The impact of elections on Indian stock market , the call put race and the gold saga

The impact of elections on Indian stock market , the call put race and the gold saga

On Monday 3 june 2024 ,the market reacted on positive side after the exit polls showing the clear mandate for NDA 360+ seats in the loksabha elections . Since the last month the market has been uncertain and the india vix has been increasing rapidly , the Indian stock market experienced significant gains, primarily driven by favorable exit poll results and strong economic data. On 3rd june the BSE Sensex surged by 2,507 points (3.39%) to close at 76,468.78

The market rally was because of several factors:

1. Exit Poll Results: Exit polls predicted a substantial majority for the BJP-led NDA government, suggesting political stability and continued economic reforms

2. Economic Data: India’s GDP growth for FY24 was reported at 8.2%, exceeding expectations. This positive economic outlook contributed to investor confidence

3. Global Cues: Positive trends in global markets, especially gains in the US stock market, also supported the Indian markets

Sector-wise, PSU banks and realty stocks saw substantial gains, with the Nifty PSU Bank index jumping over 8% and the Nifty Realty index rising 6% .

MidCap and SmallCap indices also saw significant advances, reflecting broad-based buying across segments

Additionally, the Indian rupee strengthened significantly against the US dollar, ending at 83.14, marking its largest single-day gain in six months

Now on june 4 the market reacted opposite and trapped all buyers and gave a huge dip with more than 5% correction in index.

On the next day of making new Highs in the Market the results came under expectations and the panic selling gets start the current governing party secured less than half mandate only 240 seats compared to 303 5 years back

The Market shown a drastic crash because of the uncertainty . Many psu stocks hit lower circuits on Tuesday .

The Indian stock market experienced a significant crash triggered by a confluence of factors:

1. Election Results and Political Uncertainty: The market’s expectation of a BJP victory with a significant majority was unmet. Despite assurances from political leaders, including Amit Shah, that a strong BJP victory would boost the market, the actual election results fell short of these expectations, leading to panic selling.

2. Foreign Institutional Investors (FII) Selling: There was continuous selling by foreign investors leading up to and following the election results. This contributed to the decline as FIIs pulled out substantial amounts from the Indian market in May and early June

3. Market Valuation and Volatility: The Indian volatility index, India VIX, reached its highest level in a year, indicating increased market fear and uncertainty. Additionally, Indian market valuations were relatively high compared to other emerging markets, prompting profit-taking and further selling pressure.

4. Disappointing Corporate Earnings: The Q4 earnings results for many companies did not meet market expectations, adding to the negative sentiment. Investors had anticipated better performance and started offloading stocks when the results were underwhelming

5. External Economic Factors: Geopolitical tensions, a strong US dollar, and concerns over US Federal Reserve policies also weighed on investor confidence, contributing to the market downturn

This crash wiped out approximately Rs 31 lakh crore ($380 billion) in market capitalization, marking one of the most significant single-day losses in India’s stock market history. The following day, the market did see a partial recovery, but the overall sentiment remained cautious

CALL – PUT RETAILERS

On June 3, 2024, the Indian stock market opened significantly higher, marking a “gap up” due to positive exit poll results and strong economic data. This led to a substantial increase in stock prices across various sectors, especially in public sector banks and realty stocks. The BSE Sensex rose by 2,507 points (3.39%) and the Nifty 50 gained 733 points (3.25%), both reaching new all-time highs during the trading session

Call option buyers, who had anticipated a rise in stock prices, benefited immensely from this gap up. The sudden surge in the market value meant that call options, which give the holder the right to buy stocks at a predetermined price, became significantly more valuable. For instance, those holding call options on major indices like the Nifty 50 or on individual high-performing stocks saw their investments increase dramatically in value due to the substantial price rises.

The gains for call option buyers were amplified by the market’s strong performance. As the stock prices surged, the intrinsic value of these call options increased, leading to potentially high returns for the holders. This situation is particularly advantageous in a scenario of a sharp market uptrend, as seen on June 3, 2024

To summarize, the gap up on June 3, 2024, provided significant profits for call option buyers due to the large increases in stock and index prices driven by favorable political and economic developments.

On June 4, 2024, the Indian stock market experienced a significant crash, which led to substantial profits for those involved in selling call options and buying put options.

Profits from Call Option Selling

Selling call options, or writing calls, involves selling the right to buy a stock or index at a specific price. If the market price remains below the strike price, the seller keeps the premium paid by the buyer as profit. On June 4, the market fell sharply, meaning most call options likely expired worthless or with minimal value. As a result, call option sellers benefited by keeping the premiums they had received. This profit scenario is particularly true when the market experiences a steep drop, as it did on this day, with the BSE Sensex and Nifty 50 plunging significantly

Profits from Put Option Buying

Buying put options involves purchasing the right to sell a stock or index at a predetermined price. When the market falls, the value of these put options increases, as the holder can sell at a higher-than-market price. Given the dramatic drop on June 4, put option buyers saw significant gains. The market’s decline would have increased the intrinsic value of these put options, leading to substantial profits for those who had anticipated a downturn

Summary of Market Movements and Impacts

Market Crash: The Sensex fell over 1,000 points, and the Nifty dropped below critical support levels, reflecting a broad market sell-off

Reasons for the Decline: Contributing factors included political uncertainty from the election results, continuous foreign institutional investor (FII) selling, disappointing corporate earnings, and global economic concerns

Example Calculation

1. Call Option Selling:

   - Suppose a trader sold Nifty 50 call options with a strike price of 23,000 for a premium of Rs 100. - After the market drop, the Nifty 50 fell well below 23,000, causing the call options to expire worthless. - The seller keeps the premium of Rs 100 per option as profit.

2.Put Option Buying - Suppose a trader bought Nifty 50 put options with a strike price of 22,000 for a premium of Rs 50 - After the market decline, the Nifty 50 fell to 21,500, making the put options worth Rs 500 (intrinsic value). - The trader’s profit would be the difference between the intrinsic value and the premium paid, which is Rs 450 per option.

These examples illustrate how traders positioned for a market downturn on June 4, 2024, profited from the substantial market decline by selling call options and buying put options.

Many renowned strategies get fails when the market is in uncertain and the india vix is rising

During periods of high uncertainty and significant events, such as elections, the premiums for options tend to increase significantly. This is due to heightened volatility and the unpredictable nature of the outcomes, which traders factor into their pricing models.

 Reasons for High Option Premiums During Elections

1. Increased Volatility:

   - The implied volatility of the market often spikes during election periods because the outcomes can lead to drastic market movements. This uncertainty raises the cost of options, as traders are willing to pay more to hedge against potential swings

2. Market Sentiment and Speculation:

   - Elections create a lot of speculation and varying sentiments among investors, leading to increased trading volumes in options. This demand for both calls and puts to hedge against or speculate on potential outcomes drives up premiums

3. Hedging Strategies:

   - Investors and institutions often use options to hedge their portfolios against adverse movements that could result from election outcomes. The higher demand for protective puts or speculative calls increases their prices

Impact on Call and Put Options

Call Options: Investors might buy call options expecting a favorable election outcome that would lead to a market rally. The heightened demand for these call options raises their premiums.

Put Options: Conversely, those anticipating market turmoil due to an uncertain or unfavorable election result might purchase put options to protect against downside risk, thereby increasing their premiums.

 Example from June 2024 Indian Market

On June 3, 2024, before the election results were announced, the market saw significant movements driven by exit polls and economic data, leading to high option premiums. The increased activity and anticipation of the results on June 4 led to inflated premiums for both calls and puts as traders positioned themselves for possible outcomes

The high option premiums around election periods are a direct result of increased market volatility, speculative trading, and hedging activities. These factors combine to drive up the cost of both call and put options as investors seek to manage the risks associated with uncertain election outcomes.

The Gold saga

The relationship between gold prices and elections is influenced by several factors, primarily revolving around uncertainty, economic policies, and investor sentiment. Here’s a detailed look at how elections can impact gold prices:

1. Uncertainty and Volatility: Elections often introduce a period of uncertainty, especially if the outcome is unpredictable. Gold is traditionally seen as a safe-haven asset, so during times of political uncertainty, investors may flock to gold, driving up its price.

2. Economic Policies: Different candidates and parties have varying economic policies, which can affect inflation, interest rates, and fiscal policies. For instance, policies that are perceived to lead to higher inflation or economic instability can make gold more attractive.

3. Market Sentiment: Investor sentiment around the stability and future economic direction of a country plays a significant role. If an election outcome is expected to lead to economic instability, investors might seek the safety of gold.

4. Currency Fluctuations: Elections can also impact a country’s currency. If an election result leads to a weaker currency, gold, which is often priced in dollars, becomes relatively cheaper and more attractive to investors in other currencies, potentially driving up its price.

5. Historical Trends: Looking at historical data, major elections, especially in large economies like the United States, have shown a pattern where gold prices react to the political climate and the anticipated economic impact of the election results.

 Case Studies

2016 U.S. Presidential Election: The uncertainty surrounding the 2016 U.S. presidential election saw gold prices rise leading up to the election. After the results were announced, there was a short-term spike in gold prices as investors reacted to the unexpected outcome.

  Brexit Referendum: The Brexit vote in 2016, although not an election in the traditional sense, created significant political and economic uncertainty, which drove up gold prices as investors sought safety.

- In conclusion, elections can have a significant impact on gold prices, largely driven by uncertainty and the potential economic implications of the election outcomes. Investors tend to turn to gold as a hedge against instability, which can lead to fluctuations in gold prices around election periods.

        - Naman arora