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Options strategies for the upcoming budget
8 min read | Updated on July 22, 2024, 09:51 IST
SUMMARY
Historical data shows mixed reactions on Budget Day, with the NIFTY50 averaging a 0.3% return. Market participants anticipate sharp swings ahead of the Union Budget announcement on July 23, followed by the expiry of futures and options contracts on July 25. Strategic options trading can help navigate potential market volatility.
Budget 2024: NIFTY and BANK NIFTY strategies for July 23
The financial markets are driven by news, and when major news events occur, the markets will take notice. When a company announces its financial results each quarter or if there is a change in interest rates, index and stock prices will likely move. This is no different with the Union Budget. As information that impacts various sectors is released, investors and traders will adjust their portfolios to account for potential future increased (or decreased) opportunities.
While you can’t predict the future price moves of an index or stock, you can still look to historical data to better understand the general trends of what occurs during a certain type of news event. With this information, you can then plan ahead to determine how to best position yourself if those trends occur.
Historical view
NIFTY: past 10 years (incl Interim)
| 1D Prior | Budget Day | 1D Post | 3D Post | 5D Post | |
|---|---|---|---|---|---|
| Average | 0.30% | 0.35% | 0.27% | 0.95% | 0.89% |
| Median | 0.16% | -0.11% | 0.30% | 0.91% | 0.53% |
| 3rd Quart | 1.06% | 0.83% | 0.83% | 2.08% | 2.02% |
| 1st Quart | -0.53% | -0.35% | -0.38% | -0.39% | -1.66% |
BANK NIFTY: past 10 years (incl Interim)
| 1D Prior | Budget Day | 1D Post | 3D Post | 5D Post | |
|---|---|---|---|---|---|
| Average | 0.86% | 0.94% | 0.31% | 1.36% | 1.28% |
| Median | 0.67% | 0.21% | 0.38% | 0.95% | 0.95% |
| 3rd Quart | 1.48% | 1.69% | 1.74% | 2.59% | 3.42% |
| 1st Quart | 0.37% | -0.62% | -0.98% | -0.45% | -2.60% |
While many of the returns over the last few years have been positive surrounding the budget day, they haven’t always been favourable. We also looked at what occurred on budget days in July following a presidential election for the past 20 years. In the table below, you can see that the returns on the budget day were -2.58% for the Nifty and -3.27% for the Bank Nifty. This is substantially lower than when you look across all Union Budget days. Of course, the data below only includes 4 post-election budget days and isn’t a large sample.
Last four July month budgets post-election
| 1D Prior | Budget Day | 1D Post | 3D Post | 5D Post | |
|---|---|---|---|---|---|
| Nifty 50 | 0.51% | -2.58% | -0.10% | -0.96% | -1.11% |
| Bank Nifty | 0.56% | -3.27% | -0.84% | -1.14% | -0.78% |
Potential option strategies
Now that you understand what has happened in the past, you can use that information to develop an options trading hypothesis. Based on this past information, recent market movements, and your assumptions of how the budget will impact the macroeconomic environment, do you think the markets will be bullish or bearish in the short term? If you are uncertain of the direction and simply believe that the markets will be volatile, do you think that option strategies focused on volatility are underpriced or overpriced? Let’s walkthrough a few examples.
You are bullish on the markets
As an options trader, if you believe that the NIFTY will rise by 0.97% or the BANK NIFTY will rise by 1.06% through their expiry dates, then these could be potential trades. The reason for the slight difference in break even points is due to different levels of implied volatility between the two indices. The implied volatility (IV) for the NIFTY call is 18.5%, while the IV for the BANK NIFTY call is 23%.
You are bearish on the markets
Since the NIFTY closed at 24530.90 on 19 July, the Nifty would need to fall by 1.01% to 24282.05 by the Thursday expiry in order to breakeven on this trade. Similarly, the BANK NIFTY closed at 52265.60 on Friday. This index would need to be at 51656.65 on expiry, which is a decrease of 1.17%, in order to breakeven. If the BANK NIFTY is below this price point on expiry, then you will be profitable.
You believe the markets will be volatile
Conclusion
In summary, events like the Union Budget often move the markets. With options, traders can potentially profit from any market condition whether it is up, down, or sideways. While we have presented historical data, always remember, historical returns aren’t predictive of future returns. Before starting any new trading strategy, ensure that you consider the risks and have an appropriate loss mitigation plan.
Derivatives trading must be done only by traders who fully understand the risks associated with them and strictly apply risk mechanisms like stop-losses. The information is only for educational purposes. We do not recommend any particular stock, securities and strategies for trading. The stock names mentioned in this article are purely to show how to do analysis. Take your own decision before investing.
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