Deploy Modified Call Butterfly strategy in Bank Nifty: Shubham Agarwal

The Bank Nifty, too, had a good start with more than 3 percent gains in the first trade itself. However, as things slowed down, while the Nifty held on to its gains, the Bank Nifty lost over a third of the previous trade. This was made in the final trade of the week. With almost 4 percent gains on the weekly expiry day, the Bank Nifty added 6 percent in the first week of October series.

On the open interest (OI) front, the Nifty was well placed. It was a rain of longs. Many of the longs which were added in first few week of September series could not see it through to the October series.

This could be the reason why in both the gaining sessions we saw sizable addition of long interest. This makes this week’s Open Interest increment in the futures tally of Nifty a whopping 22 percent.

The Bank Nifty on the other hand, was loaded with shorts when the week began. It did see a couple of session when there was short-covering. However, the trace of longs mid-week was a positive surprise for the index, indicating that confidence was coming back.

Aggregate futures did have similar ride. The composition favoured lot of fresh build-up, which was obvious considering the first week of the expiry. Long interest addition was seen in over 50 percent of the stocks. Almost a third of the stocks saw covering of shorts, keeping the long unwinding and short interest addition the least observed OI activity.

Slicing the stock futures further we learn that most of the sectors aggregate OI were labelled with either long or short covering.

Auto was the biggest gainer of longs, with most of them being added in two-wheeler stocks like Hero MotoCorp and Bajaj Auto. IT added longs led by Tech Mahindra and Infosys, Reliance also added from oil.

Banking stocks saw shot covering in both public and private sector players, with HDFC Bank and Bank Of Baroda being exceptions that added longs.

Sentimentally, the risk index also took a beating for the week. A two-point drop brought India VIX to the lows of August 2020. This apparently was the turning point last time around pushing Nifty down from the top. This development is highlighted to keep ourselves a little more prudent.

On the other hand, the OIPCR for both the Nifty and the Bank Nifty improved. The improvement of 20bps in Nifty OIPCR, thanks to Put writing in strikes upwards of 11,000, makes it more comforting. The mood yet again turned buoyant but at a juncture that has a proven record of triggering pull back, hence care should be taken to keep one protected on the downside.

Finally, traces of longs in the Bank Nifty futures augur well for this week. OIPCR for the Bank Nifty made a comeback with Put writers showing confidence.

The recent rise as well as Call writing in immediately higher strikes should also be accommodated in trading any further rise. Considering the basis of trading expected reversal in underperformance on fewer longs and rather fresh Put writing, Modified Call Butterfly is advised.

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

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