Nifty: Nifty option premium surges ahead of election results, use Iron Butterfly strategy: Anand James

“At the centre of the Iron Butterfly is a short straddle with a short PE and short CE as the two legs which stands to benefit from fall in premia, if history repeats with VIX. The other two legs are a long PE and a long CE on either side, which serves as a hedge to the straddle, should there be wild swings,” he says.

Edited excerpts:

What is the kind of inference that you can draw from the rollovers data in May series?
Given the long build for the event, traders have either got adequately sensitised towards the risk and reward of the electoral outcome, or are just tempted to take a bet in the much awaited event. This explains the increase in rolls, which is in contrast to the usual risk aversion ahead of an event that ends up in traders avoiding positions for a while ahead of the event especially when it falls shortly after expiry. But we did see interesting inference in how FIIs have added on to short positions in index futures, which constitutes 87% of the total FII positions in index futures. FIIs started the new series on 31st May having reduced the longs in index futures to just about 20% of what they held on the expiry eve, while shorts were increased by 32%. This is a heavy bearish bet, but if it goes wrong, it can also give legs to massive rallies.

Do you think ‘Abki baar 24,000’ is possible this week if BJP wins over 320 seats?
Possible, but not probable. While, Nifty straddles are pricing in about a 500 point range on either side, giving us just a 23000-22000 band, VIX which has been steadily playing near 24 last week, is pointing towards the potential for a 7.1% rise or fall this month, which pips the upper range at 24100. But, historically, there is enough evidence to show that any build up in prices in anticipation of an event, fizzles out almost immediately on maturity of the event. Hence, while 24k mount is a theoretical possibility, we feel that the probability of attaining it is very low. Also, the inflation and rate cut conundrum which had been pushed to the back burner lately, will soon take centre picture.

How should F&O traders position themselves for Monday’s and Tuesday’s trade as exit polls and actual results will heavily influence the market on both days.
The build up to the election results have inflated the 6th June contract’s option premia multi fold, and given the fact a fall in VIX post event is usually seen, a directional bet is fraught with high risk. Towards this end, our preference is to employ an Iron Butterfly option strategy to benefit from swollen premia ahead of exit polls and the expected fall in VIX as well as premia once the event has transpired, as evidenced in 2019 as well as 2014. At the centre of the Iron Butterfly is a short straddle with a short PE and short CE as the two legs which stands to benefit from fall in premia, if history repeats with VIX. The other two legs are a long PE and a long CE on either side, which serves as a hedge to the straddle, should there be wild swings.
What does the chart look like for the PSU index? Do you see a high risk-high reward trade in PSU stocks ahead of the election outcome?
The Nifty PSE index corrected close to 3% this week led by HAL, NTPC, ONGC, Powergrid and IOC. Keeping apart the energy stocks within the PSE index, Power financing companies remained strong. LICI, NTPC, Powergrid, BEL and IOC have shown early signs of a reversal towards the end of the week which is evident in the Nifty PSE Index chart which has seen a Pinbar Doji candle formation. If history is to repeat, the present construct is similar to the situation seen in early May where we saw ~11% upside in the following few days. Expect LICI, HAL, BEL, NHPC, PFC and Recltd to lead in such a scenario. Presently, 45% of stocks are having 14D RSI below 50, while 55% of PSE stocks are trading above 20DMA.

Give us you top ideas for the election week

NCC (CMP – 287)

View – Buy

Targets – 308 – 330

Stoploss – 267

The stock has been making higher tops and higher bottoms since 2020 and has broken above the previous all-time high of 237 (made in April 2024) this month and a narrowing wedge breakout in the weekly and monthly time frame. The undercurrent looks positive with initial upside objective of 308 and thereafter 330 in the next few weeks. All longs may be protected with stoploss placed below 267 levels.

ORIENTELEC (CMP – 228)

View – Buy

Targets – 240 – 254

Stoploss – 217

The stock has been making higher tops and higher bottoms since February and has broken the Supertrend level of 231 in the weekly timeframe.