it makes sense to lock the trades with protection. Supremely high implied volatility structure does advocate selling options in conjunction with the existing trades but looking at the situation right now, that does not seem like a case,” he said.
If we take a look at the Gujarat and Karnataka elections, implied volatility was mostly in the 16–18 range on the upside and 11–13 range on the downside, with an average of 14.50-15.
Experts pointed out that following the announcements of almost all recent elections, the Nifty has moved 400-500 points in either direction.
“We have seen up to 500 point movement in the Nifty post the election outcome event, and investors who are risk averse and want to hedge their long positions can buy ATM put options of 10800 which is trading @ 174; however, loss in premium due to a fall in VOLATILITY cannot be ruled out,” Rajesh Palviya, Head Technical and Derivative Analyst, Axis Securities told Moneycontrol.
We have collated a list of different strategies that investors can deploy ahead of the announcement of results:
Analyst: Mazhar Mohammad, Chief Strategist – Technical Research & Trading Advisory, Chartviewindia.in
Strategy: Buy 10,450 put option along with 10900 call option
As we are heading for a binary event which is capable of influencing the near term trends, in both directions, investors should give priority to hedge their existing longs with some out of the money put options which will be little less expensive.
We advise traders to buy 10450 strike put option(LTP: 124) along with 10900 strike call option(LTP: 65) and to reduce the cost further they should sell 11000 strike call option(LTP:42).
If this strategy works out and Nifty registers a breakdown below 10450 then put option will be deeply in the money and 11000 call will be at nominal value and may expire worthlessly.
On positive news, outflow traders should be ready to instantly book loss from their put option as that will rule out sharp downsides and similarly on negative news flows traders should square off 10900 strike call option.
Analyst: Pushkaraj Sham Kanitkar, AVP - Technical Research at GEPL Capital
Strategy: Buy 10,500 PE around 80 and simultaneously sell 10,000 PE
The IndiaVIX, an indicator to the volatility in the markets (especially the option premiums), has reduced substantially by a good 18% (from 22 to 18) over last 5-6 weeks. This in a way, goes to show that the markets have in a way discounted the normal outcome of the elections. Only in an untoward outcome, would this scenario change.
We feel that the volatility would largely remain status quo & therefore a covered strategy would be the best to be implemented. We suggest investors to BUY 10500 PE around 80 and simultaneously SELL 10000 PE @ 20, hence the cost of the strategy will be 80-20=60 and the break-even would be 10440 on expiry basis.
In case of an untoward outcome, the strategy would give us a good profitability while keeping the losses limited in case of a normal outcome. Simultaneously, we do not expect Nifty to reach 11500 levels in the current month; hence, we also recommend selling 11500 CE.
Analyst: Amit Gupta, Head of Derivative at ICICIdirect.
Strategy: Short 10,400 put option at 60-65 and 11,200 call option at 40-45
Volatility has remained elevated ahead of the state election outcome. India volatility index (IndiaVIX) is still high near 20 percent despite the recent upmove seen in Nifty. The market participants have hedged their long positions by buying Put options.
We recommend a short volatility play as mean reversion will come into picture and volatility would find it tough to move further after the event. Hence, one can short 10400 Put at 60-65 and 11200 Call at 40-45. Total inflow is 100-110. Keep stop loss at 140 for total premium with a target of 10.
Analyst: Rajesh Palviya, Head Technical, and Derivative Analyst, Axis Securities
Strategy: Deploy Iron Condor
December expiry started last week with the Nifty rollover of 71 percent which was a bit lower than the previous expiry. The highest open interest on the call side is seen at 11000 strikes, with 30 Lacs shares, while on the put side it is at 10500 strikes, with 37 Lac shares of OI, indicating a broader range for the current expiry.
Against this backdrop, the strategy that can be initiated before the election to combat volatility will be Iron Condor. The objective of the strategy is to take advantage of fall in options’ implied volatility once the event is over.
In this strategy, we will be selling 10800 calls & 10800 put collecting a premium of 375 Rs and simultaneously we will also be buying 11300 call @ 23 & 10300 put @ 48 giving away premium of 71 Rs.
The maximum profit in the strategy will be at 10800 levels amounting to approximately Rs 23000 /- while the loss potential will be Rs 14500. Upper BEP for the strategy will give 11102 & lower BEP 10498.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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