What if Modi fails to become the prime minister of India? Some are expecting the Nifty to crack by 1000 points in such a scenario. Although not a perfect hedge, a bear spread makes sense – think of it as insuring your portfolio against the adverse outcome.
NIFTY May 6600/6750 Long Put Spread
The Nifty will have to expire below 6695.00 for the trade to be profitable. The max profit is Rs. 4750.00 and the cost to enter the trade (and max loss) is Rs. 2750.00.
Thought process
This trade can be best described as buying a limited form of insurance. You are assuming that the Nifty will not fall too far below 6600 and losses are not going to be catastrophic. You could go farther down the option chain if you are feeling too nervous, but then your δs will get smaller so you will have to buy more spreads to cover your portfolio.
For example, if you did a NIFTY May 6500/6600 Long Put Spread instead, you will be moving the break-even to 6569.70, pay less (Rs. 1515.00) for a max profit of Rs. 3485.00. But the delta of this spread is -0.08 vs. -0.15 for spread described above.
Exiting the trade
The result of this election is expected to be declared on 16 May (Friday). Exit soon after election results are announced or right before it if the trade is profitable.
Read more about options: Options Trading Guide