How Modified Put Butterfly strategy can help you in downward breakout?

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Short heavy futures participation seemed to have found a reason for respite. Both Nifty and Bank Nifty were up last week. While Nifty clocked close to 6 percent for the week, Bank Nifty rose by almost 12 percent for the week.

Considering the weekly gains, it would seem like a good expiry but these stellar returns were not good enough to run off the damage made in previous weeks of May expiry. Finally, Nifty shut shop in May series with a loss of around 3 percent and Bank Nifty ended the expiry with a net drop of around 10 percent. That is the first layer of irony of May series.

On the open interest front, while the rollovers for both Nifty and Bank Nifty remained robust beating the 3-month average number by a decent margin. But resultant OI action for Nifty was not too conducing with sub 5 percent increment. Bank Nifty on the other hand added over 11 percent. Also, the directional impulse in Bank Nifty futures was fairly unidirectional with downward bias.

The final day increment was seen in OI but with tiny bit of Longs Nifty OI still remains fairly low as the participation seek directional sense. Bank Nifty seems to be placed better in the participation department.

Stock futures rollovers too were not disappointing as with their major contribution the market wide rollovers beat its own respective 3-month average. Even the aggregate OI additions for market wide futures participation augmented by over 8 percent. Price OI comparison however strictly from expiry over expiry perspective shows a bleak picture as nearly 50 percent of the futures participants added shorts for the expiry.

Slicing it down further, stock futures OI had one more layer of irony, many sectors added a lot of OI but contributions remained contrast. Auto with shorts in Ashok Leyland and longs in Escorts, Capital Goods with shorts in Siemens and longs in BHEL, Media with longs in Zee Entertainment and shorts in PVR. Only secular shorts were seen in financial sectors viz. private and PSU banks along with NBFCs.

Sentimentally though, we did not any concerns of longevity of the move visible in the option composition. Yet again just like last expiry this time too we are ending the month at the highest point of OIPCR for the month. This could very well be just a reaction to the recent up move. Still the excessive Put writing remains a fact.

On the other hand, the implied volatility is on a declining spree knocking off 2 more points in India VIX to 30. Interestingly, Nifty implied volatility rank widely known for testing extremes between 0-100 is at 15. This does not go well with not so hunky-dory, pandemic hit market set-up.

While possibilities of this move to get extended in a full-blown rise can never be negated, considering current state of F&O data, one should be trade with shock proof short term, known loss trades and avoid writing options. Meanwhile, the over confident sentiments, leading to possibility of ongoing up move giving into consolidation 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 those 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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