As we know , before a major event like the budget release, the markets often experience increased volatility and uncertainty. Traders expect significant price movements but aren’t sure of the direction. This makes certain neutral options strategies particularly effective, as they are designed to profit from either volatility or directional moves, depending on the trader’s view.
Here are few strategies that can be used
1. Long Straddle
- When to Use: If you expect high volatility but are unsure of the direction of the market move.
- How It Works:
- Buy a Call Option and a Put Option at the same strike price (At-The-Money or near ATM).
- The profit occurs if the price moves significantly in either direction.
- Risk: Limited to the total premium paid.
- Reward: Unlimited if the market makes a big move.
Example:
- Nifty is trading at 18,000.
- Buy 1 ATM Call Option (strike 18,000) and 1 ATM Put Option (strike 18,000).
- If the market moves significantly above or below 18,000 after the budget, you profit.
2. Long Strangle
- When to Use: Similar to a straddle but slightly cheaper, for when you expect high volatility but want to reduce upfront costs.
- How It Works:
- Buy a Call Option and a Put Option at different strike prices (OTM options).
- This strategy profits from significant moves in either direction.
- Risk: Limited to the total premium paid (cheaper than a straddle).
- Reward: Unlimited with a big move.
Example:
- Nifty is at 18,000.
- Buy a Call at 18,200 and a Put at 17,800.
- If the market crosses either level significantly, you profit.
Iron Condor
- When to Use: If you expect low volatility and believe the market will remain range-bound.
- How It Works:
- Sell an OTM Call and an OTM Put.
- Buy a further OTM Call and Put for protection.
- This strategy profits if the market stays within the range between the sold strikes.
- Risk: Limited.
- Reward: Limited but consistent.
Example:
- Nifty is at 18,000.
- Sell Call at 18,200 and Put at 17,800.
- Buy Call at 18,400 and Put at 17,600.
- If Nifty stays between 17,800 and 18,200, you keep the premium.
4. Calendar Spread
- When to Use: If you expect a rise in volatility closer to the budget day.
- How It Works:
- Sell a near-term option (low implied volatility) and buy a long-term option (high implied volatility).
- Profits from an increase in implied volatility of the longer-dated option.
- Risk: Limited.
- Reward: Limited.
Which Strategy to Choose?
- High Volatility Expected (Uncertain Direction):
- Long Straddle or Long Strangle.
- Low Volatility Expected (Range-bound Market):
- Iron Condor or Iron Butterfly.
- Volatility to Rise Near Budget Day:
- Calendar Spread.
whatever strategy one chooses, do not enter the position with naked position or without strict stop loss, one can face significant volatility on Budget day. Experts suggest it better to trade when market cools down and after the Budget is announced and volatility is reduced.
Note:This blog is just for education purposes , there is no buy or sell recommendation. Trade/invest at your own risk.
