The usual pre-budget rally is missing this time around, with the markets correcting by around 8% since mid-January instead. Expectations are indeed running very low.
But as is their practice, option sellers are protecting themselves from a large move in the markets after the Budget announcement.
Option premiums have started inching up in the past one month. At current prices, the implied volatility on Nifty options is around 28.5%, pretty much in line with the historic average of 30% around budget announcements.
Graphic: Yogesh Kumar / Mint
Markets typically either rally sharply or fall steeply on the day the budget is announced. To bet on a similar outcome using options would involve buying a call and a put option, or what is called a long straddle. At current prices, a long Nifty straddle expiring in March with a 4,900 strike price—which is closest to the current index level—would cost 305 points.
In other words, the Nifty would need to rise or fall by over 300 points for a long straddle position to break even. That translates into a move of around 6-7% from current levels. The main trigger for such a large move this time around would be the targeted fiscal deficit and borrowing programme.