Budget 2024: How should traders position themselves for tomorrow’s announcements?

Continuing with the negative trend for the month of January, Indian indices have lost around half a percent this month on the back of mixed global cues and volatility ahead of the budget.

The Interim Union Budget for the fiscal year 2024-25 is scheduled to be presented in the Parliament on February 1, 2024, at 11 am. Since the general elections are due in April and May, no major announcements are expected in this budget. A full budget will be presented after the elections in July.

This budget is likely to focus on capex, manufacturing push, and macro stability. The government's primary emphasis will persist in fostering economic growth through increased capital investment and infrastructure development. Sectors such as manufacturing and renewable energy will receive additional stimulus.

Read here: Budget 2024: What are capital gains taxes and are they expected to see any changes tomorrow?

Most experts do not foresee any immediate reaction in the markets to the budget announcement. Since the budget announcement comes soon after the Fed policy meeting on January 31, the market reaction for the next few weeks will be from a combination of the two.

"We anticipate that the Interim Budget 2024 might not bring significant shifts in the stock market or investor portfolios, but it's crucial to closely analyze any key announcements for their market impact. This year, market dynamics are expected to be shaped by political and economic factors, with a clear focus on capital expenditure rather than short-term populist measures. This continuation of last year's strategy, emphasizing long-term infrastructural investment, reflects a commitment to sustainable economic growth. Understanding this government approach is vital for investors as they navigate the financial markets in the upcoming year," said Suman Bannerjee, CIO, Hedonova.

Read here: Budget 2024: ICRA predicts these changes for markets, mutual funds and taxation

During the budget, a critical analysis of pre-rally trends becomes imperative, serving as a reliable indicator for potential market movements. While acknowledging the inherent uncertainties, the trader believes there is a 70 percent likelihood of positive outcomes, underscoring the need for vigilance and strategic decision-making on budget day, said Harinder Sahu, a Sebi-registered Research Analyst at King Research Academy.

Let's understand how traders should position themselves for the budget day:

Angel One

The budget day always holds its relevance in forecasting the economic outlook of the nation, which is simultaneously being reflected through the equity markets. It is a highly anticipated day with future projections and a roadmap for the nation is in the purview. From the data point of view, the Indian equity markets have seen a whopping gain of over 20 percent since last year’s budget, with many triumphs attained. The sound domestic developments and favorable global scenarios kept the primary trend going, and the indices secured new highs, uplifting the market sentiments.

From a technical standpoint, the benchmark index has witnessed a splendid move in the current financial year and the last quarter seems to remain in line with the ongoing trend. The cycle of higher highs – higher lows is certainly visible on the daily time frame with in-between time-wise correction phases, construing positive development for a bullish market. As far as levels are concerned, the 21,200-21,000 zone is to be treated as immediate support and a slide below could disrupt the ongoing move for another 500-600 odd points of correction. If this happens, then investors/traders are advised to start nibbling into quality propositions. On the flip side, the 22,000 mark is likely to be seen as an intermediate hurdle before the Nifty index reclaims its high of 22,125 and continues its northward journey into uncharted territory in the near future. The undertone favors the Bulls of D-Street, and dips are likely to augur well for them as well. However, a conservative approach is advisable after the recent accomplishments, and traders should remain selective in their approach, emphasising more on the themes poised for outperformance.

Read here: Budget 2024: No change likely in capital gains taxes this time, says Hemant Sood of Findoc

Share.Market Research (PhonePe Wealth Broking Private Limited)

Union Budget announcement days have been very volatile historically. Nifty50 movement has ranged between 2 and 3 percent on an intraday basis, in 10 out of the last 12 instances (2014-2023 including interim budget announcement days).

In the past, the India VIX index has mostly risen in markets leading up to the budget day and subsequently crashed during the budget speech. Hence, rather than playing on delta (taking directional strategy), strategies on vega (volatility) crush seem to be more profitable.

To test the above hypothesis, we tried various strategies such as shorting Straddle, Strangle, Iron Fly, Iron Condor, Ratio Spreads, Ratio Back Spreads, Butterflies, Batman, Jade Lizard, etc. The strategy is entered at 9:30 am and exited at 3:25 pm with no adjustments in between. The strike selection for all the legs is dynamically selected based on the combined premium on the short and the long legs, i.e. side with a higher premium has lower exposure, and with a lower premium has higher exposure, having risk management implicitly built in the process.

Read here: Budget 2024: Market moved less than 1% in just 7 of last 24 budget sessions

The result showed both Short Iron Fly and Short Iron Condor proved profitable maximum times, in 11 out of 12 instances. The maximum profit per lot earned in Short Iron Fly was in 2018 ( ₹1,700 per lot) and in Short Iron Condor was in 2022 ( ₹650 per lot). 2021 was an outlier event when Nifty50 moved 4.74 percent. However, even in such massive movement, the maximum loss was limited to ₹5,300 per lot in Short Iron Fly and ₹3,050 per lot in Short Iron Condor strategies, due to strategic hedge placed on Out of Money (OTM) wings, as long positions.

Overall we feel that Short Iron Condor/Short Iron Fly is a good way of playing vega exposure on Budget day.

Jyoti Roy, Head of Equity Research, Sanctum Wealth, believes traders should position themselves before the budget by taking position in sectors like capital goods, industrials and infrastructure as these sectors are expected to benefit from the Union Budget as the government is expected to prioritise capital expenditure for the growth of infrastructure and industrial sectors. PLI programs may be expanded and extended to cover more sectors in an effort to boost manufacturing, which will be favorable for the manufacturing sector.

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.