Nifty likely to see a bounce back this week: Deploy 'Modified Call Butterfly' spread
Among options for Nifty, we still have decent congestion in 10,800 and 11,000 Puts for the monthly series, while on the upside the highest call congestion is far off at 11,700
Research by Quantsapp Advisory, SEBI-registered research analyst (Reg. No. INH000006332)
undefinedThe Nifty50 started the week on a strong note but pessimism overdose coupled with the proximal expiry did manage to bring the index back above crucial resistance levels up in the next few sessions.
The rollovers for the August expiry were in-line with the 3-month average on an aggregate basis. However, rollovers for major indices such as Nifty50 and Bank Nifty lagged the 3-month average by ~10 percent.
On optimistic reasoning, the unwillingness of the shorts in carrying forward the short bets could be one of the reason.
The Nifty50 started the September expiry without any major change in open interest, while Bank Nifty started with a dismal 8 percent increment.
As far as stock futures are concerned, the number of stocks with a reduction in open interest expiry-over-expiry was higher than the number stocks with increment in open interest.
Once again, lack of momentum could be blamed for this lack of willingness to carry forward the bets in futures.
Slicing the stock futures into sectors, we could see many sectors rolling shorts with increment in open interest. Stocks like SBI pushed PSU Banks into a short quadrant, while second-line Pvt. Banks like YES Bank, IndusInd Bank and RBL Bank also rolled shorts.
Reliance Industries (RIL), select technology stocks along with the majority of FMCG stocks, except for ITC, also rolled longs.
On an overall basis the distribution between longs and shorts was more or less even. Similar is the situation as far as the Open Interest Put Call Ratio goes. OIPCR for the Nifty is little above 1 which indicates neutral to bullish mode.
Even the risk index ‘India VIX’ remains off its recent highs. This indicates a possibility of mean reversion if the current trajectory were to hold.
Among options for Nifty, we still have decent congestion in 10,800 and 11,000 Puts for the monthly series, while on the upside the highest call congestion is far off at 11,700.
Even on the weekly front, the level of 11,000 has a fair amount of congestion on the Put side. Bank Nifty, on the other hand, has consensus hurdle among the expiries at 28,000 on the upside, while 27,000 remains an indicative floor looking at the upcoming weekly expiry.
Considering the sentimental indicators being off its pessimistic end and index holding on to the crucial level of 11,000 an inexpensive strategy of Modified Call Butterfly is advised keeping the profitability open in case of reversal in expected upward gyration.
Modified Call Butterfly is a four-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 an upward breakout. This is a fairly risk-averse and a universal strategy.
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This trade idea was published on 2 Sep 2019 by Shubham Agarwal for Quantsapp Advisory, a SEBI-registered research analyst (Reg. No. INH000006332) and an independent proprietorship, not Quantsapp Private Limited. It reflects the market on that date and is not a current recommendation.
First published on 2 Sep 2019: prices, lot sizes and expiries are those of that time. They are illustrations for education only, not investment advice. Derivatives trading carries risk; read all scheme and risk documents before trading.