Ayodhya Verdict and Markets

On Thursday, the Allahbad High court will deliver its judgement in the 60-year old Ramajanambhoomi- Babri Masjid case and I believe even though the verdict will be out after the market hours, there could be an opportunity for traders to capitalize on the outcome.

The verdict, which no one is aware of could be:

• In the favor of the the Hindu community or the Muslim community
• Or the court might also deliver a kind of a neutral verdict and ask the parties involved to have an out of the court settlement (A dream outcome for most of peace loving people)

I believe that the way markets should react on Friday morning depends precisely on this verdict. If the verdict is in favor of any of the community, then the other will reach or is expected to react violently and thus bringing politically instability to the system and could lead to an sell off in the markets.

However, if its an neutral verdict asking for out of the court settlement (very low probability) then the markets which are expecting a sell off would react positively and should gain higher momentum.

In, either of the scenarios, what is common and is expected on Friday is UNCERTAINTY or high VOLATILITY. Thus, in order to capitalize on this active traders could use options to buy volatility.

The implied volatilities are also quite low and the strategy to buy a straddle (buying an at the money Nifty call and put options, around 6000 levels) or a strangle (buying an 6200 call and a 5800 put) could lead to a decent returns, if markets as expected remains volatility.

Thus, ones who have traded in the options in the past and are aware of the inherent risk in trading in derivatives should go ahead and execute the strategy, however freshers or novice in trading should avoid derivatives.

Happy Trading...!!! (For the first time :D )