How the Brexit trades performed? | Stocks and Commodities

June 26, 2016
Time: 10 am

How the Brexit trades performed?

1. A number of people wanted to know whether they can make money by buying options ahead of Brexit.
2. Their logic was very simple. Markets will move violently in one direction but we do not know which direction.
3. So if we buy both Put option and Call option, it is possible to make good profit when markets move violently in one direction.
4. But what are the factors which they do not consider?
5. It is not only the option buyers who know that markets will move violently, option sellers also know that fact. So they will be ready to sell option only at a higher price to factor in this risk.
6. That is why India VIX shoots up ahead of the event.
7. Most popular strategy was to buy both 8100 Put and 8300 Call, so I take the same strategy for discussion.
8. If anyone has bought both the option on Thursday afternoon at market closing, just ahead of Brexit, he would have paid Rs 132 as premium.
9. In yesterday's trade, Nifty 8100 Put hit a high of Rs 200 and Nifty 8300 was trading around Rs 5 at that point of time. SO combined premium was Rs 205.
10. So the important point was not "Entry", it is the exit.
11. Where these people would have exited?
12. If they have exited with a profit when markets were in panic in the early afternoon, it was good.
13. If they were hoping to make more profit and if they have put stop loss, then stop loss would have been hit.
14. Or if they are still holding, then they at loss.
15. Yesteray at close the combined premium was only Rs 90, a loss of Rs 42 per share and about Rs 3000 loss per lot.
16. I did mention day before yesterday that "Exit" is as important as "Entry", retail people usually "Enter" at right time but do not "Exit" at the right time.
17. Option buying is a gamble and as and when you have sufficient profit, you have to exit.
18. If you are holding until maturity, probably you will loose.
19. Even last August when China devalued its currency, Nifty 8000 Put opened around Rs 40, then shot up to more than Rs 200 but finally on the day of expiry, it closed around Rs 30.
20. Since last August China issue was not known earlier, nobody could have bought the option ahead of the event, so I take the prices just after the event.
21. Two days before the "Brexit" event, the VIX was down, at that time the combined premium for 8100 Put and 8300 Call was Rs 110 only.
22. Even that trade is also in loss at the closing price yesterday.
23. So two things are important for plain option buyers.
24. One, Buy when VIX is low, two to three days prior to the event, not just one day prior to the event, when VIX is high. (In this case the combined premium was Rs 110 on Tuesday and Rs 132 on Thursday)
25. Second, you exit when the event plays out, do not keep the positions until expiry.
26. Or at least maintain stop loss once you enter into a good profit zone.
27. Usually these are the two mistakes retail people make, they enter just ahead of the event and hold until maturity.