Traders and investors in the stock market experience something termed the 'pre-budget market behaviour' almost every year. For market participants and economists, the Union Budget is one of the most significant macro-economic events of the year, and it is of primary concern to them due to predictions in the areas of taxation, government spending, infrastructure, and the developmental policies of the government at the sector level. As the date of the budget presentation approaches every year, the participants in the market, whether buyers or sellers, begin to experience budget pressure, and the number of transactions in the market and the budget volatility increases.
More than any other characteristic, the most extreme volatility is observed to follow the budget date. Because of the policies expected to be enacted, buyers and sellers have competing perspectives on policy to be enacted. As a result, a single day gets a huge range of expected values. Because of the extreme volatility expected, the markets predict that a seller of an option will receive a significantly higher premium than the average.
It is observed every year in the market that almost all of the companies in a sector, be it government, civil aviaion, banking, capital and goods, or even the defense sector, are expected to have excessive stock movements even before the budget is announced. All of these fields have immense pressure due to government policy expected provisions.
A polarized sentiment dominates the entire market around the budget. These changes, at times, may seem to be out of context and may appear unrelated to the underlying values or cash flows of the proposition. The decisions of the seller / buyer around government policy lead to extreme ranges and volumes in expected values. The underlying phenomenon that appears to be dominant around the budget time may be media coverage focused on the budget, a leak of the budget, or even based a sole expert prediction. Budget leaks and media coverage seem to act as the foundation of market changes. Extreme changes in expected values and preferences seem to be bored out of a budget leak more than any other single factor. The underlying factor in all of these pressures is speculation.
Market data indicates an increase in activity in the derivatives market ahead of the budget. A trader's position indicates possible large changes with an option open interest build up in the futures and options. Because of the uncertainty, option writers will either shift strikes or lessen their position, while option buyers prepare themselves for movements of the breakout type.
Ahead of budget changes to the market usually occur in multiple or consistent ranges. Event risk can keep traders from making long-term investments, causing them to choose short-term trades. During this time, risk management must be one of the top priorities to avoid a large occurrences due to the numerous false breakouts.
From a side intraday trade, the activity remains the same, yet the unpredictability can be off the charts. Certain price-action support and resistance levels can be broken due to the fast triggered news.
Long-term investors typically are wiser, as they usually are more cautious ahead of the budget. Rather than making clear aggressive buys, they typically prefer to wait for the policies following the announcements to make investments. However, there can be some buying in solid stocks if the expectations are in sync with long-term growth.
To summarize, budget changes in the market result in multiple changes due to a high rates of speculation. Having the ability to recognize these speculations the budget movements provides investors the ability to make their choices, reduce their emotional choices, and avoid pitfalls with their levels of risk.
