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Nifty likely to remain weak; deploy Long Put Butterfly Spread this week

Bank Nifty after holding 30,000 for almost two months breached the level on July 19. The index seems to have lost the interest of Put writers

SHUBHAM AGARWAL | 22-Jul-19
Reading Time: 3 minutes

The last week started on a positive note but then the momentum fizzled out in the last two trading sessions and pushed Nifty below 11,500-11,450 for the week ended July 19.

Nifty lost 1.2 percent for the week while outperforming Bank Nifty lost 2.7 percent.

On the options front, the upside remains capped at 11,700 with heavy call built up, and at the lower end strong support was seen at 11,600 and 11,500, but this scenario was relevant at the beginning of the week.

After witnessing a fall of over 1.5 percent in the last session, it brought the lower level congestion down to 11,300 for Nifty.

Bank Nifty after holding 30,000 for almost two months breached the level on July 19. The index seems to have lost the interest of Put writers.

The only silver lining that one can see in this week is that the weakness did not attract a lot of short additions in any of the indices.

India VIX , on the other hand, keeps making fresh lows one week after the other.

Initial signs suggest that option writers are not getting worried, and that is a good sign. However, the mean-reverting characteristic of the Risk index does indicate a potential threat.

Lack of OI in futures amid recent weakness and aggregate OIPCR close to 1 still keeps the gyrating element active in Nifty.

With relative heaviness at 11,300, the ongoing move can be traded via moderately bearish Long Put Butterfly.

Long Put Butterfly Spread is a range-bound strategy that offers decent reward to risk at a low cost. Under the strategy, we sell 2 Puts close to the expected level in sight on the lower side and buy equidistant Puts one on the higher and one on the lower side of the strike sold.

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

Learn and read more about what are futures from Quantsapp classroom which has been curated for understanding of What is open interest from scratch, to enable option traders grasp the concepts practically and apply them in a data-driven trading approach.

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SHUBHAM AGARWAL is a CEO & Head of Research at Quantsapp Pvt. Ltd. He has been into many major kinds of market research and has been a programmer himself in Tens of programming languages. Earlier to the current position, Shubham has served for Motilal Oswal as Head of Quantitative, Technical & Derivatives Research and as a Technical Analyst at JM Financial.

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