Hedge Bank Nifty via Modified Put Butterfly strategy

After big gains, we had a bit of digestion in this short week. The digestive move that came in this week could very well have some of its roots into the anticipation from the upcoming week of expiry. This is a natural reaction after the big leap that index was seen taking in the beginning of the expiry.

The truncated week for Nifty started on a positive note. First two sessions had their gains restricted to less than one percent. This was coupled with a peculiarity of opening higher with a promising day of big gains yet closing lower than that. The closings were above the previous day but lower than the opening gains. After a stellar session mid-week, Nifty gave up most of these tiny gains on the Weekly expiry day. Some amount of recovery after this fall left Nifty almost levelled with a tiny gain of 60bps for the week.

Bank Nifty was in relatively better shape than Nifty though the week. The bank index kept pushing higher in the first couple of sessions, making good ground before the expiry day pullback. A drop on the expiry day of over 3% did wash off some of its gains, but the recovery in the last session led Bank Nifty to shut shop for the week over 2% higher than the previous week.

On the open interest front, the entire week was similar in terms of Open Interest (OI) alteration for Nifty to the price movements. The change in OI was limited to around a percent for each day. These tiny additions in long interest could not augment the overall tally much and ended up adding a mere 1.7%.

Bank Nifty futures, on the other hand, had a different route taken. First two sessions did attract around 5% long interest in the index. This was followed by a similar amount of unwinding of long interest. After this even tally, the expectation was that over 1% move in the index could bring in fresh longs but instead Bank Nifty lost over 10% in OI in the final session. This could very well be a profit booking drive after a rise. Thus, for the week Bank Nifty lost 10% in long OI.

On the aggregate futures OI tally, there was a minor increment of 1.6% in OI. This was more or less contributed by 1.5 longs for every short. However, even in the long heavy stock futures many stocks gained yet lost OI. Once again this could be suspected as profit booking at the top.

Slicing the futures into sectors we could see, OI alterations remained lower in most of the sectors. Notably, after many weeks LT and Voltas led longs in Capital Goods. ZEE and PVR led shorts in Media and Reliance led shorts in Oil. Among banks, both private and public, stocks like SBI, PNB, RBL Bank, IndusInd Bank lost OI led by profit booking of longs.

Sentimentally speaking, the lull in the Nifty did translate into the options activity as well. Nifty OIPCR remained more or less at the same level as the previous week and so did Bank Nifty OIPCR. On the risk front, India VIX pushed higher by just a few basis points. This could be seen as an indication of raising a vigil for monthly expiry led volatility.

Finally, the unwinding of OI in the last rising session indicates profit booking in Bank Nifty futures. Bank Nifty also had Call writers crowding rather closer strikes than Put writers. Fresh longs in last week of expiry may get tempted to unwinding due to already posted gains. Possible long unwinding led pullback could be handled with a hedge in Bank Nifty via a 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 a downward breakout. This is a fairly risk-averse and a universal strategy.

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

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