Budget 2024: What rollover data suggests for pre–budget positioning, and key tips for traders

The Indian benchmark indices are witnessing a subdued trend on January 24, marked by volatility following a significant fall in the Bank Nifty, which witnessed a sharp decline of 1,200 points in the January 24 trading session.

Looking ahead, market participants are closely monitoring the upcoming Interim Budget 2024, slated to be unveiled by the Finance Minister on February 1. As we approach this pivotal event, Soni Patnaik, Assistant Vice President – Derivatives Research at JM Financial, provides her insights into the pre-budget positioning:

Rollover data

Nifty January rollovers stand at 46 percent with a 0.8 roll cost, compared to 52 percent in the last series, indicating the unwinding of long positions. Bank Nifty rollovers are at 42 percent with a 0.9 roll cost, down from 51 percent in the last series, signalling a long unwinding.

Addressing the weaker rollovers, Patnaik commented, “The Nifty broke below 21,300 on a closing basis, and the next support is at 21,000/20,950, below which it may test 20,500. As long as the Nifty does not re-cross the 22,000 mark again, volatile swings and sell-on-rise scenarios may persist. Therefore, it is advisable to hedge positions. Any small upside can be utilised to hedge long positions.”

“The Bank Nifty broke the 45,500 level, and with the highest OI at 44,000 PE and 1.82 lakh contracts, it may test the 44,000 mark. Resistance for the near term is now at the 46,000-46,500 band,” Patnaik added.

Pre-budget strategy 

Starting with weaker rollovers in both indices, it is recommended to hedge any long positions with a bear put spread strategy.

The Bear Put Spread Strategy entails:

For Nifty: Buy 21,000 Put option and Sell 20,500 Put option (1:1 ratio)
For Bank Nifty: Buy 44,000 Put option and Sell 43,000 Put option (1:1 ratio)

Read more: Budget 2024 | Pre-budget positioning and tips for traders

Deploying this strategy for the February 1 expiry in the Nifty results in a total premium outflow of around Rs 90, which is also the maximum risk. Similarly, for Bank Nifty’s January 31 weekly expiry, the maximum risk is Rs 113, aligning with the maximum premium outflow.

Remain hedged with options buying strategies: Patnaik’s tip for traders

Remain hedged with options buying strategies such as the bear put strategy. Any upside recovery in markets can be used to hedge long positions, considering the weaker rollovers. The market seems to have formed a sell-on-rise structure recently, as FIIs’ long positions in the F&O space have significantly reduced from 66 percent long to 46 percent.

Avoid naked options writing due to volatile swings as the budget day is a significant event and any negative triggers could result in one-sided movements.

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