Shubham Agarwal
The September expiry started with a bang but the last week brought in a lot of nervousness. Nifty opened with a big drop on Monday (August 31) losing over 2 percent over the session. The next few sessions did manage to recoup half of those losses but Friday's session took all those gains out and the index ended at the lowest closing level for the week.
Bank Nifty suffered a similar fate, dropping by over 3 percent after a stellar run in the week prior. Unlike Nifty, Bank Nifty could not manage any recovery and barely managed to prevent any incremental damage in the following days. Additional 2 percent drop on top of a nervous first few days led Bank Nifty to shut shop for the week with a whopping 6 percent loss.
On the open Interest (OI) front, Nifty futures had a rather neutralising reaction. Built with a moderate amount of bullish bias, the long interest did unwind in the first session, but there was an attempt to reinstate the lost longs during the week.
The drop on the final day though did not leave them onboard leading to a 10 percent drop in OI led by long unwinding.
Bank Nifty futures OI was surprisingly muted. A huge drop right in the beginning led to longs unwinding, however, the rest of the week did not see any meaningful alteration in OI for Bank Nifty futures. In fact, the inflow of few shorts during the week led Bank Nifty futures to end the week with more or less no change in OI for the week.
On the stock futures front, aggregate stock futures saw a drop in long intensity as well as infusion of fresh pessimism. It is unusual to have bigger unwinding impressions, but due to the long heavy structure of the market, about 40 percent of the stocks participated in F&O unwound longs, while a little over 40 percent of the stocks added short interest.
Slicing the stock futures data further, most of the sectors either added shorts or unwound longs. Capital goods and metal added shorts almost across the sector. PSU banks unwound longs across the sector except for PNB which added shorts. Short covering in IDEA led to a rise in price for the telecom sector.
Sentimentally, the ever-lowering India VIX rebounded this week. The obvious reaction to the fall was a rise in the risk index. If after a big fall, this move turns out to be a mean-reverting up move, it could turn detrimental for the market.
Nifty OIPCR also pushed itself down last week. The small but steady sessions of recovery did push the ratio up from the low of the week. The last session pushed it down 40bps. Bank Nifty OIPCR halved last week after closing the previous week at near the high of the year.
Finally, prudence should be the priority as the turn of events like these have a notorious history of turning the tide. With commotion at the top coupled with incremental shorts in stock futures and rise in risk levels, hedge Nifty using Modified Put Butterfly.
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. In case of a downward breakout, this keeps the profit lower but constant This is a fairly risk-averse and a universal strategy.
(The author is CEO & Head of Research at Quantsapp)
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