How to effectively handle a range-bound market

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Late expiry weakness is becoming a habit for India equities now and expiry of October series contracts which happened last Thursday was not different. Last week went by with a rather see-saw movement. The sequence of fall and halt in the fall was the course of action early on. However, lack of respite in the second half of last week pushed the indices and stocks down.

Nifty started the week with a fall. Partial recovery followed by a similar fall could have been arrested the next day. However, the expiry day could not bring any respite. Unlike the last few expiries, the weekend session, which is apparently the first session of the fresh expiry also could not bring in any gains, unlike the last expiry. This led to a dent of close to 2.5% for the index. Despite this dent though the expiry ended with a decent gain of around 8% for Nifty.

Bank Nifty had a weak start to the week as well. However, short heavy Bank Nifty for quite some time has been outperforming Nifty. This proved to be the case this week when the very next day Bank Nifty reversed the losses and added gains for the week.

However, the finish was exactly like Nifty after a couple of drops the Bank index dropped by over 2% for the week. Expiry was more favourable for Bank Nifty though as the index gained around 18%. This outperformance was not so constructive when associated with OI activity.

On the open interest front, Nifty had a decent increment in participation with 25% long addition. These longs, however, were added mostly at the beginning of the expiry. After the first week gains and these longs, the rest of the weeks were rather hope and faith.

Bank Nifty futures, on the other hand, had a different reaction to the rise in the index. Bank Nifty has since COVID-19 crisis added and rolled many shorts. These shorts found an escape route in this expiry’s gains. The covering of shorts could have added more thrust to the rise.

Aggregate stock futures had a good expiry as well, with rollovers a tad bit higher than 3-M avg. However, the rise in the stocks and indices could not attract add fresh participation for the expiry. Expiry over expiry Aggregate stock futures lost OI. The open interest activity among individual stocks was encouraging with over 40% stocks adding longs in October series.

Slicing the futures into sectors we could see, many stocks and sectors added longs early on October expiry and dragged them along the last series as well as carried them forward.

Cement stocks led by Ambuja Cements, UltraTech and Auto led by Ashok Leyland and Maruti added longs. Media saw long unwinding all due to ZEE, while except longs in Kotak, short covering was seen in most of the Pvt. Banks, Reliance and BPCL led shorts in Oil, while Sun Pharma and Torrent Pharma led shorts in Pharma

On the sentimental front, OIPCR for November series started off on a positive note at 1.65 in expectation of a respite but levelled itself with last week’s close due to weakness in the last session. The real concern is the rising India VIX. This week’s weakens led to almost 3 points rise in the risk index, jeopardizing the persistence of the bullish sentiment.

Finally, looks like early expiry longs if dragged across another round of weakness could give up, pressurizing Nifty. The put congestion in 11500 is too close to count on and risks a breach after lack of respite on Friday.

Lastly, the rise in India VIX in the last three weeks despite a rising regime in Nifty raises caution. Rather dragged longs rolled into November should be traded with prudence especially amid rising IVs, hence hedge via Nifty Modified 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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