2024 Election Result - Trading Strategy

Election results just around the corner, let's analyse last 20 years historical data to find out how market behaved before the result, on the day of the election result & after the result. As an option trader one can plan their trades based on the below information.

Year 2004, won by UPA govt. The Nifty chart shows clear downtrend from 1 month before election result and the downtrend continued even after the result was announced. Market corrected almost 21% in just two months. Nifty crashed 8% just 1 day after the result was announced.

Year 2009, consecutive victory by UPA govt. This time market rallied, Nifty data shows clear uptrend, where Nifty gained 26% in two months. On the day of election result, Nifty gained 18%, that's so huge. But no big movement post election results.

Also year 2009 is the aftermath of global financial crisis, where the entire global market witnessed more than 60% crash the previous year, markets were beaten down significantly and the election result just played as a catalyst and market bottomed out completely after the result. VIX data was available only after 2010, hence couldn't include VIX Historical data analysis for the election year 2004 and 2009. Also other indices like FinNifty, MIDCAP etc wasn't there before and BankNifty also was not liquid enough to be considered for analysis.

Year 2014, NDA came to power. Nifty rallied 13% in two months, but on the day of election result no big surprises, no big movement happened. Even next day after the result, no big movement, this resulted in huge iv crush in options data. VIX dropped significantly post the event.

During Year 2014 election, market was expecting no big surprises and it was expecting NDA to come to power. When the expected outcome has certainty towards it, then we cant expect a rally or crash. Only when the outcome is totally unexpected, markets can make huge moves. Though on the day of election result, market swinged on either side but by end of the day it closed at +1.1% up move, just like a normal day move. Any option buyer would have lost significant portion of their capital on such days, since 33% on the day of the election result.

Next day after the result, VIX again crashed another 15%. So in just two days, vix crashed more than 45% which lead to premium erosions. Option sellers who played with risk defined strategies during this time period would have definitely made good profits.

But any SL based systems would have suffered big time on the day of election results due to wild swings on both side. If you are planning to deploy your option strategies on election result, just prepare yourself to face big slippages and big swings in PNL.

Year 2019, second consecutive victory for NDA. This time, no big rally at all. Market moved just 1.1% in two months. On the day of election result, Nifty closed at -0.8%. No major moves. Even next day it closed at +1.8% only.

VIX crashed 30% on the day of the result. Next day additional 15% crash in VIX, another episode of premium erosions in options. More than 45% crash in VIX resulted in good profits for option sellers who have taken the position just one day before the result.

Looks like Year 2024, Market is expecting NDA to come back to power for third time. In last one month, Nifty did not make major move, it stayed flat. However, VIX jumped from 14 to 24 levels in one month. That's 68% increase in VIX. Option premiums are trading at higher price now. Just like the last two election years, if the outcome is same as what the market is expecting with no major surprise, then we can expect VIX to crash 50% in two days, with eroding option premium favouring the option seller who have taken position before the election result day.

Considering the historical data and current political situations, am expecting no major surprises. But still as a trader we cant be sure about anything in the market, so I would be deploying a risk defined option selling strategy tomorrow, will short OTM options with closer hedge. Strategies like IRON Condor can be considered , here's an example. Where 500 points away OTM options are shorted with 100 points away strike as hedge, this will cap the max risk. The trade can be initiated tomorrow, based on where Nifty trades one can decide the OTM strikes.

Based on the maximum possible loss, I will size my position accordingly and exit the position next day after the result, capitalising the IV crush post event. In case, market goes against me, still damage will not be higher as playing with risk defined strategy deployment.

The complete details of the strategy is explained in this detailed video.

https://youtu.be/_4P7rrjD4Wk