Options Trading Strategies on Budget Day 2025
A Comprehensive Guide on Nifty, Niftybank, and Sensex Options
Introduction
Trading options on Union Budget day can be an exhilarating yet challenging endeavour. The Indian stock market sees significant volatility on this day, influenced by the budget announcements made by the Finance Minister. This guide will provide insights into trading options on the three major indices in the Indian markets: Nifty, Nifty Bank, and Sensex. We will also analyse the past data of these indices on budget days and examine how India VIX have fluctuated during these days. Based on this data we will deploy 4 delta neutral strategies and see how these strategies have performed on the budget days for all the 3 indices. The basic idea of this study is to find out the optimal strategy that can be deployed on budget day. Also please note since Sensex is a new instrument for weekly options data for the strategies is only available for 2024
Understanding the Major Indices
• Nifty: The Nifty 50 index, representing 50 of the largest companies listed on the National Stock Exchange (NSE).
• Niftybank: The Nifty Bank index, comprising the most liquid and large capitalized Indian banking stocks.
• Sensex: The Sensex or BSE 30 index, representing 30 of the largest and most actively traded stocks on the Bombay Stock Exchange (BSE).
Historical Performance on Union Budget Days
To make informed trading decisions, it is essential to analyse how these indices have performed on budget days over the past decade. The following tables provide detailed data on the indices' performance, including values for Open, High, Low, Close, and percentage changes from Open to Close and High to Low. Additionally, the tables include India VIX movement throughout the day.
Analysing Implied Volatility and India VIX
On Union Budget day, implied volatility and the India VIX are crucial indicators to watch. Typically, an IV crush occurs post the Finance Minister's speech, leading to a significant drop in volatility. This section will explore these trends based on historical data and provide insights into how traders can capitalize on these movements.
PS: The IV considered here will be the ATM Straddle IV
Options Trading Strategies
Although multiple options strategies can be deployed on budget day we are going to consider deploying a Directional and a Non-Directional Straddle with protective hedges. We will compare the strategies to see which strategy has given the best back testing performance and we will compare the performance of these strategies for all indices Nifty, Bank Nifty and Sensex.
Short Straddles using Wait & Trade
A conventional short straddle involves selling an ATM call and an ATM put option. However instead of entering both the legs at once we are going to perform a wait and trade directional straddle. This means that we will enter the call leg or the put leg only when the premium falls below 5%. We will take the reference time of entry as 9:20 am and exit time for the strategy will be 3:25 pm. We will check the reference price of both the calls and put options at 9:20 am for the ATM Straddle strike price. Let us say the Nifty on budget day is trading at 22500 then we will check the premium of the 22500 CE and 22500 PE and note down these prices. Let us say both are trading close Rs 100 each then we will enter only when the price of those options goes below Rs 95 implying that there is some direction in the market. So we will enter only that leg and avoid executing the other leg. If the market takes a direction we are bound to profit from the leg that has been executed. If the market moves up first and then down then it is likely that both the legs will get executed. The stop loss on the individual legs will be 70% each. One can execute this simple strategy via an algo execution platform.
Pros: This strategy profits from the decrease in implied volatility and can be profitable if the market remains sideways or directional.
Cons: This strategy will tend to loose money in a V-shape or U-shape market since there is a possibility of both stop losses triggering.
Iron Butterfly
An Iron Butterfly strategy involves selling an ATM straddle and buying protective wings (an OTM call and an OTM put) to limit risk. The offset units will be purely selected on the basis of the breakeven points of the straddle to keep it simple. This strategy is limited risk limited reward strategy. We will execute this strategy on all indices at 9:20 am and exit at 3:25 pm on all budget days.
Pros: On budget days the usual tendency of the market is to make some extreme movements but tend to close flat or closer to the open. If on the budget day the market tends to behave in this manner then the strategy turns out to be a high profitable strategy.
Cons: On budget day if the market becomes extremely directional then this strategy will end in a limited loss
Back tested Results
The back tested performance of short straddles and Iron Butterfly on Nifty, Nifty Bank, and Sensex indices are summarized in the following tables. These tables will help traders understand the potential profitability and risks associated with each strategy. For some strategies there is lack of back tested data available, so it is denoted as NA in the column of the strategy name
Note: All the strategies deployed as a part of this exercise are time based straddles. To optimize the performance of these strategies one can look at ATM straddle charts and can add some technical indicators such as super trend, vwap or moving averages to plan precision entries and exits for these strategies. The usage of these will definitely help increase the probability of the trade.
Please find the link below for your reference with all the data
Historical Data Indices.xlsx
The software used for backtesting the strategies in StockMock.
Conclusion
Budget week brings volatility; traders should employ delta neutral strategies to benefit from price fluctuations and implied volatility changes
Some of the key highlights of all budget days:
1. Budget week is highly volatile, with significant price movements expected.
2. Historical analysis shows an average 2-2.5% movement from high to low on budget days.
3. Implied volatility typically decreases around 11 AM on budget day.
4. Delta neutral strategies are recommended for traders lacking directional clarity.
5. Various strategies like straddles, strangles, and iron condors can be employed.
6. One should use algo platforms to automate executions since markets will tend to move very fast and in such situations, execution becomes extremely critical
7. Also do your own study by backtesting, forward testing and only then deploy your strategy in the live market
Hope you found the above article useful in helping you to prepare yourself in advance for Budget Day. All the best!
Introduction
Trading options on Union Budget day can be an exhilarating yet challenging endeavour. The Indian stock market sees significant volatility on this day, influenced by the budget announcements made by the Finance Minister. This guide will provide insights into trading options on the three major indices in the Indian markets: Nifty, Nifty Bank, and Sensex. We will also analyse the past data of these indices on budget days and examine how India VIX have fluctuated during these days. Based on this data we will deploy 4 delta neutral strategies and see how these strategies have performed on the budget days for all the 3 indices. The basic idea of this study is to find out the optimal strategy that can be deployed on budget day. Also please note since Sensex is a new instrument for weekly options data for the strategies is only available for 2024
Understanding the Major Indices
• Nifty: The Nifty 50 index, representing 50 of the largest companies listed on the National Stock Exchange (NSE).
• Niftybank: The Nifty Bank index, comprising the most liquid and large capitalized Indian banking stocks.
• Sensex: The Sensex or BSE 30 index, representing 30 of the largest and most actively traded stocks on the Bombay Stock Exchange (BSE).
Historical Performance on Union Budget Days
To make informed trading decisions, it is essential to analyse how these indices have performed on budget days over the past decade. The following tables provide detailed data on the indices' performance, including values for Open, High, Low, Close, and percentage changes from Open to Close and High to Low. Additionally, the tables include India VIX movement throughout the day.
Analysing Implied Volatility and India VIX
On Union Budget day, implied volatility and the India VIX are crucial indicators to watch. Typically, an IV crush occurs post the Finance Minister's speech, leading to a significant drop in volatility. This section will explore these trends based on historical data and provide insights into how traders can capitalize on these movements.
PS: The IV considered here will be the ATM Straddle IV
Options Trading Strategies
Although multiple options strategies can be deployed on budget day we are going to consider deploying a Directional and a Non-Directional Straddle with protective hedges. We will compare the strategies to see which strategy has given the best back testing performance and we will compare the performance of these strategies for all indices Nifty, Bank Nifty and Sensex.
Short Straddles using Wait & Trade
A conventional short straddle involves selling an ATM call and an ATM put option. However instead of entering both the legs at once we are going to perform a wait and trade directional straddle. This means that we will enter the call leg or the put leg only when the premium falls below 5%. We will take the reference time of entry as 9:20 am and exit time for the strategy will be 3:25 pm. We will check the reference price of both the calls and put options at 9:20 am for the ATM Straddle strike price. Let us say the Nifty on budget day is trading at 22500 then we will check the premium of the 22500 CE and 22500 PE and note down these prices. Let us say both are trading close Rs 100 each then we will enter only when the price of those options goes below Rs 95 implying that there is some direction in the market. So we will enter only that leg and avoid executing the other leg. If the market takes a direction we are bound to profit from the leg that has been executed. If the market moves up first and then down then it is likely that both the legs will get executed. The stop loss on the individual legs will be 70% each. One can execute this simple strategy via an algo execution platform.
Pros: This strategy profits from the decrease in implied volatility and can be profitable if the market remains sideways or directional.
Cons: This strategy will tend to loose money in a V-shape or U-shape market since there is a possibility of both stop losses triggering.
Iron Butterfly
An Iron Butterfly strategy involves selling an ATM straddle and buying protective wings (an OTM call and an OTM put) to limit risk. The offset units will be purely selected on the basis of the breakeven points of the straddle to keep it simple. This strategy is limited risk limited reward strategy. We will execute this strategy on all indices at 9:20 am and exit at 3:25 pm on all budget days.
Pros: On budget days the usual tendency of the market is to make some extreme movements but tend to close flat or closer to the open. If on the budget day the market tends to behave in this manner then the strategy turns out to be a high profitable strategy.
Cons: On budget day if the market becomes extremely directional then this strategy will end in a limited loss
Back tested Results
The back tested performance of short straddles and Iron Butterfly on Nifty, Nifty Bank, and Sensex indices are summarized in the following tables. These tables will help traders understand the potential profitability and risks associated with each strategy. For some strategies there is lack of back tested data available, so it is denoted as NA in the column of the strategy name
Note: All the strategies deployed as a part of this exercise are time based straddles. To optimize the performance of these strategies one can look at ATM straddle charts and can add some technical indicators such as super trend, vwap or moving averages to plan precision entries and exits for these strategies. The usage of these will definitely help increase the probability of the trade.
Please find the link below for your reference with all the data
Historical Data Indices.xlsx
The software used for backtesting the strategies in StockMock.
Conclusion
Budget week brings volatility; traders should employ delta neutral strategies to benefit from price fluctuations and implied volatility changes
Some of the key highlights of all budget days:
1. Budget week is highly volatile, with significant price movements expected.
2. Historical analysis shows an average 2-2.5% movement from high to low on budget days.
3. Implied volatility typically decreases around 11 AM on budget day.
4. Delta neutral strategies are recommended for traders lacking directional clarity.
5. Various strategies like straddles, strangles, and iron condors can be employed.
6. One should use algo platforms to automate executions since markets will tend to move very fast and in such situations, execution becomes extremely critical
7. Also do your own study by backtesting, forward testing and only then deploy your strategy in the live market
Hope you found the above article useful in helping you to prepare yourself in advance for Budget Day. All the best!
إخلاء المسؤولية
لا يُقصد بالمعلومات والمنشورات أن تكون، أو تشكل، أي نصيحة مالية أو استثمارية أو تجارية أو أنواع أخرى من النصائح أو التوصيات المقدمة أو المعتمدة من TradingView. اقرأ المزيد في شروط الاستخدام.