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Investment strategies for 3 different election result scenarios

MUMBAI: As we enter the crucial week of general election results in the world’s largest democracy, brokerage Motilal Oswal expects NSE Nifty to scale the 12,000 mark, if the Bharatiya Janata Party (BJP)-led National Democratic Alliance comes to power.

Almost all exit polls — including Times NOW-VMR, Republic-CVoter, India Today and News Nation — have projected a clear majority for the NDA with nearly 300 seats in the 542-seat Lok Sabha elections.

The surveys are also predicting a clean sweep by the NDA in several key states, including Uttar Pradesh, Bihar, Maharashtra and Madhya Pradesh.

“India VIX (greed and fear indicator) is near the 28 mark, which is the highest level in the last 44 months since September 2015,” Motilal Oswal analysts Siddharth Khemka and Chandan Taparia said in a note.

“Higher options premium due to election results and higher volatility suggests that volatile swing could be seen in the market as per the outcome,” they added.

The experts suggested a 'Bull Call Spread strategy in case the BJP-led NDA comes to power. In this strategy, investors should buy one lot of Nifty Call at 11,500, and sell one lot of Nifty Call at 12,000. The risk-reward ratio in this case stands at 1:1.70. They said there is a high probability of this scenario.

If the BJP comes to the power with a majority on its own, Nifty could rise to the 12,500 level, which is a moderate probability. In this scenario, they suggest investors to Buy Call options in Nifty at 11,600, which carried the maximum risk of 201 points. This would be the most rewarding scenario with a risk-reward ratio of 1:3.50.

On the other hand, in the case of a fractured verdict or if the NDA does not come to power, they recommended that investors should opt for Bear Put Spread. However, this scenario has very low probability. Nifty, in this case, Nifty would slide to the 10,500-10,700 range. Under this strategy, investors should buy Nifty Put option at 11,300, and sell one lot of Nifty Put option at 11,700. In this strategy, the risk-reward ratio stands at 1:3.20.
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