Understanding Budget-Day Option Spreads and Volatility Crushes
Praveen Dubey (SEBI Registered RA)
SP RESEARCHVIA PVT. LTD. (INH000015808)
The Dynamics of Implied Volatility (IV)
Leading up to major announcements like the Union Budget, option premiums spike due to rising Implied Volatility. Once the event details are public, IV crashes, dragging down option premiums even if the underlying index moves. The derivatives desk at SP RESEARCHVIA PVT. LTD. analyzes this behavior.
How can options traders profit from a post-event IV crush?
Deploy credit spreads, such as Bear Call Spreads or Bull Put Spreads, where the contraction in IV works in favor of the net option seller, mitigating direction risk.
Managing Event Risk
Avoid naked options buying on budget day. Unprecedented swings can cause massive slippages and wipe out capital. Always trade hedged positions to limit maximum loss scenarios.
Written by Praveen Dubey
Chief Research Analyst | SEBI Reg: INH000015808
Statutory Warning & Risk Disclaimer: Investment in securities market is subject to market risks. Read all related documents carefully before investing. Registration granted by SEBI and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. Content provided on this blog is for informational and educational purposes only.