Adopt Modified Call Butterfly strategy for Bank Nifty: Shubham Agarwal

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It was a momentum spoiler week. But as they say “All’s Well that Ends Well”. After a nervous start, the drops in the second half taking a severe turn threw Nifty over 5 percent down from the previous week close. A rebound in the last session from those lows pulled up the index reversing all the daily losses and added half a percent gains for the day. This resulted in Nifty shutting shop for the week with less than 2 percent loss.

Bank Nifty also went through a similar path. While it has been a trend since last few days and weeks for Bank Nifty to have amplified moves as compared to Nifty, this week was different as both gains and losses during the week were contained for Bank Nifty in proportion to Nifty. Bank Nifty also lost less than 2 percent for the week.

Open Interest (OI) activity for index futures had different stories to tell though. Nifty has since a long time been in a muted mode, this week was no different. Despite either side volatility this week, the alteration in OI remained in sub 5 percent range. As a result, Nifty ended the week with minor addition of shorts, insignificant to pay attention to.

Bank Nifty, on the other hand, added over 25 percent in OI. This had a mix of longs and shorts. However, interestingly 3 out of 5 sessions had long additions, especially the longs that came in as bargain hunting attempt in the last session.

Aggregate stock futures for the week had decrement in OI. This is a strange reality to be dealt with considering the time of the week. But this reassures that unwarranted volatility is nowadays unwelcomed by participants. On an overall basis, Shorts dominated the OI activity with almost 40 percent of stocks adding shorts for the week.

Dicing the stock futures OI sector-wise, after a long time the directional, as well as OI activity wide diversity, was seen this week across sectors. Notable longs were in financials where ICICI Bank from private banking and Muthoot Finance, Manappuram Finance from NBFC led the additions. After a series of bargain hunting longs, PSU banks lost long interest this week across. Oil had Reliance Industries and HPCL adding longs. ITC and Titan Company led FMCG in shorts despite select long interest additions like in McDOWELLS.

Coming down to sentiments, we had a dip and come back as far as OIPCR is concerned. Nifty OIPCR dipped to the level of 1.2 mid-week, lowest for the June expiry. However, the following sessions especially the last one pulled it up to close with minor change for the week close to 1.5.

On the risk front, India VIX has been loitering around the lower extreme indicated by many gauges like IVR. This along with the nervousness seems to have kicked in the bit of a reversal as the week saw a net increment of 2 points despite the late recovery.

Finally, Longs in Bank Nifty in 3 out of 5 sessions were notable for infusion of bullish bias in a rather choppy week. After a long time, both Weekly and Monthly Options OI composition remained in sync with Put writers in close proximity. However, sentimentally OIPCR still remains neutral along with rather fresh longs in the index reduces the reliability of the OI structure, Hence, bargain hunting in Bank Nifty especially in the last session could create momentum but recovering sentiments could keep the path shaky hence Modified Call Butterfly is advised.

Modified Call Butterfly is a 4-legged strategy where 1 lot of Call close to current underlying level is bought against that 2 lots of higher strike calls are sold and 1 more lot of Call is bought but closer to the call sold strike. This keeps the lower but constant profits in case of an upward breakout. This is a fairly risk-averse and a universal strategy.

(The author is CEO & Head of Research at Quantsapp Private Limited.)

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