The Sensibull way to trade NIFTY on Karnataka Elections

This post assumes that you are a new investor, and that you do not completely understand Implied Volatility (IV). If you understand IVs and you know what you are doing, all we have to say is to look (at the IVs) before you leap.

ATM IV, i.e. the IV of NIFTY May 10800 Strike stands today on May 14th 2018 at around 13.5%.

We have just two things to say:

Number 1. Do not trade till the uncertainty over the elections is over. Gambling on events is not smart trading. It is like a coin toss. You can trade better odds than that.

Number 2. In case you decide to ignore #1 and trade anyway, no matter what you do, do not buy options if the market gaps down or falls in a big way, say 1% or more. This is because if there is a big gap down movement, IVs are likely to spike up. The last time we saw a huge gap down, IVs went to 40% from the normal of ~14%. That was on Feb 6, and that gap was around 300 points. So check the IV and see if it has gone above 13.5% significantly.

NIFTY on the morning of 6th Feb 2018. Despite the ~200 point recovery, you could have lost money on buying a call.

Once the event is over, IVs will fall, and if you have bought options at high IV, you will lose money. A lot of money. On Feb 6th, you could have lost more than 10,000 Rs in 15 minutes regardless of whether you bought a call or a put.

Having said that, if the IV on the at-the-money call is still around 13% after the event, there is no big risk in buying options.

To understand this better and to know more please watch this video.

Happy trading, best of luck, and may the force be with you :)

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