Can go slightly risk-averse; deploy Bank Nifty Modified Call Butterfly Spread

The last week was a truncated one and started on a rather benign note after decent gains in the previous week. The Nifty50 closed with gains for the second consecutive week in a row.

On the open interest front, Bank Nifty saw a greater interest of futures participants than the Nifty. Long unwinding took more toll on Nifty futures in the beginning of the week.

Long interest in the last two sessions could not get the weekly tally in positive and the Nifty lost 2 percent net OI for the week.

Bank Nifty, on the other hand, had overpowering longs leading to carry forward of not more but nimble-footed 3 percent long interest.

Even the aggregate futures OI continued last week’s slow but steady inflow of positive interest. The mix for this week as well as favoring long interest. Over 50 percent of stock futures participants had long interest added for the week, which was followed by the stocks covering shorts created in the past several weeks.

While long unwinding remained sparse, stocks adding short interest were around this week to the tune of 20 percent of total participation.

The shock created by the lockdown and restrictions seems to be easing as India VIX just like other global peers has been softening now for the past two weeks. The drop shaved off 7 points off of the risk index this week.

If we were to look at the composition, the sentiments did take a toll on Nifty. This could be because after the sudden rise in the interest, ‘out of the money’ calls made comeback.

This pushed the OIPCR down by 10bps despite the rise in the underlying index. Bank Nifty, on the other hand, has been suffering from lower OIPCR for a while, which got picked up fairly above 1.

Carry forward of longs in Bank Nifty futures despite the outperformance indicates an expectation of the move to sustain. After weeks Bank Nifty OIPCR has turned positive and sustained above 1 during this week’s gyrations.

Since the incremental participation is fairly low amid this fluid situation it makes sense to be nimble-footed.

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 risk-averse and a universal strategy.

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

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