Sunday, February 24, 2008

Event study update: Pre-budget trades

The Union Budget for 2008-08 will be tabled on 29th Feb'08. This, probably, is the most awaited of all events in the Indian financial circles. Market movements are sharp in and around Budget time.

Can one trade (with the benefit of hindsight) or take a position to earn alpha returns based on this event?


The verdict:

[A month after the announcement of the Union Budget, the benchmark indices (BSE Sensex and NSE Nifty) closed below the pre-Budget levels on seven of the last ten occasions and of the total 17 instances they ended in the red 12 times]

Trading options:

- Undertake straddle trades, which means an investor buys both the at-the-money call and at-the-money put with at least two to three months left to expiration. However, the stock price must move significantly in order for the investor to make a profit, but the downside remains restricted to the amount of premium paid.

Exactly two years ago, I had done a small study on this. [Link]

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