Deploy modified call butterfly strategy in Bank Nifty: Shubham Agarwal

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Super exciting week for Indian equities brought a lot of gains. It all started on a positive note after the truncated previous week left us behind the rest of the globe. Nonetheless the catching up was superfast and consistent.

Nifty started rising from the word go this week. The wonderful part was the tiny but consistent increment that came into the Nifty without any halt or pullback. Hence, despite of just one session with a rise in excess of 1% this week Nifty gained over 4% for the week.

Bank Nifty had a similar story of rise as well. The only difference was the proportions were higher. The loss of gains on the very first session of the week did threaten the continuation of the rise in the index. However, couple of 2%+ gaining sessions rubbed the sings of exhaustion off of the index. The week ended with a massive 7% rise in Bank Nifty.

On the open interest (OI) front, it was slow and steady but rise in Nifty. Each one of the sessions of the week can be labelled with long interest addition due to rise in price and rise in OI.

The increment in OI kept coming at a steady pace. As a result, Nifty added over 28% in OI for the week. This pushes up the OI tally for Nifty by almost a half. This is impressive after the long unwinding dent that came into Nifty futures in September expiry.

Bank Nifty did not have such a smooth rise. The conviction into the rise was missing in the first few days. As a result, we could see short covering and very minimal incremental longs in OI in Bank Nifty futures in the early part of the week. However, the continuation of rise led to decent addition of longs towards the weekend. This led to longs overweighing short covering and an addition of 11% long interest for the week.

Aggregate stock futures too had a good run. Majority of the stocks added long interest, there were over 20% stocks which covered shorts and similar quantum of stocks added shorts as well. However, in all the gainers were more than the losers.

Slicing the stock futures further we learn, many sectors ended up in the long section this week. IT was clear winner with massive longs in biggies like Infosys, Wipro, and TCS. Tiny longs were seen across PSU as well as Pvt. Banks. Media stocks saw unwinding of longs, and unwinding of longs in Vedanta pushed Metal in Long unwinding.

Sentimentally, on the sentimental front, Nifty OIPCR kept up with the pace after the Call writers crowded the index mid-week. Humble 1.6 OIPCR for Nifty is healthy for the index. Bank Nifty OIPCR on the other hand, for the first time climbed to 1.27, highest since July.

On the risk front, the rise out of the range after many weeks along with the anxiety getting priced induced by the upcoming corporate results pushed the risk index India VIX by over 2%. The rise in IV along with rise in the index at the top is scary and has been sold into many times before. Hence, while there are no obvious signs of weakness, one must be a bit prudent in trading any further longs.

Finally, Longs in future augurs well for this week’s outperformance to continue. OIPCR for Bank Nifty has turned better than ever indicating confidence. The Load of shorts in recent past has to be accommodated in case the current longs prove unreliable. Considering the longs after a short cycle in recent past and the rise already in place Neutral to Bullish Modified Call Butterfly is advised.

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 upward breakout. This is a fairly risk averse and a universal strategy.

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

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