Adopt Modified Call Butterfly Strategy for Nifty: Shubham Agarwal

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The week gone by brought a lot of joy and cheer to overall market as well as the beaten down names. After first three gaining sessions this week there was a bit of hiccup but Nifty maintained the gains and ended the week with over 5% gains.

Bank Nifty on the other hand, went through rather sharper moves than Nifty. The digestive dip towards the weekend was a bit to deeper than Nifty. However, the sharper moves contributed to better returns for the week for Bank Nifty than Nifty rising close to 10% for the week.

Story on the Open Interest (OI) front kind of explains the reasons for the difference in magnitude of the moves in both the indices. Nifty where the OI remained fairly low for last few weeks. Hence, coming out of consolidation it got filled with fresh additions. A series of longs and long winding kept the move a bit humble.

On the other hand, Bank Nifty entered June expiry with fair amount of shorts. As a result, we had mix of short covering and fresh long additions. As seen empirically, unwinding of shorts is always hastier which explains the larger upticks and deeper pullbacks.

On the aggregate futures front, the price action left us with only two OI activity Long and short covering. Considering the first week of expiry the unwinding pressure is usually limited and so has been seen in previous such upticks early into the expiry.

However, composition of stock futures had fair amount of shorts into it. Due to this, while long interest got added into 50% of stocks futures this week, stocks covering shorts were almost 43%. What this means is, the move up had equal force coming from incoming optimists and outgoing pessimists.

Dicing the stock futures OI sector wise biggest notable is that there is not a single sector that aggregates into Short or Long Unwinding of interest. Media added longs led by PVR and Sun TV, Metals added longs led by Tata Steel, Jindal Steel, National Aluminum. Among financials Pvt. Banks added longs led by ICICI and RBL, PSU Banks saw across sector Longs, while Short hit NBFC covered shorts led by Muthoot, Bajaj Finance, M&M Financial.

Coming down to sentiments, Nifty OIPCR was a tad bit lower this week than previous closing but it did sustain above 1.5. This means it still is hovering around the upper band. One of the reasons for a bit of pressure is the incremental call additions in higher strikes especially in upcoming weekly series.

On the other hand, risk index India VIX has dipped below 30 fresh low since it started its upward course in March. These factors could reduce the pace of rise, or even push Nifty into tiny digestive run around current level.

Finally, Nifty got into a healthy Long- Long Unwinding mode after many weeks. After coming out of consolidation with big move, the weekly composition and higher sentimental indicators point at a breather.

To accommodate for a breather while trading break out from consolidation Modified Call Butterfly is advised. In case of further shot up the strategy would yield more than half of peak profit anywhere above 10350.

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 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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