Buy Nifty Put Options Ahead Of Budget, Says HDFC Securities

HDFC Securities has advised investors to hedge their portfolio by purchasing Nifty put options

The Budget comes at a time when the Indian economy has just started to recover from the steepest GDP decline in recent times. The Finance Minister Nirmala Sitharaman has already raised expectations from the forthcoming budget, saying that it will be like never before, and alluded to it as “unlike anything seen in the last 100 years.”

The budget, according to many, will emphasize on health issues such as vaccination and provide regulatory support to hard-hit sectors such as hospitality, retail and aviation.

“Many of the key themes in the budget will revolve around Covid-19, either directly on health issues (vaccines) or regulatory support to sectors most affected (e.g. hospitality, retail, aviation),” HDFC Securities said in a report titled Pre-Budget 2021 Expectations.

“While direct and Indirect taxes may not offer much scope for reforms, the main focus could be on boosting manufacturing through schemes such as PLI and to create jobs. We expect increased allocation for the social sector: MNREGA, education, affordable housing and health ministries,” HDFC Securities added.

There are growing hopes surrounding the upcoming budget. The finance minister is not only expected to announce steps to boost the economy, but also loosen the purse strings in face of the difficult fiscal situation. The downside to heightened expectations is that it leaves very little room for disappointment, especially from the stock markets point of view. The markets have almost doubled from March lows within a span of a mere ten months and are currently trading at a price to earnings ratio of 34, which is far expensive than the long-term average.

A corona cess, if it happens, could also be seen as a negative by the markets. It is being widely speculated that the finance minister would introduce a corona cess in the budget to meet the costs of covid vaccinations.

The Budget day could therefore turn out into a volatile session for the markets. The benchmark indices could swing wildly in either direction, depending on budgetary announcements.

HDFC Securities has therefore advised investors who are fully invested, to hedge their portfolio, either fully or partly, ahead of Budget Day by purchasing Nifty put options. Hedging is akin to an insurance policy and comes at a cost i.e. the premium that is paid for purchasing the put options. But the gains made in put options, in case of a market downside, would at least partly compensate for erosion in value of the stock portfolio.