Here's how you can trade the volatile market ahead of state election results

The results of state elections in Chhattisgarh, Madhya Pradesh and Rajasthan, where BJP is the incumbent political party, will be keenly watched by market participants

The Sensex, which rose around 5 percent in November, has lost almost 2 percent so far in December due to weak global cues and uncertainty around the results of the five state elections currently underway, which are slated to be announced on Tuesday, December 11.

The results of state elections in Chhattisgarh, Madhya Pradesh and Rajasthan, where BJP is the incumbent political party, will be keenly watched by market participants.

Opinion polls suggest a win for BJP in Chhattisgarh, a loss for it in Rajasthan and a close contest in Madhya Pradesh. The market expects BJP to retain Chhattisgarh and Madhya Pradesh, but lose Rajasthan.

Kotak Institutional Equities said in a note that a 3-0 score for BJP may extend the market's current rally, whereas a 0-3 or 1-2 loss (Madhya Pradesh and Rajasthan) for it may result in a sharp correction.

The one thing that will certainly happen over the next couple of days is an increase in volatility. But there is a way you can make money from the wild swings.

“As a play on volatility, the trade is still difference gauged between current implied volatility and future realized volatility. If the implied volatility is higher, then sell both Call & Put with protection i.e. simultaneous longs in higher Call and lower Put. Otherwise, go long on options just for the event,” Shubham Agarwal, CEO and Head of Research at Quantsapp, told Moneycontrol.

“As far as the directional trade go, it makes sense to lock the trades with protection. Supremely high implied volatility structure does advocate selling options in conjunction with the existing trades but looking at the situation right now, that does not seem like a case,” he said.

If we take a look at the Gujarat and Karnataka elections, implied volatility was mostly in the 16–18 range on the upside and 11–13 range on the downside, with an average of 14.50-15.

Experts pointed out that following the announcements of almost all recent elections, the Nifty has moved 400-500 points in either direction.

“We have seen up to 500 point movement in the Nifty post the election outcome event, and investors who are risk averse and want to hedge their long positions can buy ATM put options of 10800 which is trading @ 174; however, loss in premium due to a fall in VOLATILITY cannot be ruled out,” Rajesh Palviya, Head Technical and Derivative Analyst, Axis Securities told Moneycontrol.

Source: https://www . moneycontrol.com/news/business/markets/heres-how-you-can-trade-the-volatile-market-ahead-of-state-election-results-3260351.html

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