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Deploy Modified Put Butterfly Spread strategy on Nifty this week: Shubham Agarwal

Considering the OI cycle in Nifty consisting of short-short covering cycle, along with a rise in VIX, pursue a possible low risk strategy like a modified put butterfly spread.

SHUBHAM AGARWAL | 26-Apr-21
Reading Time: 3 minutes

Despite the high levels of volatility and nervousness around the rising COVID cases, broader indices managed to sustain themselves over the week. On April 19, we saw heavy selling which led Nifty to plummet to 14,150, while Bank Nifty declined to 30,500.

Moving ahead, further sell-off during the week led Nifty to touch the level of 14,150. Despite the sell-off, Nifty smartly retreated from 14,150 level and closed the week at 14,330 losing over 2% on a week-on-week basis. On the OI (Open Interest) front, OI unwinding was seen by around 2.8%.

Nifty has had a losing streak for the 3rd consecutive week now.

Looking towards Bank Nifty, it smartly recovered from the lows of 30,450 level and this level was seen after 27 January. Bank Nifty closed at the level of 31,600 losing around 1.5% over the week. On the OI front, OI Built-up was marginal 0.15%.

Moving forward to Nifty's upcoming Monthly Open Interest (OI), the heaviness of Put writers is clearly visible compared to Call writers. On an upcoming OI basis , an immediate hurdle can be seen at 14,500, whereas immediate support can be seen at 14,200 followed by 14,000 level.

Bank Nifty's upcoming Monthly Open Interest (OI), Writers are seen fairly distributed from 28,000 to 36,000 level. On the upper side, immediate resistance stands at 32,000 level and Vital resistance stands at 33,000. On the lower side, 31,000 stands as the Vital support and if it slips further, 30,000 stands as further support.

India VIX, fear gauge, has increased from 20.4 to 22.8 compared to last Friday. Investors and traders need to keep a watch on VIX whenever it is trading near 20. Further, any uptick in India VIX can propel the Nifty momentum.

Looking at the sentimental indicator, Nifty OIPCR for the week has decreased from 1.381 to 1.284. Bank Nifty OIPCR over the week increased from 0.904 to 1.038 compared to last Friday. Overall data indicates more Put writers compared to Call writers.

Moving further to the weekly contribution of sectors to Nifty. FMCG led the Nifty's fall by 70 points, followed by IT (-55 points). Whereas marginal support came from metals space over the week.

Looking towards the top gainer & loser stocks of the week in the F&O segment, ICICI Prudential topped by gaining around 13.2%, followed by Cadila Healthcare (9.2%), PVR (7%). Whereas Coforge lost 10% followed by UltraTech Cement 9% and Shree Cement -8.7%.

Conclusion: Considering the mix of shorts and short covering in Nifty, along with rise in VIX, it is prudent to seek market with a low-risk strategy like Modified Put Butterfly .

Learn and read more about nse open interest data from Quantsapp classroom which has been curated for understanding of nifty open interest from scratch, to enable option traders grasp the concepts practically and apply them in a data-driven trading approach.

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SHUBHAM AGARWAL is a CEO & Head of Research at Quantsapp Pvt. Ltd. He has been into many major kinds of market research and has been a programmer himself in Tens of programming languages. Earlier to the current position, Shubham has served for Motilal Oswal as Head of Quantitative, Technical & Derivatives Research and as a Technical Analyst at JM Financial.

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