Hedge Nifty via Modified Put Butterfly Strategy: Shubham Agarwal

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A week full of negativity that started with a drop and continued till the end of expiry of September series on September 24. September expiry was more or less levelled at the beginning of this week.

The back-to-back drops, however, pushed the index over 5% lower in just 4 sessions. The biggest drop was the final day of September series which alone took nearly 3% off of Nifty.

Back-to-back falls and drops in the first four sessions and a much lighter Open Interest (OI) in most of the stocks led by the expiry day resulted in a bit of respite from the painful drops in the final day with a rise of over a couple of percent. The week ended with Nifty losing nearly 4% for the week.

Bank Nifty, too, was not spared. Being short heavy it was obvious that the index will be beaten more than the major index. 3% drop in the first session was a brutal start for the index.

The fall seems to be arrested in the next couple of sessions with close to 1% drop but yet another drop of over 3% brought double-digit drop in Bank Nifty for the September series. Even Bank Nifty added a couple of percent in the final session of the week. Despite this respite though, the week ended with close to 5% drop in the index.

On the open interest front, Nifty has been adding fair amount of longs. This week being on the weaker note along with being expiry week, Longs in Nifty could not sustain. The drop in the OI during this week was so fierce that there was over 30% fall in participation expiry over expiry. Surprisingly, the last session did see increment in the index still there was drop in OI in Nifty.

Bank Nifty, on the other hand, had a pile of shorts that it was carrying since the beginning of the expiry. The drops did accelerate the process. This coupled with fair amount of rollovers added over 30% OI for the expiry. These additions though the expiry come alongside the decrement in the index indicate short bias.

On an aggregate basis the rollovers were more or less close to 3-M avg. However, aggregated for the sectors except IT, FMCG and Oil all other sectors rolled lower than 3-M avg.

As far as alteration n OI for the expiry is concerned, closing the series at the lowest point led to just 20 out of 136 stocks ending higher than previous expiry.

Slicing the stock futures data, most of the sectors aggregate OI were labelled with either Short or Long Unwinding. Cap Goods saw shorts in L&T and BHEL. IT witnessed short covering in Infosys, TCS, Wipro. Metals stocks added shorts almost across the sector. Telecom stocks added shorts led by Bharti Airtel.

Sentimentally, Drop in Longs in Nifty and no come in them back after a recovery reduces confidence. Heaviness in Puts shying away from current lower level strikes indicates there is room for pull back.

The pull back if continues, could end up into a reversal hence that possibility has to be accounted for. Considering the ongoing pessimism along with lack of confidence in the late week respite indicates expectation of impending room on the downside, hence Modified Put Butterfly is advised.

Finally, Drop in Longs in Nifty and no come in them back after a recovery reduces confidence. Heaviness in Puts shying away from current lower level strikes indicates there is room for pull back.

The pull back if continues, could end up into a reversal hence that possibility has to be accounted for. The ongoing pessimism along with lack of confidence in the late week respite indicates expectation of impending room on the downside, hence Modified Put Butterfly is advised.

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)

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