Traders with an appetite for risky bets can adopt a strategy involving Nifty options to make a neat profit in the run-up to the Bihar election results in the first week of November, said derivative analysts. They stand a chance of making around two times the initial investment as nervousness around the outcome of the state polls could drive up values of options.
Smart traders are simultaneously buying Nifty call and put options betting that the index could move sharply either side on the basis of the election results. A victory for the NDA government in the crucial state polls will result in a big market rally and a loss in an equally large correction. But, in either scenario, they promise that their clients would gain if they did the long strangle strategy.
"Rather than taking a directional view, it's better to do a long strangle, since markets can spring unexpected surprises," said Rajesh Baheti, MD, Crosseas Capital. The long strangle comprises simultaneous purchase of an 8000 Nifty put and an 8500 Nifty call expiring in November. Purchasing a call is a bet that Nifty would rise and buying a put that it would correct. For purchasing the two options, the trader pays a combined Rs 148 to the options writer. By buying both options, the traders seek to benefit irrespective of the Nifty's direction, based on the exit poll results after November 5 or after results are declared on November 8.
The trader will lose only if the Nifty trades between 8500 and 8000 after the polls. In such a scenario she could very nearly forfeit the price paid to the seller. Their bet is that if the NDA wins, Nifty would rally more than 4.5 per cent from Monday's close to over 8648. If it loses, they expect the index to fall over 5 per cent to less than 7852.
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