How to trade market ahead of the election results?

The markets are at record highs and the rally is likely to continue till the election results are out. As per the exit polls, the new government will be led by BJP prime ministerial candidate Narendra Modi. For analysts, the move is precursor to the rally that is expected if the actual figures meet Street expectations. 

For those who have missed the upmove, analysts are advising to buy on dips in quality frontline stocks. The midcaps which have been lagging behind may lead the next leg of rally.

"The market is moving upward mainly on the back of likely positive outcome ... However, such move in frontline and index stocks is increasing the valuation gap between mid-size stocks and frontline stocks. In case if the outcome of the event comes as per expectations, then we can expect massive buying into mid-caps" said Shrikant Chouhan, Head- Technical Research, Kotak Securities. 

"In the short term technically the nifty has broken monthly highest, which was at 6,870 that should lift the index to 7,200 in next one or two days. We like core economy related stocks but we are also focusing on technology stocks as they are available at decent valuations along with positive trend in global markets. On the down side 6,870/6,850 might be the strongest level to hold bears," he added. 

The actual election result will be declared on May 16th. The rally is on the basis of exit polls but there is a possibility that the market may see a sharp correction if the elections throw up a surprise. 

"With an expected asymmetric upside (+8%) vs. downside (-15% to -20%) scenario and the potential for Nifty Jun-14 volatility to decline more than market expectations, long stock investors should consider hedging their portfolio by buying a zero cost Jun-14 6,700-5,800-7,400 put spread collar. Alternatively, long stock investors can also consider buying 6,500 puts and selling 7,500 calls for zero cost," said Bank of America Merrill Lynch report. 

"Given the view of limited upside potential (+8% from current levels by year-end), investors who see a moderate rally in Nifty post-election can take advantage of the elevated volatility to buy a Nifty May-14 1x2 7,450-7,700 call ratio, with a breakeven at 7,950, 13% higher than the current market level," the report added. 

Meanwhile, Akshata Deshmukh, Chief Strategist - Trading, Networth Stock Broking, is of the view that Bull call spread for Nifty appears to be one with least risk and .. 

She has advised to buy 7200 CE @ 190 & sell 7400 CE@ 111. Maximum loss per lot expected is Rs 3550 while maximum profit per lot is likely to be Rs 6,450. 

"Our iron condor/butterfly election strategy is to get the benefit of higher option premium. Sell 7,000 call, sell 7,000 put, buy 6,500 put and buy 7,500 call. This strategy is giving inflow of 350 points and maximum risk is 150 points. Traders will get profit if market moves in between 6,650 to 7,350 levels," he Taparia said. 

"If market moves higher from the break even points and again comes to the mentioned range till May expiry then too we will get profit. Heavyweights stocks which are showing strength before election results are LT, BHEL, Tatasteel, M&M, Yes Bank and Hindalco. Traders can go for bull call spread in all these stocks to play the upside move with limited risk scenario," he added.