One among the most anticipated holidays in India is Diwali, also known as the festival of lights. It symbolizes the triumph of good over evil and light over darkness. On this auspicious day, many Hindus believe it is an opportune time to start new ventures and make investments for the coming year. To capitalize on this sentiment, Indian stock exchanges offer a one-hour special Muhurat trading session on Diwali every year. In this article, we will explore the potential of muhurat trading futures and options and suggest some top stocks to consider for futures and options trading during the upcoming Diwali Muhurat session.
Table of Contents
Understanding Muhurat Trading
Muhurat trading is a special one-hour trading session conducted on the Hindu festivals of Diwali and Samvat New Year’s Day. It stems from the belief in Hindu culture that investments and business ventures started on these auspicious days will bring prosperity and wealth in the coming year. Though the trading volume and turnover may be lower compared to regular market hours, Muhurat trading provides some key benefits to investors.
It allows traders to capitalize on the positive sentiment generated during these festivals through strategic investments in stocks and derivatives. People are more optimistic and confident about the market on Diwali and tend to invest their money. The pre-open session before the normal market opens gives traders a chance to place their orders at levels where they expect the market to open. This can be done without worrying about price fluctuations once the market opens.
Both retail and institutional investors actively participate in Muhurat trading by initiating new positions. Individual investors see it as an auspicious time to invest their money for the new year. Large financial institutions also use this opportunity to deploy funds based on their outlook. The hour-long session generates sufficient demand and liquidity for traders to enter the market at favourable prices. This makes Muhurat trading beneficial for investors from both categories.
Top Sectors to Consider
Some key sectors that have historically performed well during Muhurat trading and in the following year are banks, capital goods, FMCG and infrastructure. Let’s examine each:
Banks, especially public sector banks, tend to see increased buying interest on Muhurat trading day. This is because public sector banks are viewed as relatively safe investments compared to other sectors. Their large size and government ownership provides stability.
The capital goods sector also does well as capital goods companies are expected to benefit from rising infrastructure spending. With the government focusing on projects like roads, railways and energy generation, demand is likely to grow for capital equipment. Leading players like Larsen & Toubro are seen as direct beneficiaries.
FMCG stocks are regarded as good defensive investments during volatile market periods. Demand for fast-moving consumer goods tends to remain strong irrespective of economic conditions. Companies with their diverse portfolios of daily consumer products are favourites.
Infrastructure companies may gain from the government’s continued policy push for infrastructure development. Whether it is power, roads or railways, infrastructure remains a top priority. National Thermal Power Corporation and Power Grid Corporation, being key central government agencies, see interest due to their role in India’s energy security and transmission network build-out.
Focus on Futures and Options
Futures and options contracts allow traders to take positions in the stock market without having to pay the entire value of the underlying security or index upfront. This makes them very suitable for Muhurat trading as traders can leverage their capital to take larger positions for the new year.
Index futures and options on the Nifty 50 and Bank Nifty indices are especially popular during Muhurat trading. These provide exposure to the overall direction of the broader market and banking sector respectively. By trading in index derivatives, traders can benefit from even a small movement in the indices. The leverage available in futures amplifies these returns.
Traders employ various options strategies like buying calls or puts based on their market outlook. Calls are purchased if they are bullish and expect the index to rise. Puts are bought if they anticipate a downwards movement. By combining both, option strategies like bull call spread and bear put spread can be constructed to hedge risks.
Risk Management is Crucial
Risk management is one of the most important aspects of Muhurat trading that traders must keep in mind. While the festive sentiment provides an opportunity to make gains, exaggerated stock movements during the pre-open session also increase risks. Traders need to ensure they do not risk more capital than they can afford to lose. Proper position sizing is crucial, with positions reduced for high volatility stocks. Options trading, in particular, requires skill and caution. Options derive their value from the underlying asset price as well as other Greeks like time decay. If options strategies are not used judiciously based on fundamental and technical analysis, they can result in heavy losses. Traders must understand how their option trades will perform under different price scenarios.
Futures trading also exposes traders to significant leverage which can multiply both profits and losses exponentially. To counter this, traders must set stop losses at pre-determined support and resistance levels to cut losses quickly if prices move against their position. The stop loss acts as a risk management tool to limit downside. Given that Muhurat trading volumes are relatively thin, prices tend to exhibit exaggerated movements compared to regular sessions. Traders need to study historical Muhurat session charts to gauge typical price and volume behaviour. They should enter the market with a clear expectation of the price range rather than reacting to overall positive sentiments alone. This disciplined approach focusing on risk-reward is essential to make Muhurat trading profitable in the long run.
The Muhurat trading session on Diwali offers Indian traders a unique opportunity to benefit from the positive sentiments and best stocks to buy in muhurat trading associated with the festival. By choosing suitable stocks and sectors as well as employing appropriate derivatives strategies with a focus on risk management, traders have the potential to unlock value from Muhurat trading. A disciplined and calculated approach tailored for the short pre-open session can help optimize returns from this auspicious trading period to make the most of the festive season.