Indian Union Budget will be presented on 01 Feb 2018 , and as discussed in previous post Nifty and Bank 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.
The above depicts the Volatility and Range Expansion Nifty has witnessed in past 21 Budget session and Bank Nifty is past 11 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 having small capital till 5 lakhs and cannot digest the bout of volatility you are going to witness just stay away from market for Budget day. I know its difficult to control your emotions not to trade on such volatile day but if your caught on wrong side of trade you can lose big chunk of your capital in matter of minutes.
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 8600 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.
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 11000 . An options trader enters a long straddle by buying a Feb 11000 PE for Rs 150 and a Feb 11000 CE for Rs 250. The net debit for the trader is 400+ Commissions (150 +250 ), 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 10500 on expiration in Feb, the Feb 11000 Call will expire worthless but the Feb 11000 Put expires in the money and has an intrinsic value of Rs 500 . Subtracting the initial debit of 400, the long straddle trader’s profit comes to Rs 100.
- Nifty is trading at 11700 on expiration in Feb, the Feb 11700 Call will expire in the money and has an intrinsic value of Rs 700 but the Feb 11000 Put expire worthless . Subtracting the initial debit of 400, the long straddle trader’s profit comes to Rs 400.
- On expiration in Feb if Nifty is still trading at 11000, both the Feb 11000 put and the Feb 11000 call expire worthless and the long straddle trader suffers a maximum loss which is equal to the initial debit of Rs 400 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.
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Thanks a lot
Ur given best advise to option trades, thank you sir.
Thanks for your information.
VIX is dropped by 9%. Still it is profitable. Don’t think so, straddle will give profit.
instead of a straddle a long strangle 200points wouold be better right?
for a trade setup of 1-2 days..including the budget day
Hi sir. I am trying this strategy since so many on important days like elections results, budget etc… but due to vix drop always ended up with minor losses. Now I understand straddle is better than strangle. But one question sir, taking positions before or after budget announcement? Which is more safer?
if taken before budget exit as soon as budget is over as VIX will drop very fast
superb sir
thanks
Thanks for detailed explanation. You are a great teacher. And nobody teaches without fees. You are exclusive.
thanks a lot !!!