Wishing you and your family, near and dear ones a happy, prosperous, healthy & wealthy new year 2023.
As we look forward to 2023 as a year of hope, growth and wealth creation, we should be wary of the fact that an increasing trader community will keep the markets on the edge where markets will witness volatile swings which cannot be justified and anticipated.
As an investor, we simply need to miss out on all these noise and stay invested and buy on dips should be the strategy (if at all the market gives us an opportunity) else SIP (systematic investment plans) have been a tried and tested strategy to create wealth in times of volatility, time correction etc.
For Investors :
During Jan 2023, many investors would hedge their portfolio by the use of derivatives (futures and options) by selling nifty futures (One needs a margin of 1.5-2L INR to sell 1 lot of nifty future) or buying nifty put options (One needs only 10-15K cash margin to buy 1 lot of Put Option)
For Traders :
Historically, we have seen a surge in IV (implied volatility) for the options (thereby increasing the premiums of put and call options) in anticipation of what is going to happen in the Budget (usually presented on 1st February every year). As a trader, you tend to gain if you are on the Buy Side of Option trades due to spike in IV (the downside is the theta decay in option buying). Simply, as a trader you need to decide the market trend (up or down from the current levels till 1st Feb 2023) and enter a Buy Option Trade (Buy Put Option ATM Strike if you have an outlook that markets are going to fall pre-budget, Buy Call Option ATM Strike if you have an outlook that markets are going to rise pre-budget)
For Example:
Today is 9 Jan 2023, Nifty spot closed at 18100, so ATM Strike would be 18100.
Scenario 1: Bullish
If you are bullish pre-budget: Buy Nifty 25 Jan CE 18100 (Premium is 224 per lot, 1 lot has 50 Qty, so total premium cost to buy 1 lot of Call Option would be 224*50=11,200 INR)
Maximum Risk is the premium you have paid, i.e. 11200 INR if Nifty Spot closes below 18100 on or after 25th Jan 2023
Maximum Reward is unlimited, but for example if Nifty spot goes up to 19000 on or before 25 Jan 2023, the call premiums you bought would also go up from 224 per lot to 1000 per lot, thereby giving you a sales proceed of 50,000 INR (Net Profit post buying cost of 38900 INR on an investment of 11,200 INR)
Return of 350% approximately :)
You can always calculate your reward on every 100 points (i.e. 100*50=5000 INR profit) rise in Nifty from the present levels.
Scenario 2: Bearish
If you are bearish pre-budget: Buy Nifty 25 Jan PE 18100 (Premium is 168 per lot, 1 lot has 50 Qty, so total premium cost to buy 1 lot of Call Option would be 168*50=8,400 INR)
Maximum Risk is the premium you have paid, i.e. 8400 INR if Nifty Spot closes above 18100 on or after 25th Jan 2023
Maximum Reward is unlimited, but for example if Nifty spot goes down to 17000 on or before 25 Jan 2023, the put premiums you bought would also go up from 168 per lot to 1000 per lot, thereby giving you a sales proceed of 50,000 INR (Net Profit post buying cost of 41,600 INR on an investment of 8,400 INR)
Return of 500% approximately :)
You can always calculate your reward on every 100 points (i.e. 100*50=5000 INR profit) dip in Nifty from the present levels.
Theta Decay hurts the option buyer but IV surge is a friend to option buyers and it can very well compensate for the theta decay. Historically, we have seen IV increasing from 15 to 30 levels in the month of January which makes the premium double their usual levels, hence giving profits to option buyers
Final Verdict :
Each year is a unique year and we should always trade/invest keeping best case and worst case scenario into consideration. For Jan 2023, we present to you our view on pre-budget strategy and time will let us know if it turned out to be a Hero or Zero Strategy !!
What next ?
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Disclaimer: This is just exemplary and do your due diligence before investing or trading in derivative markets. Please read and refer to all the market related data and be aware of all the risks involved in trading/investing in the securities market.
