Deploy Modified Call Butterfly strategy in Nifty

It was a fantastic week for Nifty where the index kept exploring newer highs trading into uncharted territory. Nifty made yet another all-time high this week closing above the highest traded level up to this week.

Bank Nifty, too, ended the week with around a percent gain and at a new high. However, there was a bit of underperformance in Bank Nifty.

In terms of participation, both Nifty and Bank Nifty added longs. This time, however, Bank Nifty added around 28 percent long interest compared to 14 percent long interest addition by Nifty. Stock futures, too, had good additions. Considering the penultimate week of December expiry tiny fraction of stocks lost open interest for the week.

With that being the case and the price increment in majority of the stocks, more than 50 percent of the stocks showed OI reading of long. There were pockets of shorts but most of them were continuing pessimism getting augmented.

Last week of expiry along with the fact that the index just broke above 12,000 attracted a lot of participation hence there was no sector with unwinding. Lot of attention of longs seems to have been on the beaten down stocks as an attempt to do bargain hunting. Continuing longs should be awaited before committing medium-term money.

Voltas and BHEL added short for the week overpowering the bargain hunting in rest of the stocks. Bargain hunting longs were also seen in many other sectors like entire IT except for Tata Elxsi, Hexaware Tech, many metal stocks and PSU Banks. Notable longs were seen in HDFC Bank and ICICI Bank from private banking stocks.

On the sentimental front, already high OI PCR went even higher this week to end up with 10bps additions at 1.76 for Nifty. The clusters of Put interest for Nifty options remain fairly close making the confidence in the move a bit more aggressive and over optimistic. Even the risk index India VIX has been hitting lower lows and with a point down it came down to multi-month low.

The relative placement of Implied Volatility compared to recent times is around zero for a while, yet again confirming the over optimism. So, while the mood is buoyant but it is over aggressive, hence known loss strategies should be traded. Optimism is turning into over optimism hence following the longs in Nifty shall be done with a bit of prudence, hence 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.

Strategy Details

Underlying forecast optimism is turning into over optimism hence following the longs in Nifty shall be done with a bit of prudence, hence Modified Call Butterfly is advised.

Strategy Type Moderately Bullish

Target Profit 121 points, Rs. 6,075 at 12,450Stop loss 19 points, Rs. 1,425 below 12,350Break even point 12,369Initial Outflow 19 points or Rs.1,425Reward / Risk 4.3:1Tenure 4 daysRisk-Profile LimitedBuy 75 (1 Lot) 12350 CE of 26-Dec-19 at Rs. 28Sell 150 (2 Lots) 12450 CE of 26-Dec-19 at Rs. 6

Buy 75 (1 Lot) 12500 CE of 26-Oct-19 at Rs. 3

Risk Metric (Expiry) Constant Vol SkewLevelsTarget at 12,450 6,075

Stop loss below 12,350 -1,425

Position GreeksDelta 11 Theta -68

Vega 93 Gamma -04

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