The Different May Day!
Authored On: 05-May-14
Last Modified: 05-May-14
So here we are, just one week away from 'once in five years' event of D-Day for General Elections 2014. Here in this article, we will see how best we can position ourselves for possible results of 2014 verdict. Below we will see best strategy that could be placed for each type of General Election 2014 outcome. We will not be trying to predict the election results here though. We will assume all possibilities and will list what could be best trade strategies matching with those possibilities. You need to look into those strategies given below, that match with your best estimate of Election 2014 results. So here are possible outcomes of election and trade strategies matching with that. . .starting with best case scenario of one party clear cut majority to worse case scenario of completely fractured mandate resulting into coalition government, via result neutral views and matching trading strategies. . .
Also, note that at the point of time of writing this article, Nifty is trading at around 6625.
Possibility #1 - Clear Loksabha 2014, A Major Win for Single Party
Strategy-1 : Buy Nifty Dec-6500 calls trading at around 663 and reduce costing by selling Dec-7000 calls trading at around 380 currently. With 6500 already in the money by more than 100 points, the cost seem reasonable. Short leg forms the hedge against heavier loss. You can pocket gross receipt of Rs. 50K per 100 point Nifty pair described above, if Nifty breaches 7000 anywhere before or near December. More, if you have pairs with more than 100 Nifty points (lots).
Strategy-2: Buy Nifty May-6700 Calls trading at around 229 and short May Futures at current price, together in ratio of 3:1, calls being three times Futures, lot-wise. Here, the shorted Future will be hedge against the long Calls.
Strategy-3: Long Nifty May-NNNN Calls and short Nifty May-MMMM Calls to reduce cost, such that strike price NNNN < MMMM by around 50 to 150. The delta will increase post outcome that forms the Possibility #1 mentioned above. Squaring off is possible before expiry at profits. Short leg forms the hedge against heavier loss.
Strategy-4: A stable government is likely to send Rupee on stronger note and IT stocks down the line, at least for few days. Go long on Puts of majorly Infy, Wipro, HCLTECH and hedge by buying in cash some specific IT stocks cush as GEOMETRIC, HELIOSMATH, INFOTECENT. Of course, the hedge proportion should be lesser, enabling you to average, should Possibility #1 comes true.
Possibility #2 - Near-Clear Mandate for Loksabha 2014, Some Open Ends, But No Uncertain Scenario, Single Largest Party At 220 Seats Something
We would say that markets will be volatile if we see Possibility #2 as mentioned above. On the day of results and till a week thereafter, we can see movement and sharp turns in both directions. Here is how you can think of trade. . .
Strategy-1 : Buy OOM far Puts and far Calls for stocks and not for indexes. Choose a strike price such that far Call (or Put) for OOM strike is at around 30% or less w.r.to currently trading price for ATM Call (or Put). It is up to you how to take a directional call between Call and Put in which underlying, but distribute them evenly across Put and Call and across segments.
Strategy-2: Long stock Futures and in same underlying short the ATM Put. Short stock Futures and in same underlying, long the Call. This is more or less same as Strategy-1 above, but only difference is that if the volatility, which is expected in this outcome Possibility #2, is lesser than expected, then any 'slower' movement up and down, is likely to cause premium erosion in Strategy-1, rather than in current Strategy.
Possibility #3 - Completely Fractured Mandate, Clear Possibility of Coalition Govement
Oops! But anyway, here are strategies. . .
Strategy-1 : Long BANKNIFTY Puts and Long BANKNIFTY Futures, in ratio of 4:1. Futures is hedge against primary positional Puts. You can repeat same with NIFTY.
Strategy-2: Long CNX IT Futures and Short BANKNIFTY Futures, or NIFTY Futures. This is a bit risky being paired Futures call, but you can alternately change this a bit, by buying into IT Stocks in cash, and going long on BANKNIFTY, NIFTY Puts!
Strategy-3 : Long Nifty Puts-MMMM and short Nifty Puts-NNNN such that MMMM > NNNN by around 50 to 150 points.
Possibility #4 - Non-Prediction Mode
If you fall into this bucket, where either you do not wish to predict election outcome or cannot guess it, simple way is to position you across cash market across good stocks that are reaching a 'buy' zone. Here are few that you can consider. These are fundamentally good stocks, that are relatively beaten down or corrected after recent rally, either due to earning flip which may see upside in coming months or beaten down due to sudden negative news flow. They are BAJAJ-AUTO, HELIOSMATH, GRASIM, IDEA, JINDALSTEL, JUSTDIAL, MCLEODRUSS, OFSS, RCOM, TATACOMM, TATAPOWER.
Also, you can mix your strategies as listed in above Possibility zones, like what we are doing for our trades, including some cash buys from above and more stocks that we have listed above. However, do not forget to consult your financial advisor who is the only best person to assess your needs and may advise you on your trades based on required risk management practices.