If election results are different from exit polls, Nifty can tank 3-5% on May 23

If election results on May 23 are not in line with the exit polls, experts are projecting the indices to swing wildly in the range of ±10 percent from the current level.

On the other hand, if election results are in line with the exit polls, upsides will be capped.

“History suggests that if results are in line with exit polls, market moves by 1.5-2 percent post the final results; however, if they are not in line and there is a huge deviation in the results, markets tend to swing wildly to the extent of ±10 percent,” Edelweiss Professional Investor Research said in a note.

The volatility index, India VIX has already hit 4-year high of 30.18 in the intraday trade on May 22.

“Option prices are also expecting a volatile expiry hence to hedge your portfolio from this volatility and be safeguarded from the event risk, we advise to hedge your portfolios by buying Puts of the June expiry,” Edelweiss said.

The brokerage firm advises investors to buy 11,500 CE of June 27 expiry at Rs 235.

The Nifty weekly option volatility for Puts has also crossed 100 percent levels, and in some options has reached beyond 150 percent. For example, 10,100 PE to 9,900 PE contracts are trading at volatility in excess of 150 percent.

“While volatility for Call options has not gone beyond 110 percent. Such huge volatility differential indicates that there can be a very volatile session on May 23 and if correction sets in it can be a sharp one,” AK Prabhakar, Head of Research at IDBI Capital told Moneycontrol.

“A possibility of 3-5 percent fall in one day cannot be ruled out. As the event has a lot of uncertainty we would advise all to book profits or lighten their position EOD,” he said.

Prabhakar further added that due to such high volatility, buying option has higher chances for it to expire worthless (i.e. both May 23 expiry as well as May 30 expiry) or not make desired profit.

Once the election results are out, volatility will collapse down to 20-25 percent and this will lead to more than 50 percent erosion of the option premium by May 24 or May 27. Thus, the profits will not be as desirable or there can even be a loss despite your view being right.