Guidelines for Trading on a Budget Day | Motilal Oswal
Guidelines for Trading on a Budget Day | Motilal Oswal

Guidelines for Trading on a Budget Day

Most of the conservative traders do not choose to trade on the budget day but there are many traders who wait for this day to take a plunge. Most of the traders are quite uncertain about the direction of the markets and many brokers advice to use the multi-legged options strategy for trading in Nifty. Using this strategy, investors can gain from either a good rise or a sharp fall in the stock prices on the budget day.  Using the multi-legged options strategy for Nifty trading, traders can buy a Nifty call and put that is equidistant from the earlier day’s closing. For example, if the Nifty closes at about 7100 the previous day, the traders can invest in a 7300 call and a 6900 put, total for a price of Rs. 212 per share. As the price is high, traders tend to sell the 7600 call and the put of 6600 and this reduces the purchased options to Rs. 134. The catch with this option is that the trades gain when there is a sharp move in Nifty on any side and the profit gets capped. On the other side, the losses too are limited.    The unpredicted movement in stock markets not only occurs on the budget day, but the similar trend can also exist when there is an expectation of big news. This makes it hard for intraday traders and they certainly need to follow some guidelines for trading on Budget Day.  High Volatility in Markets: Traders can expect a swift up movement or a fast fall as the Union budget speech progresses. With one good news, the markets can see a jump of 30-50 points and with one bad news, the dip can be anywhere between 50-100 points. The direction of the markets on the budget day cannot be predicted even by the experts. As the markets might move very quickly, it might get hard to trade. Unless you are an expert, it is wise to keep yourself away from the markets on the budget day.  Margins Likely to be Blocked: A number of brokers do not allow the normal margin rules on the budget day. Especially for intraday, brokers do not allow trading in equity cash and hence the margin that is otherwise allowed might be blocked. So, traders who select MIS to trade in equity might witness rejected orders due to the margin rules.  Even the cover orders might not be available for trading and hence traders might face difficulty due to this. Even when the cover orders have stop losses, the stop loss might not get triggered if the index sees a major jump and also when it is a market order. Hence, there are chances that the trader incurs a loss. So, traders need to be well prepared with the needed cash in their accounts when planning for a budget day trading online. This does not make much of a difference to those traders who are not into intraday trading and for those who are not taking positional trades.   Lesser Risk Reward Ratio: When the margins are higher, traders can expect more risk and fewer rewards. When traders are trading on a budget day, more funds are at risk and traders mostly earn less profit, which in turn is not attractive for any trader in the world.  Do Not Force Yourself Into Trading: When one is trading on the budget day, there are low chances of getting a good price and this happens due to the sudden jumps that occur in the markets. Most traders wait longer and enter the market due to frustration. Such a move has to be avoided as traders might lose money.  The Volatility Crash: Though this can sound to be good news for option sellers, the delta can still do the damage. While the stock markets make some quick moves, it can as well move to the options and in such cases, the volatility crash is not of any help. Even the option buyers will not see the movement in prices and hence, it is not a good day either for the sellers or for the buyers.  Most of the traders end up losing a lot of money when trading on the budget day. Even when one can expect some good movement in the market with the positive news surrounding the budget 2017, just one bad news can make the markets move against you. So, do your own research while trading on the big day when the Union budget 2017 will be announced. 

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