Prorietary traders seen keen on F&O bets ahead of budget

MUMBAI: Proprietary desks of institutions and well-informed traders are readying bets in futures and options in the run-up to the Union Budget on Monday. While a section of them is sticking to simpler strategies by buying or short-selling stock futures or options of companies that may be impacted by announcements in the Budget, savvier traders, mainly proprietary, are using combinations of options to bet on sharp moves in the benchmark Nifty, either side, around the event.

“Proprietary traders are going long on volatility ahead of the Budget when implied volatility usually rises,” said Shshank Mehta, derivative strategist, Nirmal Bang Securities. Implied volatility, a key aspect of options’ premium pricing and measures traders’ expectations of nearterm risk in the market, usually rises ahead of events such as the Budget or outcome of general elections. This is because traders are willing to pay higher premiums to buy options against sharp movements in the market.

India’s Volatility Index, which indicates the expected volatility in Nifty options over the next 30 days based on prices, rose to 24.91% on Monday, the highest closing since early June 2010, showing traders have been paying higher premiums of late.

“Premiums of near-month contracts usually start dipping in the penultimate week of the expiration of the current month contracts (February in this instance), but March contracts have not seeing such a drop last week,” said Amit Gupta, derivatives strategist, ICICIdirect.

“This means people are buying options even at these premiums as a cushion against shocks in the Budget,” he said Traders, who don’t want to bet on the direction of the market before an event, create options strategies that would benefit from rise or fall in implied volatility, known as volatility or vol trading in market parlance.

Simultaneous purchase of put and call options of the same contract and expiry would bet on an increase in implied volatility. Traders use option combinations to bet on implied volatility, as there are no products for this purpose unlike in developed markets. Traders expect implied volatility to rise up to 27% ahead of the Budget.

“Proprietary desks will remain long on vols at the most till 11:30 on the Budget day when vols are expected to peak,” said Dharam Chand Sethia, a trader at Kolkatabased Kredent Brokerage. Finance Minister starts the Budget speech by 11:00.