Options trading strategy to benefit from high ViX due to event of Budget

The Budget and its accompanying volatility is an opportunity for astute traders to make money. Experts have explained risk-defined options strategies that we can apply

When ViX is low & expected to increase due to event risk, implement Calendar strategy

Put Calendar

An anonymous Youtuber with the nickname 'Mindset of Trader' has referred to data which proves that the ViX invariably rises on the eve of the Budget and the prices of Calls and Puts rise.

This is because of the sense of anxiety, fear and the anticipation in the minds of traders as to whether the Budget announcements will cause the market to surge or plunge.

Also, as soon as the event is over, there is a cool down in the ViX.

The Youtuber has advised that we implement a Put Calendar with the short leg expiring before the Budget and the long leg expiring after the Budget.

However, we exit both positions when the short leg expires because that will be when the ViX is at the highest. The increase in the Vix will benefit the long leg as its price will increase and we stand to make a gain.

The Youtuber has given a back-test example of how we could have implemented the Put Calendar strategy on the eve of Budget 2022 and what its outcome would have been. He has also explained how we can adjust the trade in case there is an aggressive movement on either side which puts the trade in jeopardy.

Double Calendar

The same concept alongwith the rationale and mechnaics have been explained by another YouTuber named Sudhanshu Singh of IBBM India.

He has recommended implementing a Double Calendar consisting on both Calls and Puts. He has also explained various scenarios and what their profitability potential is.

Illustration

Here is a pay-off diagram of a Double Calendar on the Bank Nifty where all the legs are at the ATM strike price of 42500. While the short legs expire before the budget (1st Feb), the long legs expires later.

The entire trade has to be exited on the date of the expiry of the short leg i.e. 25th Jan.

The trade requires a margin of Rs. 47500 for one lot each. Assuming the Bank Nifty stays standstill and expires at 42500, our gain will be Rs 7600, which is 16% of the deployed capital. The breakeven points are at 42165 and 42864 which is about 0.8% of the ATM.

The max loss is Rs 14800 which is 31% of the capital. This eventuality will occur if the breakeven points are breached and no corrective action is taken. However, in reality an active trader would adjust the trade so as to minimize the loss. If adjustments are not feasible due to lack of capital or other reasons, one should exit if a hard stop loss of 2% of the deployed capital is hit.