Expect rangebound trade; deploy Modified Put Butterfly Spread on Bank Nifty

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undefinedJuly series kick-started on a sideways note as bears dominated trading on July 5. Indices gyrated in a tight range. On a week-over-week, Nifty was down 0.19 percent with flat OI while Bank Nifty saw OI accumulation of 15 percent with the price hovering around 31,500.

The Budget day saw a spike in intraday volatility with Nifty approaching 11,800 and Bank Nifty finding resistance near 31500. Stock specific volatility spiked up in Metal (Jindal Steel, Sail) Realty (DLF), Capital Goods (Siemens, EIL), Auto (M&M) and IT (Infosys, TCS) stocks. NBFC stocks gained (Indiabulls Housing Finance, L&T FH).

Finance Minister Nirmala Sitharaman brought cheers to options traders by restricting Security Transaction Tax (STT) to the difference between settlement and strike price in case of exercise of options.

This change, however, will not affect the levying of STT on any other transaction on the exchanges.

Options data for Nifty saw significant accumulation at 12,000CE right before the Budget in both weekly and monthly options while Put writing was insignificant.

The immediate basis highest Put is placed at 11,500, indicating that the market could continue to gyrate further. The Bank Nifty options activity saw increased Call accumulation at 31,500. The broader range remains 31,000-32,000.

The reluctance of Call writer to square off positions despite the index going higher above 31,500 shows resistance could be stronger in the next week. Highest Put placed at 31,000 shows vital support.

With Bank Nifty witnessing good accumulation in OI last week of 15 percent, a halt in price at 31,500 shows that the index could gyrate in the coming week.

Call writers shifted lower and Put writers placed their bets heavily at 31,000, which could halt a move towards 31000. Thus low risk Modified Put Butterfly Spread is recommended.

Modified Put Butterfly Spread is negative to rangebound strategy that offers decent reward-to-risk at a low cost.

In this, we buy 1 close to Money option, sell 2 out of the money (OTM) option and covering the risk by buying 1 further OTM strike Put.

As we are trading weekly options, faster time decay will be beneficial to the strategy. Maximum Profit is made if the index closes next to the strike of the options sold.

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