Trading options on election results day

The Indian elections are the mother of all events. This is the event with the highest level of uncertainty, as the rising VIX and option prices have been telling us. Every trader’s question is simple: What do you do on this day, and more importantly, what do you not do on this day?

Election day analysis

The Indian market has opened with a big gap up on the back of exit polls as I am writing this. From here, there are three possibilities:

• • The actual poll results are way better than the exit polls. This is a low chance, as the exit polls have given a big majority to the NDA, and it is difficult to have better results than that.
  • The actual poll results are consistent with the exit polls, indicating that the market may be range-bound.
  • There will be a surprise in which the actual poll results can be lower than exit polls. This may trigger a sell-off, as this is a complete shocker. Even if the NDA has a majority, if the margin of victory is small, the market may take it negatively. This is the territory of “the impact of the highly improbable.”

Volatility

Implied volatility is very high. If you did not understand that, don’t worry. All I am saying is that the option prices are very high. Why? Because people who sell call options are scared the market will go violently up, so they will not sell them for cheap. And people who sell put options are scared the market will go violently down, so they will not sell them for cheap. What does that mean? Options are going to be very expensive, and it is not easy to make money buying them.

Realized volatility might also be very high. What does that mean? There will be a lot of up-and-down moves as the uncertainty is high. This means that if you are trading with small targets and tight stop losses, no matter whether you are bullish or bearish, chances are that you will be stopped out on both sides.

Bid-offer spreads on some options will be wide, and long-term options might be illiquid. This is because no one wants to take a position and get stuck without a timely exit. There is a risk of gaps when the actual results come out. This means that you cannot trade with a stoploss because your orders may not go through at the desired price. Oh, and it is difficult to sleep if you have futures or naked options sold tonight.

Dos and don’ts

1. You do not have to trade on election results day. There is no glory or wisdom in betting when there is high uncertainty. You can make money peacefully by trading on days with high predictability. So if you want to trade, you can. But there is no compulsion, and it might even make sense not to trade. Do not trade out of the fear of missing out on something big. Understand that the market will always be there, giving you opportunities.  
2. Trade with a small position size. Even a small position can make you a lot of money if the move is large.
3. Avoid naked selling of options. There can be large swings. You might eventually be right and make money, but it will not be easy to hold on to a large negative MTM and handle all that stress if a big move comes against you
4. Please avoid buying both calls and puts expecting something to happen. As we explained earlier, the option prices are very high. So you might not make money because the price you paid to buy those options is difficult to recover, even with big moves.
5. Trading with tight stop losses. Trying to capture quick moves might be a bad idea. Random swings can take out your stop losses on both sides.
6. Unhedged overnight positions, particularly futures and naked selling options, are risky. Of course, there could be a big risk of a gap, and the financial advice here is that this is not good risk management. More importantly, it is mental health advice: Why take stress? Why lose sleep?
7. Stay away from relatively illiquid options. Entry and exit might be difficult.
8. Be careful with market orders, especially with illiquid options like some stock options and faraway options. The bid-offer spread might be wide, and it might not be worth it.

The big question

I can’t tell you what to do, but I can tell you what I would do if I were to handle this. I would prioritize peace of mind, low stress, and risk management. I would also avoid a trade that could completely wipe out my capital. If I put it that way, I do not have too many options. As in choices, not the F&O waala options 🙂

My only practical choice is to do option spreads. So this is what my step-by-step guide is:

1. Try to avoid my temptation to trade on election result day.
2. Try very hard, fail, and decide to take a safe trade 😉
3. Tell myself, “Okay, if I really want to do this, I will make one trade.” And I will either be right there or wrong there; I will make my peace with it. But I will avoid degen trading—not too many trades, no intraday in and out, no churning, no scalping, no crazy-stunts.”
4. For that one trade, do something that gives me a decent amount of reward without taking a huge risk.
5. This lands me on fully hedged option trades with limited risk and reward.
   • Bull Call Spread or Bull Put Spread for an up move
   • Bear Call Spread or Bear Put Spread for down move
   • Short iron condor for range-bound
   • Long Iron condor for a violent move up or down

Why trade options spreads?

1. Limited reward, limited risks—peace of mind.
2. Cheaper than buying options and way safer than selling options
3. No matter how much the market moves, I will not be worried about huge losses. Why? My maximum loss is limited.
4. I will not worry about the gap up or down, either, because, again, my maximum loss is limited.
5. I do not have to worry about stop-losses if the market swings wildly. Why? You guessed it right 🙂 The max loss is built in, and the max loss can act as my stop loss.

So that is that. My idea is to do one trade for tomorrow—either long, short, range-bound, or volatile—through a spread. And hold it. If I am wrong, I will be wrong once and lose money. But at least I will not do tens of trades and lose too much money. 

Alright, hopefully, with all this, I am going to sleep peacefully. See you all on the other side.