Option Buying Strategy Will Flop At The Time Of Elections

Share market is giving signals, option buying strategy will flop at the time of elections, risk increases in option trading.

As soon as the election results impact the market, option premiums on one side start rising and thus option buyers capture the movement on one side.

   

Option Trading Tactics

Lok Sabha elections and General Budget are two mega events for the stock market, before which the volatility in the Indian stock market is at its peak. There is volatility in Indian markets even during American elections. During this period, traders and investors have the opportunity to earn from the market. But this isn't so easy.

Experienced option traders take advantage of market volatility. However, the increasing and decreasing option premium with every news does not bother experienced option traders as their trades are on both sides of call and put. Option buyers cannot be hedged but option sellers trade with proper hedging.

Option sellers sell options at juicy premiums in a market full of volatility and keep their positions fully hedged, keeping their losses within limits. But this time something like this is happening before the Lok Sabha election results, which shows that this time option traders especially option buyers are in trouble. The market is indicating that the option buying strategy is going to flop.

Option buying strategy in a market full of volatility

Typically, option buyers buy call options and put options at the in-the-money strike price overnight or on the same day when the outcome of an event is imminent, as soon as the budget or election announcement or outcome impacts the market. One-way option premiums start talking to the wind and thus option buyers capture one-way moves. This strategy is called long straddle. When option buyers buy options with out-of-the-money strike price, this strategy is called long strangle.

But this time the scene is such that both these options buying strategies are going to flop. The market is indicating something like this.

Implied volatility reduced before Lok Sabha election results

If we look at the option chain of indices, we will find that the implied volatility is very low, which suggests that the option premium will not increase beyond the limit. The implied volatility of a put option with a strike price 10% below the current level of Nifty 50 index on the National Stock Exchange is 18%-20%.

At the time of elections in 2019, the implied volatility was 28%-30%. Low implied volatility means less chance of something unexpected happening. Implied volatility is the market's forecast of possible fluctuations in the price of a security. When the percentage of forecasting is so low, the movement in an option will be limited considering the investment.

This is the reason why long straddle and long strangle strategies of option buyers are not likely to be successful on the day of Lok Sabha election results. This is the reason why long straddle and long strangle strategies of option buyers are not likely to be successful on the day of Lok Sabha election results.