How smart money trades before the Budget: Shubham Agarwal

Market

• January markets volatile from quarterly results and upcoming Union Budget.
• Option prices surge pre-budget; long straddle could gain from volatility.
• Avoid short straddles, late buys; prefer short-term trades for safety.

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January stands apart as the most intriguing month for traders. Two forces shape the market during this period: quarterly results and the Union Budget tabled on February 1. After New Year, Foreign Institutional Investors start positioning themselves ahead of the budget.

Traders at every level begin placing their bets on policy decisions, armed with whatever knowledge or information they possess. The timing of these positions varies wildly. It depends on your experience and how well you read participant behavior before budget season.

During January, market trends blur. Indices and stocks throw fake breakouts. Whispers of budget policies create optimism about various sectors, triggering strong sector rotation. Money flows from one sector to another, creating sharp rallies in stocks but weak follow-throughs. Most of the time, the market remains range-bound.

The question becomes: how do you trade this chaos?

In January, option prices turn expensive. Consider this example. On January 1st, 2025, weekly ATM options (both Call and Put) with 9 days to expiry traded at Rs 200-220. Near budget time, January 28th, 2025, similar weekly ATM options with 9 days to expiry jumped to Rs 350-360. This expensive nature stems from higher expected volatility. Market participants anticipate larger moves due to budget policy decisions. Retail traders buy both Calls and Puts, creating huge demand. As demand rises, options become costlier than normal.

So what should you do?

Price movements turn erratic before the budget. But one thing stays clear: option prices become expensive (Volatility increases). You can benefit from this by going long straddle, buying an ATM Call and Put. This works in your favor if options become expensive (volatility rises) or if the market makes a bigger directional move.

What's the risk? You cannot predict exactly when options will become expensive. You need to analyze past data to figure out the probable timing. The biggest risk is daily option price decay, also known as theta decay. The longer you stay in the trade, the more premium erodes. If you don't get the volatility rise within 3 days, take the loss and exit, or keep a suitable stop loss.

For directional traders, stick to short-term trades. Book profits whenever they appear. Don't expect big positional moves.

What not to do?

Avoid pure short straddles and strangles in January. These strategies carry unlimited risk potential, especially when options are expensive. The second rookie mistake: buying an ATM Call and Put 1 or 2 days before the budget, hoping for a huge move on budget day. By that time, options have already peaked in price or sit near peak levels. Straddle buying at this stage produces negative outcomes most of the time.

Here's the key insight: smart money doesn't try to forecast the market or predict policy decisions during budget time. Instead, they observe patterns. They watch how retail traders behave, how positioning builds up, and how volatility evolves through the month. From these observations, they build consistent, repeatable strategies. They don't gamble on outcomes. They bet on behavior.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.