Last Updated : Oct 08, 2018 09:52 AM IST | Source:

Deploy Long Put Butterfly on Nifty to benefit from downfall

Put writers indicate that the next halt could be at 10,000, a wider cut is expected if the index breaches this level on a closing basis, says Shubham Agarwal of Quantsapp

Moneycontrol Contributor @moneycontrolcom
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Todays L/H

Shubham Agarwal

The index was down by almost 6 percent on a week-over-week basis. The large part of the decline could be attributed to the weakness in currency and the rising crude oil prices.

On the index futures front, Nifty futures lost about 29 percent longs in the September expiry, while in the first week we saw whopping 24 percent additions with only one difference that it was on the short side.

Among the stock futures, the biggest damage was recorded in the oil marketing companies with BPCL, HPCL adding 60 percent to 30 percent in the open interest, respectively, with over 30 percent damage to the price.

Within the oil space, Reliance Industries (RIL) took a big knock of 16 percent with around 17 percent short additions in futures. Another space that was hit heavily was auto with largest recipients being M&M and Eicher Motors with over 24 percent short additions and over 10 percent cut.

On the options front, Put writers were trying to seek asylum into 11,000 and lower strikes after the down-move in the September series. Now with huge additions in same strike Calls along with additions in the Nifty futures looks like there has been a creation of opposite positions by put writers but via the synthetic route.

Due to which, by the virtue of the tally, 10,500 still remains the heaviest put. Sentimentally, too, there has been a complete turnaround. Open Interest Put Call Ratio which started off at 1.33 in moderately Bullish stance being Put writers overpowering Call writers, came down to Neutral i.e. 1 by the weekend.

On the other hand, India VIX saw a whopping 11 percent jump to end the week within kissing distance of 20. The change in regime here which held on to a band of 11-14 has now taken its turn up and could create a higher range around here.

This means negativity being fed in by the Options participants. In a nutshell, Nifty futures with larger Short additions after an unwinding spree turns the near-term view as ‘bearish’.

Now the higher implied volatility and the fall that has already happened could weigh on markets. Put writers indicate that the next halt could be at 10,000, a wider cut is expected if the index breaches this level on a closing basis.

In situations like these, the strategy is to trade without stopping out in largest of the swings, while keeping the reward to risk as sweet as they could possibly be.

Why do we say that? Because, even after considering the maximum loss as per the net outflows, trade remains economically viable. Hence, a Long Put Butterfly would be a prudent strategy.

Long Put Butterfly is a combination of 3 strikes, where close to At The Money strike is bought, few steps away two lots of lower strike is sold to fund this and with similar distance, one lot of even lower strike is bought to protect the extra option sold.




Disclaimer: The author is CEO & Head of Research at Quantsapp Private Limited. The views and investment tips expressed by investment expert on are his own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.
First Published on Oct 8, 2018 09:52 am
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