'Nifty rebound amid lack of participation concerning, hedge Nifty via Modified Put Butterfly'

Shubham Agarwal

It was week of late recovery. This week started carrying forward weakness that creeped into the market a week before. After spending most of the sessions around the lower levels, weekly expiry brought some cheer. Gains in that session could add around a percent to Nifty for the week.

Bank Nifty on the other hand was not so lucky. The same weekly expiry pushed the Bank Nifty down by a couple of percent. This created yet another dent in Bank Nifty value for the successive week pushing it down by more than 2 percent for the week.

On the open interest front too, Nifty was relatively firm. After lull in first session from open interest (OI) perspective, Nifty did lose some longs in the following two session amid small decrements. However, the comeback resorted those longs. Unfortunately, that's all that the last two sessions could do. As a result, the week for the Nifty futures OI ended with almost no change in OI for the week.

Bank Nifty OI activity mimicked the price activity for the week. After the first session of unwinding of longs. The following session attracted fresh shorts. These shorts did cover by a tiny magnitude. However, the remainder shorts for the week and mix of long and shorts for the last sessions left Bank Nifty futures with net shorts for the week alongside addition of nearly 8 percent increment in OI.

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Aggregate stock futures OI was also not too impressive. This is because the rise was fairly restricted to a limited number of stocks, some of which could attract longs. This led to majority of stocks ending up with rise in OI and fall in price equation labelled as shorts for the week. Considering the mid expiry time, relatively higher share (more than half of participating stocks) witnessed unwinding in OI. This left us with longs as the least favourite OI activity for the week.

Slicing the stock futures data further, Majority of sector averages lost out in price action. Private bank added shorts almost across the sector. Capital Goods led by L&T, Bharat Electronics and Power led by Coal India, NTPC added shorts. Metals also added in majority of stocks except Vedanta which added longs. IT added longs across the sector after a long time.

Sentimentally though, this was a week of recovery. While the consolidation helped the risk index India VIX in softening a little bit, the come back in Nifty brought the India VIX lower for the week by over a point.

This is rather comforting when associated with yet another sentimental indicator of Nifty OI PCR. The composition of Call and Put OI depicted by the ratio got some boost after rising from level of 1.22 to 1.49. However, the interest still remained more in relatively lower level Puts.

Finally, lack of participation in Nifty while reversing the gains is concerning. Stock futures OI activity led by shorts does not add to the bullish argument. The congestion in 11,500 and upwards Calls could make it difficult for Nifty to rise quickly. Come back by Nifty without participation across futures advocates caution, hence Nifty hedge via Modified Put Butterfly is advised.

Modified Put Butterfly is a 4-legged strategy where 1 lot of Put close to current underlying level is bought against that 2 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 downward breakout. This is a fairly risk averse and a universal strategy.

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

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