Trading Strategy for Election 2014 India – Things to Remember
Not only you, almost all Indian traders are awaiting for the Big Event - Indian Election Results 2014. Why?
During the last general election in 2009, Indian stock markets rose over 17% on the election result day. In general election in 2004, the markets fell over 16% on the election result day. There is no harm in traders are looking for an exciting ride on 2014 election result which is due on 16th May 2014. They buy/sell stocks, options and planning their own strategies to gain maximum profit while limiting the risk.
But you should remember, market rallied in 2009 and corrected in 2004 due to the unexpected result. Indian voters tend to change their mind at the last moment. Since things are uncertain, you should be prepared to handle the market movement in both sides.
The general prediction and opinion polls suggests that NDA can form a stable government and we have witnessed market reacting to it. If you trade based on this opinion polls, predictions and Mr.Modi wave, you are exposing yourself to a huge risk. Since Indian voters might change their mind at the last moment, we can’t rule out the possibility of 3rd party gaining majority and forming a minority government. Let’s take a close look at how market would react on these two cases:
NDA forms government with Majority
This is expected and market already reacted to this. There won’t be a drastic rally in single day as like 2004 & 2009. But long term growth is very much possible after a small correction in market. There could be a 5-8% movement in the market.
Who will make profit?
Buyers of stocks in equity segment.
Who went long in stocks and index futures.
In the Money and At the Money call option buyers.
All Put option sellers and Deep Out of the Money call option sellers.
Who lose money?
Who shorted stocks and index futures.
All Put option buyers and Deep Out of the Money call option buyers.
In the Money and At the Money call option sellers.
Straddle and Strangle players in options.
If you have planned straddle/strangle, should be careful as option premiums are so high now due to high implied volatility.
Third front gains Majority
This would be a surprise for market and fall would be unstoppable. At least 30% correction is expected. Third front has a list of PM candidates. Mulayam Singh Yadav, Jayalalitha, Mayavathi, Nitesh Kumar and so on. First of all, they would not form a government at least for 2 weeks as every one wants to be PM. Even if they form government, no one knows how long it would sustain. Do you remember 1996, Vajpayee government lasted only for 13 days?
Who will make profit?
Who shorted the stocks and index futures.
All Put option buyers.
All Call option sellers.
Who lose money?
Buyers of stocks in equity segment.
Who went long in stocks and index futures.
All Put option sellers.
All Call option buyers.
So keep these two scenarios in mind and plan your strategy accordingly.
