Hedge Bank Nifty through Modified Put Butterfly as weakness is expected to continue

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It was a lacklustre week for India equities. Tiny moves in Nifty restricted the index to on an average just half a percent move a day. Nifty had a rather slow start to the week. Almost no change in the opening session was then followed by a couple of gaining sessions pushing the index up to 11600+ levels.

However, the sequence was broken by a couple of small down sessions which followed them. This little up, little down kept the index almost where it was a week before, adding some 30bps to the index for the week.

Bank Nifty opened the week with close to 2 percent down session. The recovery alongside Nifty did seem coming reversing the damage for the week in the next couple of sessions. However, final sessions took all that away and added further weakness in the last two sessions to push Bank Nifty down by 2 percent for the week.

Open Interest tally had similar sort of run for Nifty as the underlying. The soft start attracted few shorts in the index future. The following sessions did manage to bring in a Long interest in the futures of Nifty proportionally higher than the opening shorts. However, the end of the week was not too conducive for the participants to carry forward anything into the final week of expiry. As a result, we saw 10 percent drop in the final session, levelling the OI change for the week to almost 0.

Bank Nifty’s negative opener pushed the participants to gather shorts leading to a massive 18 percent addition. Through the week some of those shorts did get covered but most of them showed willingness to carry forward. This resulted in 12 percent addition in Bank Nifty futures OI .

Aggregate stock futures OI on the other hand, did not see a lot of traction. Overall increment of less than 3 percent was relatively on the lower side. This was partly because almost 40 percent of the participating stocks unwound OI for the week. The consolidating nature of the market was visible here as well. The bias in terms of OI activity Long/ Short Covering and Short/ Long Unwinding was more or less equally divided.

Slicing the stock futures data further, most of the sectors remained close to inaction in terms of price change due to mix of Long and Short within. Cap Goods saw Longs in VOLTAS, SIEMENS and Shorts in LT. Media had shorts in PVR and minor longs in ZEE Entertainment. Apart from this, Cement saw short covering across sector. PSU Banks added shorts led by SBIN, PNB, while Pharma made a comeback with a mix of Short Covering and Longs.

Sentimentally, this week was a bit of a dampener for the Open Interest Put Call Ratio as the inability to go far beyond 11,500-11,600 got translated into the Call writing especially in the coming weekly cum monthly expiry. This resulted in softening of OIPCR by 12bps for the week.

On the risk front, the comfort was visible in the lowering India VIX. While there is inability to rise above and beyond the recent highs, the falls getting arrested did manage to cool off the risk element in the Option premiums pushing India VIX by 3 quarters of a point.

Finally, Short cycle in Bank Nifty futures developed in last few weeks keeps the bias for the index negative. OI PCR for Bank Nifty close to recent low indicates expectation of weakness to continue. Put writers distancing themselves from current lower levels keeps the room on the downside open. Considering the persistent Shorts along with the fall already in place further weakness is advised to be traded with Modified Put Butterfly.

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 downward breakout. This is a fairly risk averse and a universal strategy.

(The author is CEO & Head of Research at Quantsapp Private Limited.)

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