“Not having a trade is also a trade” – Some wise guy
We all know that betting on volatile events is gambling. And the union budget is the mother of all volatile events. So we thought we will make you a list of things to avoid during the budget day.
Buying Naked options
Options are going to be very expensive before the budget. For example, when we are writing this, NIFTY is at 17500 and the 17600 call is almost at 200 Rs. This means you need a 300 point move by expiry on the NIFTY to break even. This is very hard.
What if you do not want to hold till expiry and quickly get out? That is tough too – because the option prices will drastically drop right after the event, because of a drop in the implied volatility. If you did not understand the term implied volatility, worry not. It is enough to know that option prices will drop a lot after the budget if the market does not move.
Buying Call options and put options both
Many beginners buy calls and puts both. If you buy a 17500 call and put both, you will pay a premium of almost 400 Rs, that is 20,000 per lot. And to break even, you need a move till either 17900 or 17100. Even if NIFTY hits 17000 or 18000, you will just make 5,000. This is a low reward for the 20,000 you risked.
Not paying attention to the bid-offer spread
Bid-offer spread is the difference between bid and offer. If an option with lot size 1000 is trading at a bid of 50 and an offer of 51, you lose 1000 Rs in the bid-offer spread. Today, the bid-offer spreads will be wider than usual on all stocks. While this is something you might still be able to live with in NIFTY, on single stocks, this can cost you a lot. If the bid-offer spread is wide, please avoid trading in that strike.
Placing market orders
The market will jump fast quite a bit today. So if you give a market order to buy when the price of an option is 100, it can happen at a 105, or a 110. It can also happen at 95, but you get the drift :). Special note – If you are trading a relatively less liquid option, please do not keep SLM order.
Ideally, you should not be trading. But if you do want to trade, please trade with limited losses. If you are new to options, and you have not traded them before, we would urge you to not take your first trade today.
But if you want to have some fun anyway, try EasyOptions by Sensibull. We can give you option strategies with limited losses, to trade safely on the budget day
Good luck for today!
Co-founder & CEO, Sensibull