We have been getting lot of requests for recommending an Option strategy for benefiting from the Election results, however due to very high volatility in markets (IV close to 35% against average IV of 12-18%), the Options premiums are very costly and hence it is not advisable to enter in to any Buy side strategies like Straddle, Strangle, etc.
As we all are aware, the markets have already rallied by 6-9% in the run up to the elections on the solid optimism about the NDA forming the government under Mr. Narendra Modi.
However, in the event of NDA not getting the majority / BJP getting lesser than expected seats / Possibility of a Hung parliament, etc markets can take it negatively and experts say that this might lead to a huge fall in the markets.
So as a safety measure, in order to protect your portfolio of greater than Rs. 100000-150000 from this unexpected downfall, you can think of buying some deep out of the money put (distantly lower from the CMP by ~ 10%)
As per the market scenario NIFTY 29-May-2014 PE 6000 can be looked at for the same purpose as the insurance against a fall in portfolio.
Following aspects should be kept in mind before entering the Put Option….
This Put is suitable for you only if your portfolio is worth 1-1.5 lacs
This is not a money making strategy but is only for protecting the portfolio by reducing losses in the case of result outcome being other than the current expectations (No majority for NDA, etc). it’s like an Insurance for the portfolio which reduces the loss only on the occurrence of an unforeseen event .
The 6000 PE is currently trading near 40 and should only be bought till 45-50 levels, where by the maximum loss will be limited to Rs. 2500 + brokerage which is going to be aprrox 2.5% of his portfolio value of Rs.100000
The number of lots will completely depend upon the portfolio value
if markets go up or do not fall substantially (more than 5-10%) then the entire premium would be lost (Approx Rs. 2500+Cost)
The volatility due to the results may not start after 16th May but after the Exit polls are out post the last phase of the elections on 12th May 2014
