Nifty Budget Day strategy: Why this ‘volatility crush’ is an options trader’s best friend

While Budget week offers great opportunities for options trading, it also presents unique challenges due to the risks of market uncertainty. Historically, the days leading up to the Union Budget see a significant inflation in option premiums. Data from the last few years highlights this trend clearly: at the start of the week of where Budget Day is present , Nifty At-The-Money (ATM) straddle premiums have consistently opened at elevated levels. For instance, the opening straddle was 507 in 2022, 363 in 2023, 357 in 2024, 590 in July 2024 (Post election budget) and 638 in 2025. This high “entry cost” reflects the market’s anticipation of a major move, but it also means sellers are operating in a high-stakes environment.

This year is particularly noteworthy. Since August 2025, the India VIX and Implied Volatility (IV) – the primary measures of market risk – have remained at relatively low levels.

When options are sold in a low-VIX environment, the seller is providing insurance at lower rates. As the Budget approaches and uncertainty grows, the perceived risk causes these options to increase in value. For example, a straddle that normally trades at lower levels can swell sharply solely due to rising IV, even if the Nifty index remains flat. For an option seller, this volatility expansion results in a Mark-to-Market (MTM) loss.

Why does this happen? As the market anticipates major policy shifts, risk perception rises and options become “expensive.” To navigate this, traders often shift from a “Price-only” mindset to a “Volatility” mindset. The critical question becomes: How much premium is built on uncertainty, and when will that uncertainty disappear?

Regardless of direction, the collapse in premiums—the IV Crush on the day of budget is the most consistent event. Notice how the straddle premium consistently deflates by the end of the day.

Note: In Feb 2024, the decay was total because the Budget fell on Weekly Expiry, wiping out all remaining time value (Theta).
Trading the Union Budget: How to trade while managing Volatility

On Budget Day

Historically, the Indian stock market has shown significant volatility during the Budget speech, with the Nifty 50 fluctuating within a 2–3% range in 14 out of the last 15 instances. However, the most consistent trend is the IV Crush: IV rises before the Budget and declines sharply once the speech begins.

Backtesting Insights & Strategy Testing

To identify the most reliable way to navigate this volatility, we analyzed strategies ranging from Short Straddles to defined-risk structures like Iron Flies and Iron Condors.

• Parameters: Entry at 09:30 AM | Exit at 03:25 PM. | Lot Size : 75
• Findings: Defined-risk strategies provide a much smoother experience during violent swings. Short Iron Fly and Short Iron Condor strategies succeeded in 14 out of 15 instances.
• Historical Performance: * Max Profit (1st Feb 2024): Short Iron Fly (₹11,875) | Short Iron Condor (₹6493) per lot.
  • The 2021 Outlier: During an extreme 4.74% move, hedged traders kept losses controlled (Iron Fly: ₹5,300 max loss | Iron Condor: ₹3,050 max loss) while unhedged sellers faced ruin.

Execution by Market View:

• Bullish View: Use a Bull Put Spread. This is a credit strategy that benefits from both the market’s upward move and the IV Crush. By selling a Put and buying a lower-strike protection Put, you collect premium while capping your risk.
• Bearish View: Use a Bear Call Spread. This credit strategy involves selling an OTM Call and buying a further OTM Call as protection. It limits your max loss if the market spikes during the speech while letting you profit from falling premiums if the market drops.
• Neutral View: Deploy Iron Condors or Iron Butterflies. These are “defined risk” versions of a straddle. By adding protective “wings,” you cap your loss. This allows you to capture the premium collapse without the stress of unlimited risk.

Conclusion

To navigate the high-volatility environment of Budget Day, professional participants typically prioritize capital preservation over aggressive gains. The following observations serve as a summary of historical best practices:

• Defined Risk Over Naked Exposure: Market volatility can trigger significant price gaps in seconds. Hedged strategies, such as Spreads and Iron Condors, are frequently used to define the maximum possible loss, providing a structural buffer against extreme market movements.
• Accounting for Wide Spreads: Liquidity dynamics often shift during the initial 30 minutes of the Budget speech, leading to wider bid-ask spreads. Many participants observe the market from the sidelines until these spreads normalize to avoid heavy execution slippage.

(The author is Market Analyst, Share.Market (PhonePe Wealth)