Indian Election – Possible Option strategies

  • Stock Market Analysis
  • Editors Pick

Indian Election – Possible Option strategies

General elections for the biggest democracy of the world has begun with 2 phases already over. I have no political leaning and hoping that best party/candidates are elected to propel India to next phase of growth and prosperity for all its citizens.
I am an option trader. Any big event like election has significant opportunity for big profit or big loss. The effort of option trader is to minimize loss probability and maximize profit probability. I am attempting to do same in this article.
There are only 2 options – either BJP gets massive mandate or it does not cross majority on its own.

Scenario-1: BJP getting massive majority, market will cheer it with bump in market indexes. However, since BJP win is factored in by market, the upside may be limited to 5% to 10%. Thus to benefit from this, one possible strategy is to Buy a OTM call and sell farther OTM call. The payoff chart for this strategy is as follows:

 
Scenario-2: This scenario assumes BJP does not get majority on its own. It may not matter much to market if this is coalition government or opposition government. In either case, market tanks significantly. While I have no logical level here buy by going what happened in 2004, it could be 15-20% downside. One possible strategy for this event could be buying an OTM put and selling even farther put. The payoff chart for this would be as follows:

If you look at risk-reward of the two scenarios, it is clear that market is betting on scenario-1. Nifty option chain confirms that trades are happening for both scenarios. What if you don’t want to guess? Here is payoff chart if you get into both strategies:

 
Who is right will be known on 4th June. Till then happy guessing and possibly investing for profit.
Disclaimer: I am not SEBI certified/registered. This article is to initiate discussion on option strategy for the event, which interests me as Option Trader. Please do not take positions based on this article. Pls consult your financial advisor for any market investment.
Author is retired CXO of a multinational. Dabbles in Option trading for self besides business consulting and running an e-com venture.

Drop an image here or Supported formats: *.jpg, *.png, *.gif up to 5mb

Error: File type not supported

Drop an image here or

100

Related Articles