Bidirectional trading strategies for interim budget 2024

Authored by Puneet Sharma, CEO of Whitespace Alpha, where he recommends bidirectional strategies to take advantage of volatility in the market.

Indian equity markets have had a phenomenal bull run since the last budget, with NIFTY 50, Mid-Cap 100 and Small-Cap 100 indices gaining about 20 per cent, 53 per cent and 61 per cent, respectively till 25 January 2024. Unsurprisingly, days leading up to the budget see higher volatility and significantly large intra-day movement on budget day. For example, last year on February 1, the markets saw an intra-day move of more than 3.5 per cent for Nifty 50, and even higher for the other indices.

With the Vote on Account budget scheduled before the national elections later this year, things could get a little more interesting, come budget day on February 1, which is also the weekly expiry of NIFTY 50 options. Bank Nifty expires one day prior on January 31.

In our view, volatility and speculative trading before the budget announcement should not impact long-term investment decisions for investors. With national elections expected to take place in the month of May, the market may look at factoring a return of the current BJP-led government, given recent state election results. As such, we expect the current market rally to continue post-budget as well.

However, if you are trading intra-day or taking positions in the derivatives market, you should consider stopping losses at reasonable distances such that they provide sufficient protection, while at the same time not so close that they are triggered by the exaggerated intra-day movements.

For option traders, option premiums will be high considering higher anticipated volatility. Traders can consider direction-agnostic strategies such as butterflies, long strangles/straddles or iron condors to have a higher chance of profiting from the volatility.

For example, one can consider taking a PE butterfly position centred at 200 or 250 points below NIFTY 50 with 100-point gaps for the wings and a CE butterfly position at a similar distance above the market price. The price of this butterfly with 4 days to go for expiry is just Rs 7. Taking a position both ways on this would cost Rs 14 with a potential upside of making RS 100 on expiry day if one position hits or even an extreme figure of close to RS 200 if both hit. This is a nominal risk-reward payoff of 1:7 going up to 1:14.

What must be noted is the ability to close these trades even without waiting for expiry at 3.30 pm on February 1, if they hit in the interim at a smaller profit. Traders may note that strategies like these come with max risk reward predefined and also have much lower margin requirements given that the position is essentially market neutral.

Disclaimer: The opinions expressed above are personal and may not reflect the views of DSIJ.