Budget 2024: Pre-budget avoid aggressive directional strategies, says Chavan of Angel One

Indian stock indices have been on the decline since mid-January 2024, after a strong bull run that started in November, and faced significant profit booking last week, primarily due to HDFC Bank’s dismal performance.

The banking sector, constituting 35 percent of the benchmark Nifty index, triggered a market nosedive. Looking forward, investors will monitor the interim budget set to be presented on February 1.

Sameet Chavan, head research – technical and derivatives, at Angel One, analyses pre-budget positioning:

Derivative activity indicates that the ongoing correction can be primarily attributed to long unwinding. Particularly noteworthy is the significant increase in bearish bets in the banking index, with open interest surging by more than 40 percent over the same timeframe. A substantial addition of short positions in the Bank Nifty for the upcoming series potentially reflects a strategic move ahead of the budget announcement.

FIIs turn net sellers

After continuous buying, foreign institutional investors (FIIs) turned net sellers in equities this month, selling Rs 26,700 crore of stocks in January. The major chunk seems to be in banking counters, mainly HDFC Bank, which had its worst monthly decline for the first time since March 2020.

FIIs also trimmed long positions and added short positions in the index futures segment. Their long-short ratio plunged to 47 percent from 70 percent, indicating a complete shift from an overbought situation.

Fear index surges

India VIX, a measure of market expectations of near-term volatility, has been on the rise and a surge beyond the 17 mark should be a cautionary signal for the market.

Psychological support in jeopardy

Considering these critical data points, the psychological support level of 21,000 on the Nifty is in jeopardy. On the upside, crossing 21,500-21,750 in the near term would be a daunting task.

Pre-budget positioning

“The Union budget session typically surges market volatility. Yet, given its interim nature without any major announcements expected, it is anticipated to unfold as uneventful. The preceding week witnessed substantial profit booking, and this trend has persisted into the current week. Notably, there has been a significant formation of short positions in the banking index on the derivatives front, coupled with foreign institutional investors engaging in selling activities in index futures, which hasn’t been encouraging for bullish sentiments,” Chavan said.

Considering the recent developments, Chavan suggested refraining from adopting any aggressive directional strategies. Instead, a prudent approach would involve implementing a Bear Put Spread in the Nifty, which is a moderately bearish strategy with capped potential profit and loss.

Bear Put Spread in Nifty: Recommended derivative strategy

Considering that the Nifty is currently hovering around the 21,300 zone, a strategic move would be to purchase a 21,200 put while simultaneously selling a 21,000 put. The risk-reward ratio for this Bear Put Spread strategy stands at approximately 1:2.3, making it an attractive option for traders.

Tips for traders

Chavan advises traders to remain nimble-footed going into the budget event. Since it’s an interim budget, major reforms are not expected, and the markets may treat it as a non-event.

Monitoring global developments is crucial as they are likely to provide directional triggers for our market in the coming weeks.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.