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Deploy Nifty Modified Call Butterfly Spread to protect downside, says Shubham Agarwal

A falling India VIX opens the room for further upside. Thus, a low-risk Call Butterfly Spread is recommended to protect the downside and participate in the upside momentum.

SHUBHAM AGARWAL | 15-Feb-21
Reading Time: 3 minutes

undefinedFinally, the Indian equity market saw gyration after a stupendous rally seen at the start of the February expiry. The Nifty remained range-bound in the 15,000-15,250 band and ended the week with a modest gain of 1.54 percent. Open Interest (OI) increased marginally by 4 percent.

The Bank Nifty, on the other hand, remained under pressure and moved in a broader range of 35,500-3,6500. Frequent swings within the range did keep option buyers on toes, while option writers benefited from the move. The Bank Nifty ended the week with a gain of 1.38 percent and OI up 6.7 percent.

The Nifty Options Data shows broad Call addition in strikes above 15,200 to 16,000, with vital resistance placed at 1,5200. Put remained light, with the support placed at 15,000.

Monthly expiry shows even a higher range, with 15,500 as highest Call and 14,000 as the highest Put. It will be prudent to watch the data as it unfolds to get clarity on the trend.

The Bank Nifty Option Data reflects stiff congestions at both Call and Put, indicating that intra-week volatility could continue. On the weekly basis, 37,000 is the vital resistance on a higher level and 35,500 strong support at the lower end.

Data analysis also shows that the Nifty and Bank Nifty ratio that was quoting at 0.46 at end of January slipped to 0.42 in the week gone by, indicating that the Nifty underperformed the Bank Nifty.

The ratio has moved down by 19 percent from the September level. Data shows 0.40 as a significant level. Thus, the probability of the Nifty outperforming the Bank Nifty in the coming session increases. Broader sectors like OIL and NBFC could see some buying emerging.

IndiaVIX, the risk barometer, fell 150bps from 23.50 to 22 in the previous week. It suggests that traders are getting comfortable in the current market scenario. Sentimental indicator Nifty OIPCR has marginally declined from 1.524 to 1.383. For the Bank Nifty, OIPCR has gradually declined from 1.172 to 1.083 level.

Moving further to the weekly contribution from the sectors, except FMCG (-35 points) and pharma (-3 points), all sectors contributed to the Nifty.

OIL topped by contributing (110 points) followed by metal (56 points) and PVTB (50 points). The top gainer in the FnO segment, Motherson Sumi topped by gaining more than 26 percent, followed by the Adani Enterprises (19.6 percent) & CONCOR (16.6 percent). BHEL bleed the most, losing 11.2 percent, followed by the Balkrishna (-8.2 percent) and ITC (-8 percent).

Considering the Option band of the Nifty in weekly and the Bank Nifty placed at higher levels, internal strength emerges in the broader market. A falling India VIX opens the room for further upside. Thus, a low-risk Call Butterfly Spread is recommended to protect the downside and participate in the upside momentum.

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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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