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Nifty may dip towards 12,000, deploy Modified Put Butterfly strategy

Modified Put Butterfly is a 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

February 17, 2020 / 10:39 AM IST

Shubham Agarwal

The past week had its ups and downs, but the topsy-turvy moves did not manage to post any big change on Nifty. On the other hand, for Bank Nifty, the late week drops were a bit too much compared to Nifty. As a result, while Nifty ended the week without any major change for the week, Bank Nifty lost more than a percent.

As the indices surpassed the Budget woes, the open interest (OI) activity also pulled down the intensity of magnitude. There were reactions to the moves but due to lack of intensity, Nifty ended up losing OI for last 4 out of 5 session resulting in a drop of 4 percent+ loss in OI for the week.

For Bank Nifty though, there was a jump of around 10 percent in OI but directional impulse was more or less equally divided between long and short. This leaves us with more confusion than clarity in terms of directional guidance.

Stock futures, on the other hand, were not that lucky as during the lows and highs, stock futures could not match the catch-up game like Nifty and most of the stocks ended the week with a price destruction and addition of short interest. This kind of share of shorts in the aggregate stock futures OI activity is being observed for the first time this expiry.

For the week, the most notable OI activity was in the power sector that lost most of the OI led by Coal, Power Grid and NTPC as the non-directional participation exited. Weakness induced shorts in cement led by Ambuja, Grasim and metals led by National Aluminium, SAIL and Tata Steel. PSUs were the ones that dragged banking with shorts in PNB, Bank of Baroda and SBIN.

Limited number of longs were seen during this week, with Bharti Airtel leading the charts for many weeks in a row. Pharma did not do well as a sector but stocks like Torrent Pharma and Dr Reddy had positive OI activity.

On the sentimental front, things suddenly turned quiet. The OIPCR (Open Interest Put Call Ratio) did drop for the week a tad bit by less than 20bps for the week. If it were not for the last session fall, this change would have been even smaller.

On the risk front, India VIX has been on a falling spree, rightly so due to the drop in excitement after the event. However, there was a bit of bump up in implied volatility late this week as Nifty seemed to be losing grip on momentum.

Lack of OI activity in futures of Nifty for the week despite the volatility indicates the directional impulse is missing, this along with slight drop in the OIPCR and halt in fall of India VIX indicates there is a possibility of yet another gyration towards 12,000. But just in case the solid 12,000 support gets penetrated, provision should be made for the trade to still not lose money. Hence, trading neutrality is advised with Modified Put Butterfly betting on Nifty, meandering around 12,000.

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.


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The author CEO and Head of Research at Quantsapp Private Limited

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Moneycontrol Contributor
Moneycontrol Contributor
first published: Feb 17, 2020 10:39 am