'Investors should hedge Nifty positions by deploying Modified Put Butterfly'

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26 Aug, 2025 12:21

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Shubham Agarwal

The Indian market was fairly volatile in the January series that saw a downtick of about a percent, but the index did manage to hit a record high of above 12,400 during the series.

But, the Bank Nifty was not that fortunate, as the sector index could not pierce the all-time high, In fact, it slipped below the lows of December and closed the expiry and the month below it.

The Nifty and the Bank Nifty rolls were lower by 8 percent and 10 percent, respectively, from their 3-month averages.

On the open interest front, the Nifty futures held on to the longs for most part of the expiry but the speed of rollover kept its pace slow and lower rollovers led to 12 percent dent in the Open Interest (OI).

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CEO and Head of Research|Quantsapp Private Limited

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The Bank Nifty futures also lost OI in January expiry but the short interest additions and a possible carry forward towards the end of the expiry led to just around 2 percent drop in OI.

On the aggregate stock futures front, the equation was slightly different. The total tally boosted by non-directional OI in many PSUs remained higher but this time, too, nearly half of the stock futures failed to carry forward additional positions this expiry.

There has been a lot of interest in the public sector stocks participating in futures from across sectors led by non-directional built-up, which was more emphatic in power sector OI rise.

Longs were seen in a sizable number in only two pockets-- cement led by ACC and Ramco cement and telecom led by Bharti Airtel. In positive OI activity, cap goods heavyweight L&T did manage to cover shorts.

The sentimental indicators had major shifts in the week gone by. There was an obvious reaction of the rise in the excitement by the options participants to the upcoming Union Budget, as a result there was yet another increment of 2 points in India VIX till Friday, January 31.

On the other hand, Nifty OIPCR witnessed a dip over the week. With the index losing grip ahead of the event, the Put writers seemed prudent in not being willing to write options. As a result, Nifty OIPCR dropped by over 40bps to near neutrality of 1.04 right before the event.

With the Nifty futures losing a lot of longs in January expiry and added shorts in the first session for February expiry, unwilling Put writers pushed the OIPCR close to Neutral for the index.

The Nifty has already ended Friday’s trade below the heaviest 12,000 Put for monthly series and further rise of 10 percent in India VIX indicates the expectation of volatility post the Budget. Hence a low-cost hedge via Nifty Modified Put Butterfly is advised.

Modified Put Butterfly is a 4-legged strategy where one lot of Put close to current underlying level is bought against which two 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 a downward breakout. This is fairly risk-averse and a universal strategy.

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

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