Option Trading Strategy for Union Budget 2015

By | February 21, 2015

Indian Union Budget will be presented on 28 Feb 2015 , and as discussed in previous post Nifty remains in a wide range so there is  an opportunity to trade in Nifty Options  And the opportunity could turn out to be quite promising.

Which will be market direction post budget we do not know so its  best we take a position that is completely independent of the direction of the market and possibly make money out of it.

Though we dont have an idea of the direction, historically, the maximum change in Nifty from the budget date to the next expiry date is quite decent in either direction. So, we can fairly assume that the move post budget is going to be big as it always is. So lets discuss the Option Strategy

Long Straddle strategy

A long straddle strategy is when you buy a Put Option and a Call Option of the same expiry and at the same strike. 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 😉 ).Yeah, offcourse, there could be a loss. There is nothing called ‘100% probability of profit’ in stock market. But, definitely we can identify strategies with bear minimum losses and with a good potential of profit.

Budget Range

 

The above depicts the Voaltality and Range Expansion Nifty has witnessed in past 18 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 9000 so trader will eye on 9100 Call and 9100 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.

 

Long straddle options are unlimited profit, limited risk (Risk of Losing the whole capital if proper Stoploss are not maintained)  options trading strategies that are used when the options trader thinks that the underlying securities will experience significant volatility in the near term.

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.

Profit Calculation:

  • Price of Underlying – Strike Price of Long Call – Net Premium Paid
  • Strike Price of Long Put – Price of Underlying – Net Premium Paid

Loss Calculation:

  • Max Loss = Net Premium Paid + Commissions Paid
  • Max Loss Occurs When Price of Underlying = Strike Price of Long Call/Put

Breakeven Points

  • 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 9000 . An options trader enters a long straddle by buying a March 9100 PE  for Rs 120 and a March 9000 CE for Rs 160. The net debit for the trader is 280+ Commissions (120 +160 ), This is the maximum loss for the trader per lot. The position will be profitable if Nifty changes by more than 4% at expiry date.

  • Nifty is trading at 8700 on expiration in March, the March 9100 Call will expire worthless but the March 9100 Put  expires in the money and has an intrinsic value of Rs 400 . Subtracting the initial debit of  280, the long straddle trader’s profit comes to Rs 120.

 

  • Nifty is trading at 9400 on expiration in March, the March 9100 Call will expire in the money and has an intrinsic value of Rs 300  but the March 9100 Put expire worthless . Subtracting the initial debit of  280, the long straddle trader’s profit comes to Rs 20.

 

  • On expiration in March if Nifty is still trading at 9000, both the March 9100 put and the March 9100 call expire worthless and the long straddle trader suffers a maximum loss which is equal to the initial debit of Rs 280 taken to enter the trade.

For a traders their is no Thumb rule that he need to keep position till Expiry even before expiry if trader is seeing profit in the position can exit the trade.

Trade with  only 1-2% of your trading capital with this strategy, Protection of Capital is most important for Trader.

 

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18 thoughts on “Option Trading Strategy for Union Budget 2015

  1. sayyed

    Hi
    bramesh,
    I m visiting ur blog since may 2014…
    great analysis…
    M option hedger & advisor..

  2. Ravi

    Grate job Barmeshji…….. Knowledge and experience only give………..:)

  3. Chandan Chatterjee

    Dear Bramesh, i think the position should be entered one day before if possible as you said the same day implied volatility will be greater and so the premium would be costly.

  4. Bramesh Post author

    I just discussed the most simple strategy which retail traders can use.

    There are many strategies which can be used and applied.

    Do proper back testing and apply with proper risk management.

    Rgds,
    Bramesh

  5. mohitjain

    Batmesh ji we can sort nifty nd buying call 9100 so we can save puts prem nd put sl on nifty above 9000 breckout (spotlabel) thish expiry looking below 8900 whats view of you

  6. Bramesh Post author

    Try 1 day before Budget or on Budget day..

    Rgds,
    Bramesh

  7. Abdul

    Hi bramesh, when can I enter for long straddle for march expiry…on 27th Feb or on the budget itself….

  8. Bramesh Post author

    Dear Prakashji,

    There are many strategies which can be applied, Please backtest it see result and apply.

    Rgds,
    Bramesh

  9. prakash tanak

    Sir,

    I have 1 more question on this topic.

    When should one buy the March expiry options for adopting your budget strategy?

    Should they be bought on the budget day itself or should they be bought earlier beginning from Monday?

    I liked your following statements.

    1. 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 😉

    2. Traders who are weak heart and cannot digest the bout of volatility you are going to witness just stay away from market.

    I have also made an academic note of your following statements.

    1. 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.

    2. As soon as the event is over the IV will come down drastically and there will be huge fall in Option Premium.

    3. Risk of Losing the whole capital if proper Stoploss are not maintained

    4. For a traders their is no Thumb rule that he need to keep position till Expiry even before expiry if trader is seeing profit in the position can exit the trade.

    The cherry on Ice-cream was your warning of

    “Trade with only 1-2% of your trading capital with this strategy, Protection of Capital is most important for Trader.”

    You are simply great, doing a yeomen service to investors / traders.

    All your articles are worth printing and preserving. Keep it up.

    Regards.

  10. prakash tanak

    Sir,

    How about Long Strangle Strategy by those who have comparatively lesser budget? Your views please.

    Both CE and PE will be OTM

    Upper BEP = CE Strike Price + Total Premium paid

    Lower BEP = PE Strike Price – Total Premium paid

    This strategy will also make profit when price rises above Upper BEP or falls below Lower BEP exponentially.

    Reward will be unlimited and risk will be limited to the extent of premium paid.

    Risk of loss is when the price gets locked in between upper & lower BEP

    I agree that this loss zone will be broader as compared to Long Straddle Strategy.

    Please review.

    Regards.

  11. bhalchandrabhuskute

    Good learning Bramesh. Please keep educating us. Bhalchandra

  12. Vijay

    Thanks Brameshjee,
    I am learning a lot from blogs. Have been a keen waiter for your articles.
    I too had a thought on straddle. I was thinking to book out profit @ 25% each on both sides. Going by last budget day data, 7600 CE+PE has given 25% on both sides intraday. This time it is 1st day of series and so we can wait for whole month for 25% returns. Please advice.

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