Deploy short iron butterfly strategy in Nifty: Shubham Agarwal

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Last week the markets opened with a bang as Nifty gained in the first two sessions with no signs of respite visible at least at the beginning of the week. Mid-week session high though satisfied a lot of long chasers it seems and after making the weekly high, Nifty gave up the gains of that day as well as some of its previous gains. This was only to be followed by digestive consolidation with minimum price movement under the option indicated hurdle level of 11,200. Despite of all this, Nifty gained over 2 percent for the week.

Bank Nifty had a similar path. In fact, Bank Nifty went through bigger strides pushing it around 6 percent higher than previous week at the mid-week high. However, the consolidation in last two sessions of the week turned into a bit of a pullback in the last session. Hence, what could have been a much bigger outperformance turned out to be a relatively lower out performance to Nifty with over 3 percent gains for the index this week.

On the Open Interest (OI) front, Nifty had a rather simple equation with price moves. With the increments there was increment in OI and alongside the slight pullback and consolidation we could see either tiny long interest addition or unwinding of longs leading up to over 7 percent increment of long interest.

Bank Nifty on the other hand, like every other week recently, behaved a little differently. While the flow of longs upon rise and unwinding upon the fall was the case with Bank Nifty as well. But mid-week when the index gave up the rise for the day and lost some of previous gains it added over a third of the week’s OI on the short side.

Aggregate stock futures OI also augmented for the week by about 3 percent. Out of this almost a third of the stocks added shorts, followed by Longs, Short Covering and Long Unwinding. If it was not for the digestion in the second half of the week, the equation could have been different.

Slicing the stock futures data further, just like stocks sectors are also equally divided between gains and losses more or less. Mixed built up in Pvt. Banks with over powering longs in ICICI Bank and Axis Bank created long orientation for the sector this week. PSU Banks saw longs in SBI but continuing shorts in Bank of Baroda, NBFC also aggregates price rise along with rise in OI but within it, price gainers impacted lesser than the Short interest of Bajaj twins. ZEEL led media into shorts.

Coming down to sentiments, the risk index India VIX did not move much but still had a tiny increment for the week after many weeks all thanks to that mid-week shocker session. Could this be a start of reversal in risk index? Well, the gains are too tiny to be conclusive.

Nifty OIPCR which is already on a high horse made yet another recent high around 1.9, only to be humbled by the latter consolidation. The week ended with almost unchanged OIPCR.

Finally, Upcoming week will have expiry of July series Monthly contracts. After the recent run-up and late week digestion, a long unwinding move cannot be ruled out. Rise in Nifty led by longs with over optimism amid lack of secularism in stocks restraining the rise indicates a consolidation could be in the offing and is advised to be traded via Short Iron Butterfly.

Short Iron Butterfly is a 4-legged strategy where 1 lot of Put and Call each is sold close to current underlying level and 1 lot lower strike Put and 1 Lot higher strike Call is bought. This keeps the position profitable in case of consolidation in underlying along with defined loss led by bought options in case of a big move. This is a fairly risk averse and a universal strategy.

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The author is CEO & Head of Research at Quantsapp.

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