Markets
Budget 2024: How should traders prepare for Budget Day? Here's what experts say
Summary
Budget 2024: Market participants expect volatility in the domestic market on Budget Day as the Finance Minister is not expected to make big announcements.Even though the Minister of Finance Nirmala Sitharaman is not expected to make big bang announcements in the Interim Budget 2024, market participants expect the domestic market to witness some volatility on Budget Day.
The General Elections are due in May 2024, so this Budget will be interim only. The full Budget will only be presented in July 2024 after the new government formation. Traders and investors will keep their focus on fiscal deficit targets, measures for increasing manufacturing in India, and government expenditure on infrastructure.
Experts point out that volatility is at its peak before the Budget speech begins and goes down as the speech ends.
So, how should traders prepare for Budget Day?
Days leading up to the Budget see higher volatility and significantly large intraday movement on the Budget Day. However, traders can take advantage of this volatility by adopting suitable strategies.
Puneet Sharma, CEO of Whitespace Alpha recommends bidirectional strategies to take advantage of volatility in the market.
"With the Vote on Account scheduled before the National Elections later this year, things could get a little more interesting on the Budget Day on February 1, which is also the weekly expiry of Nifty 50 options. Bank Nifty expires one day prior on January 31," Sharma pointed out.
"If you are trading intraday or taking positions in the derivatives market, you should consider stop loss at reasonable distances such that they provide sufficient protection, while at the same time not so close that they are triggered by the exaggerated intraday movements," said Sharma.
Also Read: Interim Budget 2024: Six key areas to look out for
For option traders, Sharma said option premiums will be high considering higher anticipated volatility. Traders can consider direction-agnostic strategies such as butterflies, long strangles/straddles or iron condors to have a higher chance of profiting from the volatility, he said.
"For example, one can consider taking a PE butterfly position centred at 200 or 250 points below Nifty 50 with 100-point gaps for the wings and a CE butterfly position at a similar distance above the market price. The price of this butterfly with four days to go for expiry is 7 rupees. Taking a position both ways on this would cost 14 rupees with a potential upside of making 100 rupees on expiry day if one position hits or even an extreme figure of close to 200 if both hit. This is a nominal risk-reward payoff of 1:7 going up to 1:14," said Sharma.
Also Read: Budget 2024: Trading Strategies by Geojit Financial Services
"What must be noted is the ability to close these trades even without waiting for expiry at 1530hrs on Feb 1 if they hit in the interim at a smaller profit. Traders may note that strategies like these come with max risk reward predefined and also have much lower margin requirements given that the position is essentially market neutral," Sharma said.
Sharma said volatility and speculative trading before the Budget announcement should not impact long-term investment decisions for investors. With national elections expected to take place in May, the market may look at factoring a return of the current BJP-led government, given recent state election results. Sharma expects the current market rally to continue post-budget as well.
Shrey Jain, Founder and CEO of SAS Online said the best way to play the high volatility is by employing a short strangle with a clearly defined stop loss on both legs.
"Here the investor makes money if the underlying remains in a narrow range. We expect the index to trade in a narrow range on the Budget Day, as the Interim Budget may not have big bang announcements. Traders need to stick to stop loss and take cues from price action," said Jain.
Also Read: Interim Budget 2024: Trading strategy for Budget Day by HDFC Securities, Arihant Capital, 3 others
Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.
