Nifty in, strong long cycle, deploy modified call butterfly strategy

It was yet another winning week for Indian equities. Nifty opened on a positive note with over a percent gain in opening of the week. However, the road to expiry was a struggle. The level of 13,000 did act as a magnetic field pulling the index towards it. On the day of expiry, Nifty tried to distance itself from 13,000 but could not succeed. Final session tough, did bring the momentum in Nifty to push itself almost a couple of percent higher than 13,000. For the week, Nifty added little over a couple of percent.

Bank Nifty for the first time in many weeks could not manage to outperform Nifty this week. The start was rather similar with close to 1% gains posted in the first session after the long weekend. However, while Nifty was struggling Bank Nifty lost grounds by over a percent in the next two sessions. The comeback in the last session was stronger than that of Nifty with over 2% gains. However, the damage done during the week kept the weekly gains for Bank Nifty under 2%.

On open interest front, both Nifty and Bank Nifty gained participation for the week. In a four sessions week, the first two session for Nifty too were not to conducive for participants to commit might be because as the struggle of distancing from 13000 was going on. However, in the last two session gradual rise in OI on the long side augmented Nifty OI by over 7% for the week.

Bank Nifty had a bit of struggle in this department as well. After adding small amount of longs in the first trade, Bank Nifty actually added fresh shorts in the next two losing sessions. Last session however, did bring along rather large amount of longs. For the week bank Nifty added 24% in OI but about 60-70% of them were on the long side.

Aggregate stock futures added around 5% in OI for the week. Positive vibe was visible in the stock futures too. With most of the stocks posting gains for the week, the most noticed activities this week were Longs followed by Short Covering. Number of stocks adding shorts or unwinding longs were not notable.

Slicing the stock futures further we learn, most of the sectors had aggregate long activity in the first week of December expiry. Longs were seen being concentrated into pockets which meaningfully lag the rest of the market. One such pocket is PSU Banks where PNB and CANBK led the longs, other is Telecom where IDEA led the longs. Media sector added longs led by SUNTV. Meaningful short covering was seen in almost all the Auto stocks, except HEROMOTOCO.

On the sentimental front, the OIPCR did have a humble start from last week. However, as Nifty distanced itself from 13,000 the OIPCR picked up pace and ended the week with a rise of ~30bps at 1.57. Considering the newer highs claimed by Nifty, OIPCR still remains fairly humble.

On the risk front, India VIX dropped a bit further. Once again, the slower moves can be accredited for that. The drop this week in India VIX by around 2bps brings it down to lowest level closing post pandemic. Overall mood of the market remains positive.

Finally, Nifty remains in strong long cycle. Distancing from 13,000 brought more confidence, visible in strengthening OIPCR and softening India VIX. Lot of put writers in and around 13,000 show expectation of rise above 13,000 here to stay. Longs, rising optimism and lowering risk makes a case for this slow upward momentum to continue, hence Modified Call Butterfly on Nifty is advised.

Modified Call Butterfly is a 4-legged strategy where 1 lot of Call close to current underlying level is bought against that 2 lots of higher strike calls are sold and 1 more lot of Call is bought but closer to the call sold strike. This keeps the lower but constant profits in case of upward breakout. This is a fairly risk averse and a universal strategy.

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

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