Assembly Polls: Scenario Analysis and Derivatives Strategy

Madhya Pradesh, Chhattisgarh, Rajasthan, Mizoram, and Telangana are holding assembly elections, whose results will be out on December 11.

Dec 07, 2018 12:12 IST India Infoline News Service

Madhya Pradesh, Chhattisgarh, Rajasthan, Mizoram, and Telangana are holding assembly elections, whose results will be out on December 11. Further, the result will be seen as a warm-up for the general elections in early 2019.
1. Mizoram:  In Mizoram, the Congress has been in power since 2008. In the hill state with 40 assembly seats, Congress has been up against state parties Mizo National Front and Mizo Peoples Conference. 
2. Telangana: In Telangana, the ruling Telangana Rashtra Samithi (TRS) is seen to be going strong and will face contest from the Congress and the BJP. In the 2014 assembly election, TRS won 63 seats. Congress stood second with 21 seats, AIMIM secured seven, while the BJP won five and its then alliance partner TDP won 15 seats. The five remaining seats went to Others. The state assembly has 119 seats.
3. Madhya Pradesh: Chief minister Shivraj Singh Chouhan has been in power for four consecutive terms keeping BJP in power since 2003 in the state. The state assembly has 230 seats.
4. Chhattisgarh: There are three key parties contesting in the state -- the incumbent BJP, the Congress and the Bahujan Samaj Party (BSP). The state assembly has 90 seats.
5. Rajasthan: The desert state of India, Rajasthan faces a bipolar fight between Congress and BJP. The state has brought these two parties into power in alternate assembly elections for over two decades. The last time any party won two consecutive terms was in 1990 and 1993 when BJP won both times. The state assembly has 200 seats.
The BJP is in power in three of these states -- Rajasthan, Madhya Pradesh, and Chhattisgarh and in 2013, the BJP had won 165, 163, and 49 seats Madhya Pradesh, Rajasthan, and Chhattisgarh assemblies, respectively, with the Congress securing 58, 21, and 39 seats. The corresponding strength of these assemblies are 230, 200, and 90. In fact, the BJP is in power in Madhya Pradesh and Chhattisgarh for three consecutive terms, so for BJP, these three states are at stake.
Scenario analysis and their Impact on market:
1. BJP to retain Chhattisgarh and Madhya Pradesh, but lose Rajasthan (Result 2-1).
Impact on Market: Neutral 
2. BJP win in Chhattisgarh, Madhya Pradesh, and Rajasthan (Result 3-0)
Impact on Market: Positive 
3. BJP win in Chhattisgarh, but lose Madhya Pradesh, and Rajasthan (Result 1-2)
Impact on Market: Negative 
4. BJP lose in Chhattisgarh, Madhya Pradesh, and Rajasthan (Result 0-3) 
Impact on Market: Very Negative 
Derivative Strategy: Far month back Ratio Spread 
Ratio Spread is a neutral strategy that is created by purchasing OTM call and put and Selling ATM call. It has limited loss, unlimited profit potential, and is undertaken when the options trader thinks that the index will experience high volatility in the near term.

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