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Last Updated : Jan 22, 2019 01:11 PM IST | Source: Moneycontrol.com

'Playing the market on Budget day is like taking the Kiki challenge'

A week before the budget, start watching sectoral movements. Zero in on liquid sectors (Nifty, Bank Nifty and Nifty IT as on date) that are witnessing voluminous buying with the rise in prices

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Sunil V Tinani

Playing the markets on the Budget day is like doing a Kiki dance alongside a moving, driverless truck. Either you’re crushed under the tyres, or arrested for being a menace to the society.

Yeah, Budget days are extremely dicey to initiate a trade. Check how the markets behaved on budget days up to 2017, and therein lies a tale of wars that were lost and of pyrrhic victories.

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You’d notice that 2018 is missing from the numbers below, and that’s because 2018 post-budget was a horror show.

unnamed

Post Budget day in 2018, the Sensex lost 800+ points intraday. The Nifty lost 250 points, and the resultant crash lit funeral fires beneath many portfolio holdings.

The carnage that followed in the midcaps in the months to come has given enough juice to make at least 7-8 sequels of The Evil Dead.

Fortunately, all that is behind us.

We are now in an election year and, naturally, a whole lot of goodies are expected from the budget.

What if these goodies are not announced?

But what if the goodies are announced and yet the fiscal deficit gets kayoed? Point is, we are uncertain as to what is contained in the Finance Minister's budget briefcase.

Therefore, to stay safe on Budget day trading, here are some pre-Budged days strategies that will help you stay profitable or financially unharmed on a fateful day:

CALL SPREADS IN INDICES

Informed analysts analyse massive volumes of data and place their short-term bets before the Budget.

Retail investors do not have access to such data and, therefore, the thing to do is to become street-smart and game the big boys.

Here’s what you should do:

A. A week before the budget, start watching sectoral movements. Here is a page that contains solid data that is updated live. You can track sectoral scan for reference here.

B. Zero in on liquid sectors (Nifty, Bank Nifty and Nifty IT as on date) that are witnessing voluminous buying with the rise in prices. In the case of illiquid sectors, work with stocks.

C. Buy a near-price call option and sell a far-price call option.

For example, if you witness buying in the banking sector, and if the spot price is 27,300, then buy a BNF 27,500CE for the nearest expiry and sell a BNF 27,700 CE for that same expiry.

D. If you see a bearish trend, buy a near-price put option and sell a far-price put option for the same expiry.

For example, if you witness selling in the banking sector, and if the spot price is 27,300, then buy a 27,100 PE for the nearest expiry and sell a 26,900 PE for the same expiry.

The number of lots you trade in depends on your trading style.

If the trade goes your way, you will pocket the difference in premiums. If it goes against you, you will lose the premium difference.

Either case, the loss or profit will be limited. You will get your fill of trading thrills and yet not lose megabucks. Most likely, you will gain because you have spotted the trend in advance. Remember to square both positions at the same time.

STOCK OPTIONS STRATEGY

This is a repeat of the strategy listed above except that it is played for individual stocks that are part of illiquid indices such as Nifty PSU Bank, Nifty Private Bank, and a few others.

You need to check trending sectors (as suggested above) and pick on stocks that are witnessing heavy volumes with the rise in price or stocks that are witnessing a fall in price accompanied by heavy volumes.

After shortlisting a couple of stocks, you should apply the same strategy as above.

For example, if you feel a stock is bullish, buy a near CE and sell a far CE. If you feel a stock is bearish, buy its near PE and sell a far PE (on the lines of the example mentioned above).

SECOND GUESSING THE BUDGET PROPOSALS:

It’s a no-brainer that in an election year, every FM showers goodies and subsidies on businesses that are not doing well.

Therefore, you need to make educated guesses about business sectors that are hurt by an economic slowdown and make educated guesses.

As on the date of writing this article, it is well known that the agriculture, exports, and the MSME sectors have been pummeled by the economic downturn.

The MSME sector stocks are typically listed on the SME boards of NSE and BSE and these are highly illiquid stocks. And you cannot be playing in illiquid stocks.

Therefore, relatively safe sectors to pick on this year seem to be agriculture and exports.

Guesstimates suggest that stocks such as Coromandel International, Chambal Fertilisers, GNFC, and RCF are examples of agro stocks that are likely to do well.

In exports, you can check out textiles because that is one area in which our neighbours (Bangladesh and Sri Lanka) have overtaken us. The government needs to do something to keep up to speed. Export companies like Trident, Welspun, etc., should benefit.

Now, before you invest on Budget day, know that the full impact of the Budget is analysed a day after and that analysis sets the trend for the market.

Going by the historical data, and experience, investing in stock on the budget day can be a bad idea. Therefore, short-term players should work with options, and medium and long-term investors should enter after the trend is set a day or two later.

NIFTY & BANK NIFTY LONG-STRANGLE OPTIONS STRATEGY

The Nifty and Bank Nifty swing wildly on Budget day and a 100-point swing happens in the usual course of business.

It makes solid sense to enter into a long-strangle trade for both these indices.

A long strangle implies buying equidistant out-of-the-money CEs and PEs and waiting for volatility on a budget day to swing the trade in your favour.

For example, if Nifty is 10,900 a day before the budget, you can buy an 11000 CE and a 10,800 PE and hope for massive volatility on budget day. Likewise for Bank Nifty, where you can buy CE and PE that is ±200 points from the spot price.

TECHNICAL SETUP FOR BUDGET DAY

There actually is no ideal technical setup for the budget day and it would be very risky to trade on lower time frames because trends can change with every announcement.

Still, here is set up on the 1-hour charts:

1. Draw pivot points—high and low of the previous day (Resistance-2 and Support-2), and high and low of the first 1 hour of the budget day (Resistance-1 and Support-1).

2. Add VWAP (Volume Weighted Moving Average)

3. Add volumes

4. Add 10-MA (Moving Average) to volumes

5. Now switch to a 30-minute period

Let us assume that January 18 is the budget day and plot this setup on the charts:

unnamed (2)

How to play the strategy:

Buy when the price on the 30-minute charts crosses above the VWAP so long as the volumes are above the 10-MA. This indicates a rise in price is accompanied by a rise in volumes (bullish).

Sell when the price on the 30-minute charts crosses below the VWAP so long as the volumes are above the 10-MA. This indicates the fall in price is accompanied by a rise in volumes (bearish).

Use the VWAP as the primary signal and the pivot points as confirmatory signals. So, if the price crosses above VWAP with the rise in volumes, it is a buy, and when it crosses Resistance 1, it is confirmation of the trend and then can work as the target level, and so on.

Despite this technical setup, my advice to you would be to stick to options spreads or strangles on budget day. Also, stay away from making investments on budget day. Understand the impact, watch the trend on the next day, and then buy.

Therefore, trade on the budget day by second-guessing the trend and sectors before the budget day, make your moves (options) a day in advance.

Now you can dance the Kiki.

Sunil V Tinani is a Chartered Accountant and Investor who has been investing in the equity markets since 1985. He operates BullBull.in, a blog that guides investors through the dense stock market jungle. Twitter: @TheBullBull.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his 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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First Published on Jan 22, 2019 01:11 pm
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