How to play Brexit? | Stocks and Commodities

June 22, 2016
Time: 8 am

How to play Brexit?

1. A blog reader wanted to know whether he can do 'Long Strangle' by buying Nifty 8100 Put option and 8300 Call option.
2. It is the same strategy even Economic Times reported that many people are doing.
3. In my opinion, it is difficult to advise unless I know the client's financial capability and risk taking capacity.
4. First, worldwide markets are not falling ahead of Brexit, so the fear is very less.
5. Second, India VIX is not shooting up, though it was up by 20% in the last few weeks.
6. Third, after the death of an MP, momentum is in favour of 'In' campaign.
7. Fourth, there are lot of good news locally like GST, monsoon, economic liberalisation, etc.
8. Fifth, midcaps are doing extremely well despite large caps not doing well in the last few days.
9. Every day, one theme is catching up yesterday being textiles.
10. So if you are looking for plain vanilla strategy and if you have only limited capital, then you may go for buying 8100 Put and 8300 Call, the premium works out to be Rs 110.
11. You make profit if Nifty rises above 8410 or falls below 7990.
12. Alternatively you can think of many other strategies depending on your financial capabilities.
13. One method is "Buy Nifty 8100 Put and sell 8000 Put, buy 8300 Call and sell 8400 Call".
14. The logic behind this strategy is that markets will be moving violently but the violent will not be too much.
15. The positive is that the financial out flow will be less as we finance the buying of options by selling of options.
16. If you think markets are going to move with too much violence, you may "Buy Nifty 8100 Put and sell Nifty 7800 Put in July and Buy 8300 Call and sell Nifty 8600 Call in July"
17. Or if you think that markets are going to move very violently, a 300 to 400 points on either side, you may "Buy Nifty 8100 Put and 8300 Call and then sell December expiry Nifty 7000 Put and 9500 Call to finance the buy".
18. So it all depends on 'how much violence' you expect and how much you are prepared to lose if that does not happen.
19. Don't forget the kind of panic that was created last weekend when Raghuram Rajan said he is leaving, on Monday nothing happened.
20. So there is every possibility, Nifty may close between 8000 and 8400 and option buyers may lose.
21. I am planning to do all three strategies partially. Means if you have money for three pairs, do one pair of point number 13, 16 and 17.
22. Remember if you want to follow my method, you need lot of margin money.
23. Also on Friday morning, you have to exit the buy option of the opposite side immediately.
24. If markets fall, then you need to cut the 8300 buy option immediately or if markets rise, you need to cut the 8100 Put immediately, to optimise the profit.
25. Volatility is likely to fall on Friday morning and hence option premiums.
26. Remember most of the time, option buyers lose money in this kind of situations as everything is factored in.
27. You make money only when markets move violently more than the expected movement.
28. So we will see what happens and we will analyse on Friday evening about the performance of these strategies.
29. I also have lot of long positions, except the "Brexit" all other factors are favourable to bulls.
30. I expect Nifty to trade at all time high by November 2016, once this Brexit issue goes through smoothly.
31. I do not want to book the profits on my long positions, so I am buying 8000 Put options to protect the folio and financing the buy by selling Nifty 9000 and 9500 Call options of December expiry.