If BJP were to retain 2 out of 3 Hindi heartland states where it is in direct competition with the Congress, market would heave a sigh of relief and be range bound.
It looks like it will be a close contest between the ruling party BJP and the biggest opposition party, Congress, when the results for the five state elections will be announced on Tuesday.
Ahead of the results, India VIX fell 3.70 percent to close at 18.59 levels on December 7. It has risen from 18.22 recorded on December 3. Higher VIX suggests more volatile swing in the market in next coming sessions.
The S&P BSE Sensex and the Nifty50 plunged below crucial support levels in trade on December 10 and exit polls suggested a tight finish between the BJP and the Congress which might not go down well with markets, suggest experts.
A loss of BJP will not push markets into a tailspin but will limit further upside. If the opposition gains ground in key states such as Madhya Pradesh, Rajasthan as well as Chhattisgarh it might hit investor sentiment.
“If BJP were to retain 2 out of 3 Hindi heartland states where it is in direct competition with the Congress, the market would heave a sigh of relief and be range bound. However, if BJP were to emerge victories only in 1 of those 3 states then it would inject a sense of uncertainty in the run-up to the general elections due in April-May 2018,” Ajay Bodke, CEO - PMS, Prabhudas Lilladher told Moneycontrol.
“The possibility of a largish correction is still looming. However, the Indian market is unlikely to breach its recent low of 10,100 due to the dramatic plunge in global crude oil prices and improvement in macros,” he said.
On the options front, maximum Put OI is placed at 10,000 followed by 10,200 strikes, while the maximum Call OI is seen at 11,000 followed by 11,500 strikes. Options band signifies a broader trading range between 10,550 and 10,850.
Most of the exit polls suggest that Congress is likely to make a comeback or at least give a tough fight to the ruling party, BJP, in Chhattisgarh, Rajasthan as well as Madhya Pradesh. The other two states, Mizoram and Telangana, are not material to the markets.
But, following exit polls blindly is also dangerous because there have been instances when they went not just off the mark but totally wrong. Hence, the outcome of the exit polls should be taken with a pinch of salt.
However, what it will certainly do is make markets volatile on Monday and on Tuesday when the actual results are scheduled to be declared. The next big question is, ‘what should investors do now’?
Well, the most straight and safe answer is avoid trading and if in case you have already placed your bets according to what you think could be the outcome and how it will play out in markets, buying put options to safeguard your portfolio can also be done, suggest experts.
“Ideally, for a situation like this when ahead of the event we have seen a big uptick from the recent lows. Anything bought can be held on to with a protection buying. Considering a negative outcome, the impact of risk premia on the buyer of the Puts post-event, be ready for a knock of about a couple of percent,” Shubham Agarwal, CEO & Head of Research at Quantsapp Private Limited told Moneycontrol.
“This limits the downside as with if not more (looking at the preceding move) the odds remain equal for either side, hence if there is upside volatility, it seldom gives chance to buy into,” he said.
Amit Gupta, Head of Derivative at ICICIdirect told Moneycontrol that history suggests that since 2016, Volatility has found it tough to move above 25 percent levels. Hence, we don’t recommend buying further Put options now in case you have bought before.
“In fact, post the event as volatility is expected to decline one can sell the options after that to capture the decline in option premiums,” he said.
Foreign investors have pulled put close to Rs 400 crore from the Indian stock market in the last five trading sessions amid weakness in global equities due to the arrest of a high-profile Chinese executive.
This comes following a net inflow of over Rs 6,900 crore in the equity market by Foreign Portfolio Investors (FPIs) on easing crude oil prices and a strengthening rupee.
It looks like FIIs are also moving cautiously ahead of the event, but not negative which suggests that the possibility of a big downside remain limited.
In the derivatives market, FIIs added 21,000 short Index Futures, 9,000 long Index PE and 19,000 short Stocks Futures contracts on Friday, AceEquity data showed. “Nifty DEC added 14247 contracts in Open Interest today, Banknifty DEC continued to shed OI with reduction of 8,375 contracts.
“Since last 10 days, FIIs have been a buyer in the INDEX FUTURES & INDEX OPTIONS segment amounting to 5174 crs & 8072 crs respectively, which indicates that FIIs have taken a hedge position ahead of not only election results but also against upcoming global events,” Rajesh palviya, Head Technical, and Derivative Analyst, Axis Securities told Moneycontrol.
Gupta of ICICIdirect said that FIIs who were absent in the previous months have started buying in both Debt and Equity markets as the rupee move has stabilized. “They have bought close to Rs. 14500 cr. in both Debt and Equity segments. This points towards some optimism before the event,” he said.
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