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Last Updated : May 21, 2018 08:57 AM IST | Source: Moneycontrol.com

Banking stocks to remain under pressure; deploy modified put butterfly spread on Bank Nifty

Considering negative bias for the index, it is recommended to adopt a modified put butterfly spread in the Bank Nifty to take advantage of the downside momentum.

Shubham Agarwal

The stellar rally witnessed in the Nifty and Bank Nifty came to a halt as indices reversed their key resistance area of 10,950-11,000 and 27,000, respectively. Bears took the charge of the market with the Nifty and Bank Nifty declining nearly two percent on a weekly basis. Geopolitical events, depreciating rupee against the dollar and higher crude oil prices led to nervousness among market participants.

Both key indices saw long unwinding and initiation of fresh shorts in index futures towards the fag end of the week. Weekly option data for the Nifty index depicts aggressive call writing of 15 lakh shares at 10,700 and 10,800 strikes. Put writers were jittery and reduced positions across strikes of 10,400 to 10,700, indicating bearishness. The option indicative band is now placed at 10,500-10,800, with outstanding open interest (OI) of around five million shares.


The put-call ratio is headed southwards to 1.35, leading to further selling in the market. Foreign institutional investors (FIIs) turned negative in the Indian market, selling Rs 1,240 crore in index futures. Their long to short ratio in index futures fell from 1.38 to 1.15 as they added significant short positions. In index options, their net put longs (long put-short put) inched higher by 41,840 contracts, while net call longs (long call-short call) fell by 13,281 contracts, signifying a shift in bias.

Clients on other end added 57,043 contracts to net call longs (long call-short call) in this correction, while on the put side status quo remains.

Bank Nifty option data for weekly expiry is showing higher congestion in calls relative to puts, indicating reluctance among put writers to create positions, while call writers are getting aggressive.

Considering negative bias for the index, it is recommended to adopt a modified put butterfly spread in the Bank Nifty to take advantage of the downside momentum.

Modified put butterfly spread is a bearish strategy that offers a decent reward-to-risk with low cost. It is recommended when the trader is looking to execute a high yielding trade at a very low cost. Under this strategy, we need to buy one higher strike PE, selling two middle strike PE and buy one lower strike PE.

As strike distance is not equal in a modified butterfly spread, most profit is made if prices close at the middle strike. However, if prices fall below the lower strike, limited profit would be made giving the modified butterfly strategy an edge above the traditional butterfly spread.

Disclaimer: The author is CEO & Head of Research at Quantsapp Private Limited. The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on May 21, 2018 08:57 am