Deploy modified call butterfly strategy in Bank Nifty

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Looked like a spiraling week, but we ended with a positive twist as the one day up, one day down sequence was broken on the last trading day of the week giving stocks and indices much needed break from circling around 10,000. The daily trading range for Nifty was fairly bigger than the moves posted as daily returns for the index.

Nifty ended the week with little less than 3% gains. Bank Nifty, too, was no different as on the down days Bank Nifty nearly touched previous week’s low, which was apparently the lowest point of the month of June. However, along with the rest of the market Banking also ended with a positive surprise. Bank Nifty ended up outperforming Nifty by 60 bps with a gain of over 3% for the week.

Open Interest activity for both Nifty and Bank Nifty has been diverse for many weeks now and this week was no different. Nifty futures entered the week a little more burdened with previously created longs early on June expiry. Monday drop was scary enough to push many of those longs out. The see-sawing index kept up with tiny increment and decrement and despite weekend longs for the week Nifty lost around 5% of OI.

Bank Nifty, on the other hand, had no such baggage. One of the reasons why the index did better. Despite a tiny wave of short and short covering Bank Nifty shut shop with net longs for the week thanks to long interest carry forward on Friday.

Aggregate stock futures Open Interest ( OI ) activity was not too discouraging either. Around 60% of stocks ended up with positive gains this week. More importantly, 40% of the participating stocks added long interest this week. This was followed by short covering OI activity. Shorts and Long unwinding remained limited this week.

Dicing the stock futures OI sector wise, most of the sectors remain heavily loaded with longs. Heavy OI activity in Hero MotoCorp and Escorts kept the OI additions in Auto high, while shorts in L&T overshadowed the longs in rest of the Capital Goods. Zee led Media in longs, while most of the Pvt. Banks except Indusind Bank added longs. Reliance led the Oil sector into longs, while short covering in SBI overshadowed longs in the rest of the PSU Banking stocks.

Coming down to sentiments, the nervousness early on did set the mean reversion momentum on for the risk index India VIX after closing close to 33, India VIX ended the week with a point loss compared to a week before thanks to the last two sessions.

On the option composition front, OIPCR seems to have made a habit of dropping down once before settling down with minor gain or loss. Similar was this week’s move as the ratio pushed to around 1.2 early this week and then regained confidence to come back and add almost 10 points to previous week’s close.

Finally, Long carry forward in Bank Nifty for the week could augur well for the index. The options composition is also positively biased with most improvement in the sentiments indicated by OIPCR in the last few weeks.

Monthly expiry being in the coming week could take a toll on the agile recent longs added in the banking sector. Hence, considering monthly expiry in the coming week longs in futures could be best followed with Modified Call Butterfly.

Modified Call Butterfly is a four-legged strategy where one lot of Call close to current underlying level is brought against that two lots of higher strike calls are sold and one 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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