Deploy Nifty Modified Call Butterfly strategy

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It was a week of consolidation. Nifty opened the week on a positive note. The increments, however, were not so big but it kept coming till mid-week. After going into lull for a session the major index felt a relatively big jolt in the final session. However, towards the end it was no harm done as Nifty lost more or less what it gained through this week and ended the week down by just 30bps.

Bank Nifty compared to Nifty had a similar ride but the moves were proportionally bigger. Well, in Bank Nifty terms it may not be labeled too big. Gain of over 2 percent till mid-week for the Bank index got washed out in similar fashion as Nifty with a weekend session of more than 2 percent decrease. Even Bank Nifty lost a tiny 30bps for the week.

On the open interest front, Nifty futures had lack interest during the week. The daily increment or decrement in the OI in futures was limited to a maximum of 2.5 percent this week. Just like the underlying the futures open interest (OI) also went through a series of increment and decrement. This has led to almost no change in OI this week for Nifty futures.

Bank Nifty even on the futures OI front had larger alterations than Nifty futures. While Nifty futures did not react much to the early week upticks, Bank Nifty futures did and added over 20 percent longs. The weakness later on did lead to unwinding of some of them, yet Bank Nifty shut this week’s shop with 15 percent rise in OI (more longs than shorts).

Aggregate stock futures OI shrunk a little this week mostly due to the tug-o-war between stocks adding fresh OI and unwinding OI. This week’s OI activity was almost equally divided among Longs, Shorts, Long Unwinding and Short Covering. This fails to point at any particular bias on aggregate basis.

Slicing the stock futures further we learn, most of the sectors’ aggregate change in OI was minor and not worth noting. However, Capital Goods added longs across the sector led by BHEL and Voltas. Media also added longs led by ZEEL. Telecom, on the other hand, took a beating - overweighed by shorts in Bharti Airtel.

On the sentimental front, Nifty OIPCR did take a hit this week but the move seems a rather spontaneous reaction to the last session fall and over weighed by the upcoming weekly expiry options OI than the monthly options OI. While drop in OIPCR reduces bullish intensity, at 1.31 it still remains fairly healthy.

On the risk front, there was no such fright till the end of the week. India VIX fell by almost 2 points through the week but gained 1 point in the last session, still losing a point for the week. These levels of India VIX are indicative of no great fright among participants.

Finally, a lack of freshness in the Nifty futures after an inflow of longs indicates we may slow down a bit in the up move. Call congestion in Weekly but not Monthly expiry options in Nifty indicate overall headroom remains higher after an expected consolidation around here. Lowering IVs also indicate in case of a rise we may not see a runaway rally. Minor but firm long bias in futures OI along with the neutral vibe from Options OI and sentiments could be effectively traded with Modified Call Butterfly.

Modified Call Butterfly is a 4-legged strategy where 1 lot of Call close to current underlying level is brought against that two 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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