General Budget will be presented by Finance Minister P Chindbram on 28 Feb.Budget is one of the most awaited events from stock market perceptive.We see Nifty trading in wide range of almost 150+ points and volatile moves will be seen. As most of retail investor will prefer trading the Option Route to trade ( They should not trade but still they cannot resist the temptation of not trading 😉 ). 28 Feb also being an Expiry day will add more to Volatility.
The above depicts the Voaltality and Range Expansion Nifty has witnesed in past 6 Budget session.Just by going at the sheer number its looks mind boggling. So Stop Losses are must for traders on Budget day. Traders who are weak heart and cannot digest the bout of volatility you are going to witness just stay away from market.
So Following Option Strategy can be used to play the Budget day:
A long straddle is the best of both worlds, since the Call Options gives you profit if Nifty goes up and the Put Options gives you Profit if Nifty goes down at a particular strike price . But those rights don’t come cheap, because as the Budget day come nearer Implied Volatility of Nifty Options will rise which in turn will increase the price of Options. As soon as the event is over the IV will come down drastically and there will be huge fall in Option Premium.
The goal is to profit if the stock moves in either direction. Typically, a straddle will be constructed with the call and put at-the-money ie. Suppose Nifty is trading at 5810 so trader will eye on 5800 Call and 5800 Put . Buying both a call and a put increases the cost of your position, especially for a volatile stock. So you’ll need a fairly significant price swing just to break even.
By having long positions in both call and put options, straddles can achieve large profits no matter which way the underlying stock price heads, provided the move is strong enough.
- Price of Underlying – Strike Price of Long Call – Net Premium Paid
- Strike Price of Long Put – Price of Underlying – Net Premium Paid
- Max Loss = Net Premium Paid + Commissions Paid
- Max Loss Occurs When Price of Underlying = Strike Price of Long Call/Put
- Upper Breakeven Point = Strike Price of Long Call + Net Premium Paid
- Lower Breakeven Point = Strike Price of Long Put – Net Premium Paid
Lets discuss with an Example
Suppose Nifty is trading at 5807 tommrow Opening. An options trader enters a long straddle by buying a Feb 5800 PE for Rs 37 and a Feb 5800 CE for Rs 45. The net debit for the trader is 82+ Commissions (37+45), This is the maximum loss for the trader.
Nifty is trading at 5600 on expiration in Feb, the Feb 5800 Call will expire worthless but the Feb 5800 Put expires in the money and has an intrinsic value of Rs 200. Subtracting the initial debit of 82, the long straddle trader’s profit comes to Rs 112.
On expiration in Feb if Nifty is still trading at 5800, both the Feb 5800 put and the Feb 5800 call expire worthless and the long straddle trader suffers a maximum loss which is equal to the initial debit of Rs 82 taken to enter the trade.
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