Deploy modified Put Butterfly strategy for Nifty: Shubham Agarwal

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The previous week started with a huge drop to a certain extent correcting expiry-led anomaly created by the exiting short interest in the final week. After the first session blow, the following session did not witness any further follow-through but, there was no recovery either. As a result, Nifty shut shop for the week 6% lower for the first week of May expiry.

On the other hand, Bank Nifty continued its underperformance. While the course taken was similar taking the biggest hit, in the beginning, lack of recovery in the rest of the week shaved off 10% off of Bank Nifty.

The story on the open interest front was somewhat different for both the indices. As a huge surprise to many participants, Nifty’s reaction was out of the ordinary, especially to the first session drop. Nifty futures lost interest in the first session and all along the week, pushing the OI down by 10% right in the first week of expiry itself. On the other hand, after bringing forward a sizable amount of shorts from April expiry through the 10% fall Bank Nifty added further shorts to the tune of 43% for the week pushing pessimism even further.

The story was not so different on the stock futures front either. Aggregate stock futures added close to 9% of fresh interest. However, unlike many weeks in April expiry yet again there was a domination of shorts this week. Over 63% of stocks ended up adding a fresh round of stocks, which was closely followed by Long Unwinding. Roughly 10% of the participating stocks came out of this week unharmed with increment in prices for the week.

Slicing it down further, apart from minor unwinding in Cement, Oil and Positive bias in Pharma and to a certain extent in Telecom rest of the sectors added shorts. Maruti Suzuki and Ashok Leyland led Auto in shorts, BHEL and Volats dragged Capital Goods in shorts, while ITC single-handed led FMCG in short. All Media stocks added shorts, Private Banks like RBL, Axis Bank and Federal Bank added leading short interest.

Sentimentally, risk level in the Nifty options rose yet again. After falling for 5 weeks straight India week was up for this week by 4 points indicating the recent drop was not considered just like a pullback from the rise. Any further fall could trigger a move in India VIX to its fresh higher average of recent times.

OIPCR also reacted with a mean reversion this week after hitting a year high at the close of a week before. It was a classic indication of over optimism when OIPCR was elevated level signalling caution a week before. In such situation agility in commitment is necessary for each and every trade or at least systematic hedge mechanism that prevents damage from falls like the one faced at the beginning of this week.

At this juncture, Dominance of shorts this week should be taken seriously and safeguard from any further fall should be created.

Options OI indicates congestion in 9000 strike may halt the fall at least temporarily, which cannot be ignored at the same time. However, the possibility of a deeper cut in case we fail to sustain 9000 should not be ignored either. After a 6% fall, an inexpensive strategy respecting congestion at the level of 9000 of Modified Put Butterfly is advised.

Modified Put Butterfly is a 4-legged strategy where 1 lot of Put close to current underlying level is bought against that 2 lots of lower strike Puts are sold and 1 more lot of Put is bought but closer to the Put sold strike. This keeps the lower but constant profits in case of a downward 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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