Budget 2023: Use this F&O strategy to hedge downside move in Nifty
The Budget session of Parliament will start tomorrow, January 31, with the Economic Survey scheduled to be released tomorrow and Budget to be announced on February 1.
Union Budget proves to be a significant cue for the market investors and traders as it drives the sentiment on the Street. Ahead of the event, the market generally stays jittery.
In the run-up to the Budget, the market has been volatile since last week due to the allegations aimed at Adani group by US-based Hindenburg Research.
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India VIX has jumped in last 3 days from 13.30 to 19. The surge in volatility and decline in benchmark indices ahead of the Budget is concerning.
“It is advised to hedge your existing long position by buying Protective Puts or initiate Bear Put Spread in Weekly or Monthly expiries. It is also advised to reduce the cost of position in delivery by writing higher strike Calls in selective F&O stocks (Covered Call) as upside seems to be capped for time being,” said Chandan Taparia, Derivatives & Technical Analyst, Motilal Oswal Financial Services in a report.
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“Nifty index has given a breakdown from its long consolidation of last 20 trading sessions with surge in volatility index. It is facing sustained supply near to its key moving averages and it started to form lower top – lower bottom in multiple time scale. It has broken previous month’s low along with formation of Bearish Engulfing pattern which has negative implication,” said the Motilal Oswal report.
The report said Nifty could further slip to 17,200-17,350. To deal with such weakness, Taparia has suggested a hedging strategy for the Budget month, as follows:
Nifty Monthly Hedging Strategy : Bear Put Spread : Buy 17700 PE and Sell 17200 PE (23rd Feb, 2023)
Buy 1 lot of 17,700 Put @ 330
Sell 1 lot of 17,200 Put @ 180
Margin Required : Approx ₹35,000
BEP: 17,550
Net Premium Paid : 150 Points
Max Risk: 150 Points ( ₹7,500/-) If Nifty moves higher
Max Reward: 350 Points ( ₹17,500/-) If Nifty goes below 17,200 zones
Risk : Reward ratio: 1:2.35
This strategy hedges the downside move by Nifty towards 17,200 by paying the cost of 150 points, 1% of the index, said the Motilal Oswal report.
The break-even point is at 17,550, which means if Nifty moves higher than that then the investor/trader can lose the money invested. On the other hand, if Nifty goes below 17,200 the reward would be ₹17,500.
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