Budget 2023: Use this F&O strategy to hedge Nifty downside

The Union Budget proves to be an important signal for the investors and traders of the market as it drives the sentiments on the street. Prior to the event, the market generally remains volatile.

Ahead of the budget, the market has been volatile since last week due to allegations leveled by US-based Hindenburg Research on the Adani group.

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India VIX has jumped from 13.30 to 19 in last 3 days. Ahead of the Budget, the rise in volatility and fall in benchmark indices is a matter of concern.

“It is advisable to hedge your existing long positions by buying protective puts or by initiating bear put spreads in weekly or monthly expiry. It is also advised to reduce the cost of position in delivery by writing higher strike calls in select F&O stocks (covered calls),” said Chandan Taparia, Derivatives & Technical Analyst, Motilal Oswal Financial Services. a report.

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“Nifty index has given a breakdown from its long consolidation of last 20 trading sessions with a jump in volatility index. It continues to face supply near its key moving averages and has started forming lower tops – lower bottoms on multiple time scales. Motilal Oswal reports that it has broken last month’s low along with formation of Bearish Engulfing Pattern, which has a downside bias.

The report said that the Nifty may further slip to 17,200-17,350. To counter such weakness, Taparia suggests a hedging strategy for the budget month, which is as follows:

Nifty Monthly Hedging Strategy: Bear Put Spread: Buy 17700 PE and Sell 17200 PE (February 23, 2023)

Buy 1 lot of 17,700 Put @ 330

Sell ​​1 lot of 17,200 puts @ 180

Margin Required: Approx 35,000

BEP: 17,550

Net Premium Paid: 150 Points

Maximum Risk: 150 points ( 7,500/-) if Nifty goes up

Maximum Reward: 350 Points ( 17,500/-) if Nifty goes below 17,200 zone

Risk : Reward Ratio : 1:2.35

Motilal Oswal reports that this strategy prevents the Nifty from moving towards 17,200 by paying a cost of 150 points, which is 1% of the index.

The break-even point is at 17,550, which means the investor/trader can lose the invested money if Nifty moves above it. On the other hand, if Nifty goes below 17,200 then there will be reward. 17,500.