The Union Budget has consistently driven trends in the Indian market. The upcoming Union Budget for the financial year 2024-25 is expected to prioritise capital expenditure, emphasise manufacturing growth, and ensure macroeconomic stability. Historically, Union Budget announcements significantly influence the stock market, shaping sector trends based on government policies and financial plans.
The Union Budget for FY 2024-25 will be presented in the Parliament by Finance Minister Nirmala Sitharaman on July 23, 2024, at 11 am.
Budget days have historically been very volatile, with Nifty 50 moving 2-3% intraday on 10 out of the last 13 occasions (2014-2024). Rather than betting on market direction (delta), a strategy focusing on volatility (vega) crush may prove more effective.
To test this hypothesis, we analysed various strategies, including shorting Straddles, Strangles, Iron Flys, Iron Condors, Ratio Spreads, Ratio Back Spreads, Butterflies, Batman, and Jade Lizards. Each strategy was initiated at 9:30 AM and exited at 3:25 PM, without any interim adjustments. The strike selection for all legs was dynamically chosen based on the combined premium of the short and long legs: the side with the higher premium had lower exposure, and the side with the lower premium had higher exposure, inherently incorporating risk management.
The analysis revealed that Short Iron Fly and Short Iron Condor strategies were the most consistently profitable, succeeding in 12 out of 13 instances. In conclusion, Short Iron Condor and Short Iron Fly strategies effectively harness the volatility crush observed during the Budget speech, offering a profitable and risk-managed trading approach.
In my view, retail investors should take a longer-term view while investing in equity markets especially now that there is an expectation of continuity in government policy and actions.
For those interested in trading intra-day through the derivatives market, you should consider stop losses at reasonable distances. For options trading, we expect a higher premium in anticipation of higher volatility.
Direction-agnostic strategies such as butterflies, long strangles/straddles, or iron condors can be utilised for benefits during such periods. For example, one can consider taking a butterfly position on either side of NIFTY 50. Such strategies come with a predefined nominal risk-reward payoff of 1:10 going up to 1:20. However, traders should be prepared to close trades as soon as the price of the index is within range of the butterfly.
For budget positioning, focus on sectors likely to benefit from government spending, such as infrastructure, healthcare, and renewable energy. Diversify across these areas while maintaining a balanced portfolio. On budget day, avoid knee-jerk reactions. Wait for market sentiment to stabilise before making trades. Focus on specific policy announcements relevant to your target sectors. Consider using options strategies to hedge against volatility.
The Union Budget will be a major event and will keep the market buzzing. Investors should get the opportunity to take long-term positions in the sectors that get allocation. We will certainly see sentiment and a major focus on sector-specific picks like auto, chemical, sugar, power, and infrastructure.
Markets generally trade with a negative bias before the budget. The prime reason is that uncertainty levels rise as we get closer to the budget. Market participants prefer to book profits and sit on cash and let the event pass by.
Since 2010 there have been 17 budgets (14 were full and 3 were interim). The average returns 1 week before the budget is -0.45%. This time around we have seen a sharp rally in the last 20 days. Nifty has moved up by more than 10% in the last 20 trading sessions. This calls for some profit booking in the near term. The returns one week after the budget is announced are generally positive as the uncertainty is over. Average one-week returns, post budget presentation, is 1.32% for the Nifty. Thus, market participants can start booking profits in stocks that have over-extended rallies and wait for some dips around the budget to re-enter them.
Navigating the volatility of budget days requires a strategic approach. Experts recommend focusing on volatility rather than market direction, employing risk-managed trading strategies, and paying close attention to sectors likely to benefit from government spending. By adopting these strategies, investors and traders can better manage the uncertainties and capitalise on the opportunities presented by budget day market movements.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.
