Option selling during elections can be a highly lucrative yet risky endeavor due to the immense volatility and rapid changes in market conditions. However, with the right strategies, traders can capitalize on the premium melts to make significant profits. In this discussion, we delve into two approaches for option selling on election day, tailored for different risk appetites: one for cautious traders looking to minimize exposure and another for those aiming to leverage overnight positions.

The period surrounding elections is characterized by heightened volatility, which can be measured by the India VIX index. On election day, this volatility is often extreme, but it tends to stabilize by the next morning as uncertainty fades. The key to profitable option selling in such a volatile environment lies in exploiting the premium melts, where the value of options decreases significantly as volatility subsides.

For those looking to trade safely on the morning of the election results, history provides valuable insights. For instance, during the 2019 elections, selling out-of-the-money (OTM) options proved profitable. Taking a put and call option that were 2000 points away from the market price on the day of the election, we observed that these options closed at Rs. 213 and opened the next day at Rs. 122, ultimately dropping to Rs. 25 within minutes. This rapid decrease in premium underscores the importance of timely trading.

On election result day, it’s crucial to act quickly, ideally between 9:15 and 9:16 AM. At this time, traders should look for options with a premium around Rs. 80. For instance, if you’re trading in Bank Nifty, identify where the market is likely to open and select options 1500 points away. The challenge, however, is executing these trades manually, as premiums can evaporate swiftly. To overcome this, using algo trading can be highly effective.

With algo trading, you can set up strategies to automatically sell options at a specified premium. For example, you could use an algo platform to create a strategy that sells options at Rs. 80 precisely at 9:16 AM. This can be set up to execute trades within seconds, minimizing the risk of missing out on profitable opportunities. The strategy could involve selling both call and put options with no stop-loss, aiming for a defined profit.

Consider a scenario where you target a profit of Rs. 1200 with a corresponding maximum loss. Setting an exit rule when the overall profit reaches Rs. 1200 and a trailing stop-loss can help lock in gains while minimizing risks. If the profit target is achieved, the algo could be programmed to lock Rs. 1100 and increase the target with every additional Rs. 200 profit increment. This systematic approach ensures disciplined trading without emotional interference, which is crucial on such a volatile day.

This cautious approach is ideal for traders who prefer to play it safe and avoid the unpredictability of overnight positions. Even if the market moves significantly, a well-defined exit strategy and disciplined trade execution can protect against excessive losses while securing reasonable profits.

For traders willing to take on more risk to potentially gain higher rewards, overnight positions can be lucrative. The overnight strategy leverages the extreme volatility and high implied volatility (IV) leading up to election results. For example, during the 2019 elections, options had a high IV of around 45, indicating significant market uncertainty and rich premiums.

By analyzing historical data, we see that the premium on a straddle—a strategy involving buying both call and put options at the same strike price—tends to be very high before elections. For instance, on the eve of the 2019 elections, the straddle closed at a premium of Rs. 1301 but opened the next day at Rs. 960, indicating a sharp premium drop. This demonstrates the potential for significant profits from premium melts overnight.

The safest way to play this overnight strategy is by defining your loss parameters clearly. For instance, if the total premium is Rs. 1900 for a straddle, with the call and put options both highly priced due to the anticipated market movements, you could set up a strategy to profit from the decrease in IV once the election results are announced.

By taking positions overnight, you aim to capitalize on the premium melt as the IV collapses and the market stabilizes. Setting strict loss limits is crucial to prevent excessive losses if the market moves contrary to your expectations. For example, you could set an exit rule if the total loss reaches a certain percentage of the premium, ensuring that the risk is manageable.

Using these strategies, traders can navigate the volatile election period effectively. On the morning of the election results, acting swiftly and using algo trading can help capture premium melts within minutes. For those willing to take on overnight risk, understanding historical patterns and setting strict loss parameters can lead to substantial profits from the volatility collapse.

Overnight trading in the stock market, particularly with strategies like Butterfly, Iron Condor, and Iron Butterfly, can be a complex yet rewarding endeavor. When dealing with large accounts and significant positions, it’s essential to choose the right strategy to maximize returns while managing risks. Let’s delve into the details of these strategies, focusing on how to deploy them effectively in the Indian market, specifically using the Bank Nifty as an example.

The Iron Butterfly, often referred to as Iron Fly, is a popular choice among traders for overnight positions, especially around significant events like elections or major financial results. The Iron Fly strategy involves selling an at-the-money (ATM) call and put, while simultaneously buying out-of-the-money (OTM) call and put options as hedges. This creates a defined risk and reward profile that can be highly effective in volatile markets.

To understand why an Iron Fly might be the best choice for overnight trading, consider the costs and potential gains. Selling options from far out, as required by an Iron Condor, typically involves higher hedge costs. On result days or similar events, the premiums for hedges become expensive, reducing the net gain from the strategy. For instance, if you’re selling a position at 1900, it might look attractive initially. However, the costs involved in hedging could diminish your profit margin.

Let’s take a practical example with the Bank Nifty index. Assume that on Monday’s closing, the Bank Nifty is at 1900, which hasn’t moved much from the last close. By the next day, we anticipate it could be around 1500, given the historical volatility and recent trends. Last time, we saw it at 1300, so 1500 is a reasonable estimate for this cycle. Given this scenario, we can set up an Iron Fly at the ATM level.

On a platform like Sensibull’s Strategy Builder, select the Bank Nifty for analysis, avoiding the Nifty due to insufficient premiums. Custom build the strategy with the chosen expiry date, for instance, June 5. Sell an ATM put and an ATM call to capture the highest premium, which could be around 28000 rupees with a 27% implied volatility (IV). However, selling options naked is risky, so hedges are essential.

To hedge, we need to buy an OTM call and an OTM put. Suppose we sell an ATM call and put at 28000 rupees each. To hedge, we might buy a call at 52000 and a put at 47000. This setup creates a balanced Iron Fly, providing a risk-to-reward ratio of about 1:2. This means you could potentially earn 10000 rupees while risking around 22000 rupees. However, due to the high cost of hedges, it might be wise to tweak the strategy.

Instead of buying expensive puts, consider buying them around 46000, where the cost is lower. Adjust the call hedge similarly. This adjustment increases the potential profit while expanding the range slightly, making it 2.8% to 3.2%. Even if the market gaps up or down, your blue line (profit/loss line) stays within the profitable range.

Understanding the role of IV is crucial. On average, the IV for options might hover around 18%, but it can spike to 46% during high volatility periods. A 15-point drop in IV can significantly impact your profits. For example, if the IV drops from 45 to 30, you might see your max profit of 5000 rupees overnight jump to around 11000 rupees as the options premiums melt.

The margin requirement for such a trade might be around 63000 rupees. With potential earnings of 10000 rupees, you’re looking at a 20% return in a single day. This kind of return is exceptional, highlighting the peak days in your trading equity curve. Even with market fluctuations, the blue profit line covers the green area, indicating you’ll likely open in profit regardless of market direction.

Executing large orders requires careful timing. Avoid hitting market orders immediately after the opening. Allow the market to settle for at least 1-1.5 minutes to avoid significant slippage. For instance, a large order might turn a 10 lakh profit into a 2 lakh profit if not executed carefully due to the large quantity affecting the price.

On high volatility days like election results or budget announcements, premiums can melt rapidly. If you’re trading with one or two lots, you might not face significant issues, but with larger quantities, it’s crucial to handle orders with precision. Trading on such days, even with small quantities, provides invaluable experience. It prepares you for future volatile events, enhancing your trading skills.

For example, on election day, if you see combined call and put premiums around 80 rupees each in the morning, you might aim to sell them and then quickly buy them back as the premiums drop, securing a profit. This rapid premium decay happens because the uncertainty of the event is resolved, leading to a sharp decline in IV and option prices.

Deploying an Iron Fly the day before the result announcement can be highly profitable. You capitalize on the high IV leading up to the event, knowing it will drop post-announcement, resulting in a significant premium drop and profit realization. Adjusting your hedges based on market bias (bullish or bearish) further refines the strategy, reducing potential losses while maintaining profitability.

In conclusion, if you plan to trade on significant event days like elections or major financial results, consider selling options in the morning for quick intraday profits. For positions held overnight, the Iron Fly is a robust strategy. It leverages the anticipated drop in IV, captures premium decay, and provides a structured risk/reward profile. This approach, combined with careful execution and market experience, can lead to substantial profits in a short time frame.

Algo Option Trading Software: https://web.algorooms.com

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