What is the best trading strategy for around the election results?

I guess it is obvious that there will be quite a bit of volatility, but what is the best way to play it?

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It depends on volatility.There are multiple ways to play election results depending on your risk appetite.But the most popular strategy is to buy a straddle.Since last 2 elections options buyers have made a killing.This time already options are pricing 10% move.So buying a straddle might not be a profitable trade this time.

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My guess is this: 

1. Using INDIA VIX, the limitation would be that we have only 3 weekly contracts. Since the counting is going to start only May 16, any position on VIX anticipating this event  can be taken only from last week of April onwards (3 weeks before May 16). VIX usually trades between 13 to 30, presently around 21 for March last week and 27 for April 2nd week, but definitely when the May 3rd week contract opens for trading the last week of April, the value would be on the higher end of this range. 

During the 2009 elections(no data for 2004 elections), value of VIX shot up from around 35 to almost 60, when the markets went circuit up on the results day. 

If you are able to buy VIX around 30 anytime from the last week of April until the election results, it will be a decent trade expecting volatility in the markets. 

2. Using Options, the safe way to play it out would be by being long options - both calls and puts, either long straddle or strangle. The idea is to be able to make money, if market move sharply upwards or downwards after the results. 

But here is the tricky thing, most people are factoring in atleast a 10% move either ways after the result, so if you are putting up any strategy based on long volatility (feel that volatility will go up), do it only if you expect the markets to move up/down by more than atleast 10%. 

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I am thinking of following two strategy on the assumption that volatility is very high and selling option is more Profitable.

  1. Bear call strategy : sell 7100 call and to contain risk buy 7200 call. It is unlikely for nifty to cross 7000 and if it crosses I am putting a limit on my loss at 7200. Profil is limited to the premium received.

  2. Bull put strategy: sell 5900 put and buy 5800 put. Chances that market will not break below 5900. If it breaks I have contained my risk at 5800.

  3. Establish simultaneous call and put backspread : this is another form of straddle. You think that market will explode in either direction. You also know that volatility is very high and option has priced in the move. You still want to participate but at a lower cost.

In this strategy you sell 1 ATM call (6700 call) and buy 2 OTM call at 6800. similarly you sell 1 ATM put at 6700 and buy 2 OTM put at 6600. You are net long and still with less cost.

Caution: check all scenarios, risks and margins before initiating a trade. Know everything before you put a trigger.

if NDA forms government, NIFTY might move between 5-10%. This move might not be sufficient to make profit. But stocks from particular segments like Infra, Bank, PSU and Power would make a rally due to the reform plans.

On the other hand, if third party gains majority, market fall will be unstoppable. I am expecting 30% downwards movement and that is sufficient for me to make profit.

I would buy ATM and nearest OTM calls of below stocks for which Option Premiums are comparatively low and has a good potential to rally if NDA forms the government:

NTPC
Coal India
IDFC
Bharti Airtel
Hindalco
BHEL
SBI

‚ÄčSource:http://www.fiis.in/trading-strategy-election-2014-india-strategy/‚Äč

Margin for VIX 1 lot is 5lks, any other way to play this?

what if the Vix falls prior to election results ? Didn’t it happen during Infy results 2 quarters back ?

By VIX you mean the VIX futures or the underlying index?both are not behaving in sync of late… :slight_smile: But an event like election, hmm the only way VIX will fall will most likely be when there is complete consensus on who is going to come to power with the exit polls.

Dude…can you kindly elobrote on how a 5-10% move on Nifty is not sufficient to make a profit?

Hi Karthik,
I am not sure what is the strategy you follow…but rally in individual stocks will be more than NIFTY. If NDA forms government, Rupee appreciates which is not good for IT companies. IT stocks may drag NIFTY…so individual stocks from bank,infra,power,consumer goods would perform better than NIFTY.

What you said is true boss. But tell me one thing. If Nifty moved 5-10 percent, how can you not make money! I think you can easily double your money buying out of the money options. Good luck

Look at the top gainers today :slight_smile: