India’s equity markets may see increased volatility after the results of crucial state elections this weekend, prompting analysts to recommend investors hedge their portfolios using options.

Results for elections to five state assemblies will be declared on Sunday. Exit polls conducted by private agencies are due after polling on Thursday evening. India’s general elections will follow early next year.

India’s blue-chip Nifty 50 index, hovering near record highs, has rallied 5% in November and is up 11% this year. It was at 20,044.6 at 12:40 p.m. IST.

Nuvama Wealth and Investment late Wednesday recommended long-only investors should buy a 20,000 strike put option on the Nifty 50 expiring on Dec. 28. The option currently costs 160 rupees.

A put option allows an investor to sell the underlying asset at a particular price, in this scenario, at 20,000.

HDFC Securities’ head of retail research Deepak Jasani recommends out-of-the-money protective puts on a portion of the portfolio, with strike price set at 200 to 300 points below the current Nifty 50 level.

By buying the put option, the investor is protected against any fall on the Nifty 50 below the strike price plus the cost of the option.

Societe Generale on Wednesday downgraded Indian equities to “neutral” from “overweight”, citing the upcoming general elections among the reasons.

“Political events have been known to be notorious to change the mood in the market,” Sagar Doshi, head of technical research at Nuvama, said in the note, pointing out that a Nifty 50 rally of more than 1,000 points without a 1% correction has “brought a sense of complacency.”

A possible fall of 2% to 4% on the Nifty 50 was likely on Monday, if India’s ruling Bharatiya Janata Party lost elections in both the key states of Rajasthan and Madhya Pradesh, HDFC’s Jasani said.

Nuvama’s Doshi noted a divergence between Nifty 50, which was just 200 points away from all time highs, and stocks that were making new 52-week highs.

Plus, retail positioning in index futures had peaked recently.

All these factors call for “a prudent approach” to the state election results by hedging positions, Doshi added.



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