With exit polls predicting a comfortable win for the BJP-led NDA coalition, markets are likely to see heavy activity on Monday. Still, the verdict is not a given, and traders will need to position themselves for any unexpected development.
Nandish Shah, Senior Derivative and Technical analyst at HDFC Securities shares his strategies on how to position trades on election result day, considering various scenarios: What if BJP-NDA fails to form government, wins 320-360 seats; If it wins more than 400 seats:
Trading Plan for Monday by Shah:
SCENARIO 1: IF BJP LED NDA GETS MORE THAN 400 SEATS
Nandish’s view: Expect market to shoot-up as market is not expecting NDA to get 400 seats or more. The simplest thing to do is to buy a Nifty Call. Due to uncertainty of the election outcome, many traders prefer to use options to express their view. Moreover though India VIX has risen to 25 odd levels during last few days, it is still lower than 2019(26%), 2014 (32%) and 2009(51%).Therefore we suggest plain vanilla strategy of buying a call option.
Strategy BUY NIFTY 23000 CALL AT Rs 240 (06-June Expiry)
Leg 1 : Buy NIFTY 06-June Expiry 23000 CALL at Rs 240
Total cost of the Strategy Rs 240 points(Rs 6000 per strategy)
Breakeven Point : 23240
Maximum Profit : Undefined (Unlimited on the upside)
Maximum loss : Rs 6000 per lot at 23000 or below Nifty level on Expiry
PAY OFF CHART
SCENARIO 2: IF BJP LED NDA GETS AROUND 320-380 SEATS
Shah’s views: This scenario is widely expected by market participants. Markets will react positively as uncertainty would be out of the way, but gains will be limited. Post the expected outcome, implied volatilities are likely to fall. Here we suggest the long butterfly spread strategy.
A long butterfly spread with calls is a three-leg strategy created by buying one call at a lower strike price, selling two calls with a higher strike price and buying one call with an even higher strike price.
STRATEGY : LONG BUTTERFLY SPREAD STRATEGY: NIFTY
Leg 1 : Buy 1 Lot NIFTY 06-June Expiry 22500 call at Rs 485
Leg 2 : Sell 2 Lot NIFTY 06-June Expiry 23000 call at Rs 240.
Leg 3 : Buy 1 Lot NIFTY 06-June Expiry 23500 call at Rs 115.
Max Profit Rs 9500 if Nifty closes at 23000 on 06-June Expiry.
Maximum loss of Rs 3000 if Nifty closes at or below 22500 or if Nifty closes at or above 23500
Breakeven point: 22620 and 23380
Risk Reward Ratio: 1:3.17
PAYOFF CHART
SCENARIO 3: IF NDA FAILS TO FORM GOVERNMENT
Shah’s views: Unexpected outcome for the markets. Expect a steep declined accompanied by rise in implied volatilities. Here the simplest thing to do is to buy a Nifty Put.
STRATEGY : BUY NIFTY 22200 PUT AT Rs 275
Leg 1 : Buy NIFTY 06-June Expiry 22200 Put at Rs 275
Total cost of the Strategy Rs 275 points(Rs 6875 per strategy)
Breakeven Point : 21925
Maximum Profit : Undefined(Unlimited on the downside)
Maximum loss : Rs 6875 per lot, for Nifty > 22200 on 06-June expiry.
PAYOFF CHART
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