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Here is how you can play the markets on election result day

After the exit polls showed a strong possibility of the incumbent Narendra Modi - led National Democratic Alliance (NDA) coming back to power, the markets have risen nearly 4 per cent. The current rally took the benchmark indices to their lifetime high levels of 11,856 (Nifty 50) and 39,487 (BSE Sensex). 

However, investors now need to be cautious. If the actual results are way off the mark as compared to what the exit polls have predicted, there could be a sharp slide in the markets. Volatility is likely to be high and may even cross over 4 per cent on May 23 when the election outcome will be known.

That said, there has been a debate whether there has been an actual fresh buying that has moved indices higher or is the rally a good opportunity to exit long positions? Above all, is it a short covering or addition of longs?

On Monday, volumes crossed the high of last one month reaching 200 crore. FII figures show buying worth Rs 1734.45 crore. Stocks like State Bank of India (SBI), Tata Motors, Adani Ports and Special Economic Zone surged over 7 per cent. To ascertain the real trend, one needs to focus on follow-up buying patterns. This rise seen on Monday needs a jump of at least 1 per cent - 1.5 per cent.

Stock data for Monday, May 20, 2019; Source: Spider Siftware

Among other heavyweights, ICICI Bank, Reliance Industries (RIL), Axis Bank - though have risen - did not rise much. They need to climb at least 5 per cent for the market-wide momentum to sustain. On the other hand, stocks like Bajaj Auto, Dr. Reddy's Laboratories Ltd. and Tech Mahindra closed weak. Bata India and InterGlobe Aviation, which were trading with high optimism till last week, have also closed in the red. Even, Titan closed with just 3.50 per cent u move.

Technically speaking, when front-line indices rise around 4 per cent and major stock moves just 5 per cent, it means the markets face selling pressure.

During periods of high volatility, the best opportunities are offered in the options segment. Fortunately, the election result is falling on the day of weekly expiry; hence, one can take maximum advantage of this event. Given that the markets will be volatile on May 23, traders can look at buying options, especially Out of the Money (OTM). The strategy is known as “Long Straddle” where one buys OTM call and simultaneously buys OTM puts.  

Options strategies have given minimum of 300 per cent returns on special days of trading.