If you study the way implied volatility behaves before an event you will figure out that IV always run up in anticipation of an event, thus making the calls and puts very expensive. IV tend to fall just after the event unfolds.
One classic example I can think of is Infy's IV shooting up before their results are announcement..if I'm not wrong, IV goes upto 55-60%. They always run up and drop like a ball just after the results are announced (to their avg volatility of about 30%)
As and when the IV drops, the premium also drops. Now based on the outcome of the result - lets say great results were announced, the premiums on puts tend to fall faster than the raise in the call premiums.
So the answer is yes, IV tend to go up before an event...but the pace at which it accelarates decreases as and when the event approaches...but most certainly drops after the event unfolds. You can expect the same during the Lok Sabha election results day.
A great way to trade this would be adopt short volatility strategies...something like a short straddle or a strangle.
This is the VIX histoical chart below from the time of inception, 2008 onwards. Around the elections in 2009, VIX spiked to almost 80, I am sure it would have been the same in 2004 when we hit downward circuit after election results.
We are at around 32 today, but if market behaves any way like it did last 2 elections, 32 might seem very less in hindsight :).
My guess is that when 20th MAY VIX contract opens on 29th April, it will most likely quote upwards of the 40 range as the results are on 16th May and would fall under this weekly VIX contract
It is a very tricky time to be trading around elections, thing to remember is that it is never too high or too low, markets won't really be behaving according to logic.. :)
The best way to play is to be safe, even if you are planning to short volatility by say shorting at the money calls and puts, make sure to buy deep OTM calls and puts even if they are costing a bomb, to ensure that the risk is covered.
We all know that IVs fall AFTER the event, but, here, I am talking abt. PRIOR TO EVENT itself.
If we see India Vix chart, it seems to have risen very fast in last 10 days. Frankly, I did not expect such a fast rise to 30+ levels in such short time. This makes me wonder if IV.s will drop PRIOR to LS Results announcement, and trap all the ppl. who are holding LONG OPTIONS, After results, there can be a Volatility crunch as well.
Infy results were better than expectation this time, but Call Premium increased faster than decrease in Put Premium. This is contrary to your statement above. Can you justify?
