Deploy Nifty Modified Call Butterfly strategy

We had a rough start to the past week, but it ended with a sigh of relief as the pullback fears subsided. After rather soft start to the expiry on first Friday of the August expiry, Nifty started the week scaring most of the participants as it pierced the heaviest Put level of 11000 and closed almost a percent lower than that. The next session though showed a speedy recovery and each session after that added small and steady gain to the index value. At the end of the week Nifty gained over a percent and a quarter reversing almost all the losses of this week as well as previous week.

Bank Nifty took a similar path to recovery after a rather deeper drop proportionate to that of Nifty. That and the recent underperforming trend of Bank Nifty could be the reason why we did see a recovery but even slower than that of Nifty. This resulted in just half a percent gains for the Bank index. Also, Bank Nifty still has a lot of ground to cover to reverse losses created in the last week of July expiry.

On the open interest front, Nifty futures has been rather confident this week as the reaction to the big drop was just a tiny reduction in OI, while the rising sessions saw increment in OI, except for the mid-week unwinding. As a result, Nifty ended with tiny 2% addition of longs for the week.

Bank Nifty futures on the other hand, had a different reaction to the early week weakness. There was an addition of short interest in the beginning, which got unwound in the next couple of sessions. The tiny increments in the Bank index attracted some longs bringing the weekly OI addition tally to over 3% with more longs than shorts.

Aggregate stock futures OI just in terms of number of units rose by a whopping 23% mostly because of big lot stock futures like IDEA more than doubled their OI. Nonetheless, among stock futures, over 50% of them added long interest for the week. This was followed by equally divided short interest addition and short covering. For a slow market, this was a rather better reaction from the F&O participating stock futures.

Slicing the stock futures further we learn, most of the sectors’ aggregate change in OI indicated long interest addition. Auto added notable longs led by Ashok Leyland, M&M and TVS, while Metal and PSU Banking stocks added longs across the sector. Skewed long additions were seen in Oil which was led by only Reliance and private banks led by RBL Bank only.

Sentimentally, Nifty OIPCR did dwindle confidence a bit at the beginning, but with Nifty holding on to the level of 11000 the confidence came back. The week ended with rather strong OIPCR at 1.64. India VIX also gave into the consolidation argument and kept up with the falling spree, hitting yet another multi-month low.

Finally, Nifty futures along with aggregate futures had long interest additions, affirming the positive bias. Come back in OIPCR supports the bullish part of neutral to bullish argument. Lowering IVs on the other hand, indicates even 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 India VIX 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 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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