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Hedge you portfolio by deploying #39;Long Put Butterfly#39; in December

December 02
16:02 2019

Shubham Agarwal

Even though the struggle continues at the top, bulls would take respite in the fact that the Nifty ended last week above the 12,000 levels for the first time on a weekly basis.

While the index continued its journey in the uncharted territory, the move could not have been topsy-turvy.

Despite almost a percent drop in the final session of the week, the Nifty still managed to add over a percent for the week. The Bank Nifty, on the other hand, kept the outperformance spree on for this week too.

The November series contracts expired with diverse carryforwards for both indices. While Nifty did add a couple of percent for the expiry, it failed to add any additional participation, and on the other hand, lost a bit of OI (Open Interest).

Bank Nifty added over 6 percent for the expiry and more than doubled its OI. The aggregate OI is up 7 percent at the opening of December expiry with incremental OI equally divided between Long and Short recipients.

The leadership of long positions is taken by bargain hunting in stocks like Indiabulls Housing Finance, RBL Bank from the Financials space. Among other sectors that saw long buildup include media, telecom, and pharma.

While the index rose in the week gone by to record highs, the option participants were also in a positive mode, which got translated into a rise in OIPCR of 1.78 towards the weekend.

Last session weakness though brought it down to upwards of 1.5. India VIX, on the other hand, continued to nose dive throughout the week, pushing itself into quarterly lows under the level of 14 with a drop of a point over this week.

While the OIPCR is high led by a larger number of Puts in open interest. The heaviest Put across all the available December expiries is placed at 12,000 levels.

Weaker stocks are leading Longs (long positions) amid overoptimistic set-up calls for cautiousness in the Nifty Index, hence while trading longs, traders should hedge via monthly Nifty Long Put Butterfly.

Long Put Butterfly Spread is the moderately bearish strategy when executed with lower strikes than the current market price.

It offers a decent risk-to-reward at a low cost. In this, we are selling 2 Puts close to the expected level on the lower side and buy equidistant Put one on the higher and one on the lower side of the strike sold. The maximum profit is made if the index closes at the strike of the option sold.

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