Deploy fairly risk-averse Modified Call butterfly strategy on Nifty: Shubham Agarwal

The 10 most valued domestic companies together added a whopping Rs 4,04,068.05 crore in market valuation last week, with RIL and HDFC Bank leading the gains. Here are the top 10 firms according to their market capitalisation for the week ended April 9:

The excitement continues for the second week of November expiry. The aftermath of the event seem to have created augmented positive vibe. Nifty started the week with a bang.

Nifty started the week with a bang. This was followed by back-to-back rise till the day of weekly expiry. The slow down in Nifty was just a bit of digestion as the drop was relatively small and the following session pushed the Nifty to end the week close to the high of the week. The week brought over 4% rise in Nifty.

Bank Nifty had similar start to the week. The index rose at rather swifter pace than Nifty and gained more ground. However, the drop on the day of expiry was also likewise proportionately bigger than Nifty. The ground gained in the last week of the session was not good enough to push the index as close to its weekly high as Nifty. Nonetheless, Bank Nifty gained over 6% for the week.

On the open interest front, Nifty had a better run than Bank Nifty this week. The sequence of Long and Long Unwinding comes back to the index futures. Nifty added fairly sizable amount of longs in the first three sessions. Expiry session did take some of the away but some of it got reinstated in the following session. Nifty futures ended with week with almost 10% rise in the OI despite of late week hiccup.

Bank Nifty on the other hand, had lack of incremental participation this week. The week started with almost 7% drop in OI along side rise in the index. This indicates remainder of shorts betting against the success of the event getting out. Following sessions did manage to add some longs with unwinding of few of them on expiry day. On an overall tally, Bank Nifty lost OI for the week to the tune of almost 4%.

Aggregate stock futures tally too was little less encouraging than last week. The share of short covering this week was almost 40% this week while nearly 50% of the stocks added longs. Total OI for the week stood almost 4% higher than last week. Incremental share of short covering is definitely disturbing but can be overlooked if the vacuum created by this activity gets filled in by incremental longs.

Slicing the stock futures further we learn, Most of the sectors and stocks added either longs or covered shorts. EICHER and TATAMOTORS led longs in Auto. NAUKRI and COFORGE led longs in IT. BANKBARODA and CANBK added sizable longs in PSU Banks.

Sentimentally, this week was a bit comforting as implied volatility took a beating for the second week in a row. Drop of a point pushed risk index India VIX down by nearly a point. Option composition summarized by OIPCR was humbled this week by inflow of Call writers. An end to the event along with the rise attracted Call writers in higher strikes.

Finally, Continuing longs are indicative of conviction in the up move. Incremental put congestion in 12000 thru 12500 indicates put writers comfortable with current elevated levels. Lastly, fall in India VIX indicates ease in commotion despite of recent rise. However, considering the rise already in place a nimble footed bullish strategy of Modified Call Butterfly is advised.

Modified Call Butterfly is a 4-legged strategy where 1 lot of Call close to current underlying level is bought against that 2 lots of higher strike calls are sold and 1 more lot of Call is bought but closer to the call sold strike. This keeps the lower but constant profits in case of upward breakout. This is a fairly risk-averse and a universal strategy.

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