Can Deploy Modified Put Butterfly strategy on Nifty

After a strong start to the week, nervousness at the top took a toll on the indices. Nifty was slow at the start but gradually made its ground. A tiny push mid-week led the major index up into the kissing distance from the next milestone millennium of 12,000.

What came after that was a tad bit scary. The weakness after the rise is not that unusual but the scary part is the force. This has been rather a new normal for the indices to rise gradually and give up the gains quickly. The fall of close to 3 percent on this week’s expiry was also such fierce. A tiny rise on the weekend right after that balanced the whole thing. Nifty still ended up losing just little over a percent for the week.

Bank Nifty took a different road. The week of the bank index started on a nervous note. Alongside Nifty, Bank Nifty too had decent gains mid-week, which was then followed by a 3 percent gain on the expiry day. However, for Bank Nifty the highest gains came in on Friday with an uptick of 2 percent, Bank Nifty washed the additional declines compared to Nifty and ended up with similar losses of a little over 1 percent for the week.

On the open interest front, Nifty had 3 out of 5 sessions with loss in OI despite rise in prices. This is labelled as short-covering but signifies lack of conviction in the up move. With net fall in prices and fall in OI, it will still be labelled as long unwinding but such unwinding cannot be overlooked.

Bank Nifty as well had a hint of shorts during the first two sessions of the week where the index was down. Unwinding of nearly 5 percent day-on-day on both falling and rising last two sessions pushed Bank Nifty OI down by 5 percent for the week, which means what got built up this week got unwound and additional unwinding also took place.

Aggregate stock futures added around a percent in OI this week but the same came in with shorts in almost 40 percent of the participating stocks. Also considering just being halfway through in the expiry the flow of unwinding (Lon Unwinding + Short Covering) was higher this week (almost 50 percent). This lack of commitment is disturbing.

On the sentimental front, the risk index India VIX rose for the second week in succession. Sitting at the highest point in the last 4 weeks, the catalysts for the rise was the ongoing result season and the sudden fierce drop. We have had a rising market, rising India VIX scenario, which has seldom had a happy ending.

On the other hand, Nifty OIPCR had a usual reaction after the fall, but interestingly the OIPCR started the week on a weaker note and never made it previous weekly close despite the tiny rise in Nifty.

Finally, unwinding in Nifty futures despite the rise early this week is disturbing. OIPCR for Nifty also getting nervous regardless of the rise or a fall is concerning. Lastly, the risk index has been on a rise as well with fall in index. Considering many structural F&O data developments proven to have been followed by weakness, Modified Put Butterfly is advised.

Modified Put Butterfly is a 4-legged strategy where 1 lot of Put close to current underlying level is bought against that 2 lots of lower strike Puts are sold and 1 more lot of Put is bought but closer to the Put sold strike. This keeps the lower but constant profits in case of a downward breakout. This is a fairly risk-averse and a universal strategy.(The author is CEO & Head of Research at Quantsapp)

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