Monday, 4 April 2016

How to trade for RBI policy on 5th April,2016 ?

Today RBI will announce its policy at 11:00 a.m.

How can we use this event for making some profits ?

There can be two scenarios :-

First - Markets move sharply in any direction due to some sudden surprise by the policy.

Second - Markets remain range-bound as there is no surprise in the policy.

In both the cases , there is one thing which will surly happen.

Implied Volatility of options will go down after the policy.

So, best method to trade in such an event is sell options on both sides. Yes a short strangle can be a great strategy, as after the event,  prices of both call and put may go down , considerably.

More conservative traders can create an iron condor , so that even if there is a big move in any one direction, there are no / small losses

We must take some precaution while  creating such positions. Most important is , we must ensure that  we are sufficiently away from the spot levels of market so that in case of any sharp move, none of  our positions get In The Money. In case we are able to achieve this, chances are very bright that we will be able to make profit only.

Because of such events, IVs always go up and after the event, irrespective of outcome of event, IVs go down. So if IVs will go down, option writers will be benefited. Since we know that markets may not make a significant move till the policy announcement, we can always initiate our positions just before the event.

If you are relatively new with option writing, just go for paper trading to understand the scheme of things.

All the best.