Nifty has ended January on a flat note but with a Doji candle on the monthly timescale, signalling confusion at higher levels. On Budget day today, which coincides with weekly derivative expiry for Nifty, option premiums will be high considering higher anticipated volatility.

Option traders would do well to note that VIX usually rises in the fortnight ahead of Budget, with last year seeing a 66% rise during the same period, only to see a steep fall in VIX, post Budget, Anand James of Geojit said.

We reached out to traders to understand what options traders should do on Budget day:

Jatin Gedia, Sharekhan

Options Strategy – Short Iron Fly
Buy 1 lot – 22000 CE – 28
Buy 1 Lot – 21500 PE – 64

Sell 1 Lot – 21750 CE – 91
Sell 1 Lot – 21750 PE – 175

All the options are for 1st Feb, 2024 Expiry

Also Read | How has Sensex performed on Budget days? Take a look at history

We recommend the Short Iron Fly strategy for the Budget session. Overall, we expect Nifty to expire around 21750 and hence we have suggested this non-directional strategy. The maximum profit potential of this strategy is 8700 (if the Nifty expires at 21750) and the max loss is capped at 3800 which makes it a risk-reward (1:2) favourable strategy. The hedges (buy legs of CE and PE) shall help to mitigate the intraday volatility. The breakeven for this strategy is 21484 and 22016 and hence as long as the Nifty expires within this range the strategy is likely to be profitable.

Deven Mehata, Choice Broking
Trading options on the budget day presents inherent risks, especially for option writers, with anticipated significant spikes in premiums, particularly in indices like Bank Nifty and Nifty. The volatility reflected by INDIA VIX currently at 16.05 levels, is a key factor impacting option premiums. Further movements in INDIA VIX may lead to increased premiums, affecting option writers negatively but potentially benefiting option buyers if market movements align favourably.

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Conversely, a cooling off of INDIA VIX could result in a drastic reduction in option premiums. Additionally, the coinciding weekly expiry of Nifty options on the budget day, where out-of-the-money options can approach zero value towards market closing, poses a risk for option buyers, potentially leading to losses.

Mitigating risks in such a dynamic market involves employing hedge strategies, especially for option buyers. Strategies like Bull Call Spread for bullish positions, Bear Put Spread for bearish views, and Iron Condor for neutral/sideways expectations, and Butterfly for varied market conditions can provide a structured approach to navigate the uncertainties associated with budget day trading. These strategies aim to balance risk and reward, offering a more nuanced and prudent approach to option trading amid the heightened volatility and market unpredictability on budget day.

Puneet Sharma, CEO of Whitespace Alpha
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.

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One can consider taking a PE butterfly position centred at 200 or 250 points below Nifty50 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 200 if both hit. This is a nominal risk-reward pay off 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 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: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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