Deploy Nifty Modified Call Butterfly strategy: Shubham Agarwal

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This week affirmed that market is in ‘weakness will be bought into’ mode instead of a ‘straight rising’ mode. Nifty opened the week on a weak note. Scaring all of us of the weekend nervousness from previous week would get a strong hold.

However, the very next session pulled the index up. The rise did continue to mid-week only to once again get into higher level grind within 11300-11400 and there abouts range. However, with the help of mid-week upticks Nifty did manage to post a gain of close to 2% on the charts.

Bank Nifty too had a similar run. However, for the rise credit goes only to Tuesday’s session as that is the most the index has risen. The weekend sessions also posted the rise but it was more of a recovery from the latter half grind that indices went into. Nonetheless, just like Nifty thanks to the mod-week rally Bank Nifty too added over 2% gains for the week.

On the open interest front, as usual the reaction of the futures participants was different. Nifty had a few down days and rest of the moderate or sizable rises.

Good part about Nifty was that during a lull or on a down day Nifty futures lost interest, while on the days where there was a decent rise posted Nifty futures added interest. This indicates a healthy Long-Long Unwinding sequence in the index futures. The week ended with Nifty futures adding almost 5% in OI.

On the other hand, Bank Nifty had exactly opposite position alterations in futures. The few fantastic sessions with rise were associated with reduction in futures OI. On the other hand, the nervousness got sold into with addition of short interest in OI. However, the reductions led by short covering outnumbered fresh shorts. As a result, Bank Nifty lost nearly 7% in futures OI.

Aggregate stock futures OI was also up by 3% for the week. The composition of futures OI alteration among stock futures was also mixed. With most of the stocks on rising mode, the favorite OI activity was longs, which was closely followed by short covering. Just 20% of stocks trading in F&O either added shorts or unwound longs. This is a very healthy sign.

Slicing the stock futures further we learn, Notable sector aggregated activity this week was either Long or Short Covering. Banks were well placed this week, with Ex- Bank of Baroda rest of the PSU Banks adding longs and Except RBL and Axis rest of the Pvt. Banks adding longs. Telecom led by Bharti Airtel added shorts. Media Ex-PVR covered a lot of recent shorts.

On the sentimental front, we did have a dampening start which led to nervousness in the beginning but overall increment led to a rise in Nifty OIPCR. This boosts confidence. India VIX also was on a roll. The risk index dropped by nearly 2 points, indicating there is comfort around these levels.

Finally, Longs in Nifty and Long addition heavy futures built up indicates bullish bias intact. Call congestion in Monthly expiry options in Nifty indicate overall rise is expected but with a slow speed. Upcoming week of expiry could also play a spoil sport, hence smaller loss strategies should be resorted to. Futures data is pointing at an upward looking bias, however considering the call congestion and week of futures expiry moderate small interval 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.

The author is CEO & Head of Research at Quantsapp.

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