Deploy modified Put butterfly strategy in Bank Nifty: Shubham Agarwal

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Last week was a week of struggle at the top. Nifty opened on a rather positive note after falling own from 12000 level. The opening gains created enough optimism for the index to touch again and even cross the level of 12,000 last week.

However, the rest of the week just went by in pursuit of yet another infamous round figure. Tiny push mid-week did raise hopes but the gains even on that day could not push the index across 12,000. After a struggle around the top Nifty shut shop last week with a moderate gain of close to 1.5%.

Bank Nifty, on the other hand, had a decent sprint. The outperformance of Bank Nifty over Nifty is being witnessed since a few weeks now. Rightly so, because the Bank Index has grossly underperformed Nifty during this come back after COVID-19 crisis.

However, the road taken to this outperformance was almost similar to that of Nifty. Most of the weekly gain was attained by the index in the first session itself, what followed was a series of tiny gains. The last session could have brought in cheer but the gains could not be held. The week ended with Bank Nifty adding yet another 4% gain.

On the open interest (OI) front, Nifty added longs during the week and the OI tally too is up in excess of 7% but the only concerning part is most of these longs were added on rather quiet days. Almost half of it got added in a session when Nifty lost grounds from the top. This reduces faith in the freshly added longs.

Bank Nifty futures also had a similar situation. The longs early on were more in the first session itself, which was confidence-boosting. However, oven here concerning fact was that most of the OI increment came in the last session when the Bank index fell from the top and could not hold the gains. This along with the baggage of shorts the Bank Nifty is carrying does not digest well for a positive outlook.

Aggregate futures, this week did not have any such issues in this department. The favourite activity was long interest addition. These additions in the penultimate week of expiry could be the only less cynical positive development that happened last week.

Slicing the futures into sectors we could see most of the sectors added long interest in aggregate (price up-OI up) or had short covering, but sectors like Auto in longs had price up due to short covering in Tata Motors and OI up due to Shorts in Hero MotoCorp, TVS. Capital Goods stocks covered shorts almost across sector.

Steel stocks led longs in Metal, while SBI and Bank of Baroda led longs in PSU Banks, M&M Financial and Shriram Transport led longs in NBFC. Reliance led shorts in Oil.

On the sentimental front, risk index India VIX went up by a tiny bit this week too. Now, in an overall rising market regime, the move that India VIX has seen of almost 4 points does look concerning. Well, one school of thoughts do blame it on the ongoing result season but after announcement of few big results this risk premium should have come down. This raises question on the comfort of option writers around current level.

Nifty OIPCR on the other hand did get a boost. With the upcoming weekly expiry also being the monthly expiry, looks like the excessive writing was missing on an aggregate basis pushing the overall OIPCR a tad bit up last week.

Finally, last week despite the rise, having more shorts than longs in Bank Nifty futures is concerning. Rising index with rising IV and falling OIPCR reduces confidence in the current up move. Lastly, the baggage of shorts in Bank Nifty futures from past expiries does question the reliability of the current move. More shorts interest in futures coupled with more pressure from Call writers in Bank Nifty indicates pullback on the cards hence, 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)

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