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Optionalysis: Budget Day Option Strategies


Optionalysis: Budget Day Option Strategies

Before the Budget madness, let’s take a quick look at option strategies. Strangely, implied volatility is VERY low, with the VIX at 18.18 (election time saw it go up to 40).


August Options Strangle/Straddle?

Look at the implied volatility curve for August options: (Note: Not July, but August!)

Optionalysis: Budget Day Option Strategies

At 7500, we see the volatility is lower on the puts – substantially so, at 15%. This is even after two down days, when the IVs should have shot up!

15% is low relative to the rest.

There is an opportunity of a long 7500-7700 strangle (long 7500 put and 7700 call) which will cost Rs. 272 in total, but the decent amount of time left ensures that losses are low if the market doesn’t move. However, this needs to be exited soon, as after Friday the weekend will eat up a lot of time value. We’ll attempt to do this today in our account before the budget.

The other opportunity is to believe the market will not go up – meaning, there’s money to be made in the puts – so we could build a unbalanced strangle. (Two 7500 puts and one 7700 call, for example).

We looked at various short butterflies, like the 7500-7600-7700 (short one call, long two, short one) but the profits they show are of the order of Rs. 500 per lot, which is not exciting.

The Expected Range: 7500 to 7900?

Looks like the option traders think 8,000 will be beaten today. Look at the Put Call Ratio on each strike:

Optionalysis: Budget Day Option Strategies

The 8000 call option open interest is literally off the chart!

You can see again here that on a relative basis the put options go crazy from 7500 below. The expected trading range there is between 7500 and 7900.

The near month 7600 straddle quotes at Rs. 260, which is a 4% range for the rest of the month. Which again isn’t that much, considering we have the budget and the earnings events later this month.

Goes to say, this month looks like it will favour option buyers.

The ITC Trade

ITC is volatile because the market expects the finance minister to raise taxes. This might be true, but taxes don’t matter for addicts, for the most part. The 300 put trades at Rs. 2.15, for a lot size of 1000. This could be worth writing, as the implied volatility is over 45 (for the 300 put, July).

Optionalysis: Budget Day Option Strategies

The budget is actually expected to be not volatile at all for the Nifty, but very volatile at the stock level. Unlike other times, it may be useful to buy the underpriced options on the index, and sell options on key stocks (TCS, Infy, the big banks and Reliance).

Given massive intraday volatility we would be careful of trading in very large sizes – remember the 1% rule – do not risk more than 1% of your portfolio in any one trade. If this means you can’t trade certain stocks – like Kotakbank whose lot size of 500 makes it a Rs. 4 lakh lot and the risk is higher – you don’t trade those stocks.

And on a final note, the CAPM MA20 – our proprietary indicator that maps the number of stocks above their 20 day moving averages minus the ones below (on the Nifty) is headed down, but isn’t way south yet.

Optionalysis: Budget Day Option Strategies

Happy trading! Lots of budget updates coming in after this. We’re trading light.

Live Budget Coverage

Don’t forget to check in at our Live Budget Coverage at:



Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion.

Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.



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