Budget 2024 Trading Strategy: The Union Budget for FY25 will be presented by the Finance Minister Nirmala Sitharaman on February 1. Being a vote on account ahead of the general elections this year, the government is unlikely to announce any major policy reforms in the interim budget.
Dalal Street analysts also do not anticipate any major impact of the interim budget on the stock markets. However, volatility is expected to persist and the benchmark equity indices Sensex and Nifty 50 are likely to give some trading opportunities to traders and investors.
Historically, the Indian stock market has remained volatile on Union Budget announcement days. Nifty 50 movement has ranged between 2-3% on intraday basis, in 10 out of the last 12 instances.
Sujit Modi, CIO at Share.Market Research (PhonePe Wealth Broking), shares his views on how traders can make profits with a simple plain vanilla strategy on the budget day.
In the past, India VIX index has mostly risen in markets leading up to the budget day and subsequently crashed during the budget speech.
Hence, he believes rather than playing on delta (taking directional strategy), strategies on vega (volatility) crush seem to be more profitable.
To test the above hypothesis, Modi said, they tried various strategies such as shorting Straddle, Strangle, Iron Fly, Iron Condor, Ratio Spreads, Ratio Back Spreads, Butterflies, Batman, Jade Lizard, etc.
“The strategy is entered at 9:30 am and exited at 3:25 pm with no adjustments in between. The strike selection for all the legs is dynamically selected based on the combined premium on the short and the long legs, i.e. side with a higher premium has lower exposure and with a lower premium has higher exposure, having risk management implicitly built in the process,” Modi said.
The result showed both Short Iron Fly and Short Iron Condor proved profitable maximum times, 11 out of 12 instances.
“The maximum profit per lot earned in Short Iron Fly was in 2018 ( ₹1,700 per lot) and in Short Iron Condor was in 2022 ( ₹650 per lot). 2021 was an outlier event when Nifty 50 moved 4.74%. However, even in such a massive movement, the maximum loss was limited to ₹5,300 per lot in Short Iron Fly and ₹3,050 per lot in Short Iron Condor strategies, due to strategic hedge placed on Out of Money (OTM) wings, as long positions,” he added.
Overall, the analyst feels that short Iron Condor or Short Iron Fly is a good way of playing vega exposure on the Budget day.
