In order to build option trading strategy to make use of budget volatility, we need to find out what has happened in the previous budget sessions.
I did an extensive historical data analysis for the period 2008 to 2019, and written this article to exhibit what kind of Trading strategy one can use to make use of Budget movement.
This is what happened on the during the intraday time frame on the budget day for last 10 years of budget sessions.
2015 (the below chart is the next day after the budget session. Opened gap up)
As you can see from the above charts, the volatility is extremely high on the day of budget session making it very difficult for the intraday options players to make money.
And if someone wanted to buy options much before the budget session, then the premiums becomes very high due to increase in IV, option buyers would not make much returns even if there is big move on budget day since the premium gets eroded once the event is over, so to certain extent option sellers make high returns since premium sky rockets before the events and goes down on the budget day.
But what I have observed with this last 10 years of data is, Market has always moved in one side direction with huge trend once the budget session is over.
We need to make use of this huge trend post budget and also the IV drops after the budget event. So the best strategy that can favor option buyers is to buy options on budget day after 3:00 PM. I have back tested the Long Straddle strategy for last 10 years.
Rules: Buy ATM Call and Put after 3 PM on budget day & hold it till expiry. The max risk is the premium that you pay, that’s all.
Here’s the result.
Either you can buy 1 lot in call and 1 lot in put. But sometimes, the option premium will not be same for call and put. The call option may trade at 90Rs. but the put option may trade at 180 Rs. So we buy 2 lots in call and 1 lot in put, to make the proportion equal.
The total returns is more than 300%, however if you could see the result you can see in 2013 the market did not move much which resulted in total loss of -85%. So invest only the money you can afford to lose in this strategy, but the risk reward ratio is much higher, favors the option buyer here. The key is enter the trade when budget session is over.
As per the above mentioned strategy, after 3 PM on Budget day Feb 1st 2018 IV was down and Nifty was around 11100.
Initiated ATM call and PUT, 11100 CE & 11100 PE.
11100 CE = 100
11100 PE =166
In total, 266 i.e. 266*75=Rs.19950 — Total Investment.
As of feb expiry end, the value was
11100 ce = 0
11100 pe = 705.
In total, 705 i.e. 705*75=Rs.52875 — Returns = 165%
Year 2019 — July 5th Budget day. Nifty was around 11800.
Initiated ATM call and PUT, 11800 CE & 11800 PE.
11800 CE = 143
11800 PE =126
In total, 269 i.e. 269*75=Rs.20175— Total Investment.
As of July expiry end, the value was
11800 CE = 0
11800 PE =542
In total, 542 i.e. 542*75=Rs.40650 — Returns = 100%
9 out of 12 times this strategy has given positive returns in last 12 years.