Deploy hedge on Nifty through Modified Put butterfly strategy: Shubham Agarwal


Weak Friday session spoiled the mood in this mildly gaining week. Nifty started the week on the usual course of recent times with about a percent uptick in the first session itself. As we graduated in the week, the rise started slowing to almost flat sessions.

However, Nifty did maintain the gains claimed early on. The last session that pushed the index by over a percent was responsible for erasing most of the gains the index made so far this week. However, the we still ended up with a gain of half a percent for the week.

Bank Nifty also had similar gains for the week. However, bank index started off on a weak note. Recovery the next two sessions of almost 2% brought the index back on track. However, the decline in the last session erased most of the gains accumulated so far for Bank Nifty as well.

On the Open Interest (OI) front, Nifty futures OI just like the price moves did see incremental longs in the first session. This did not see any follow up though. On top of that the weak sessions brought back-to-back unwinding of longs in the index. This resulted in a couple of percent drop in Nifty futures OI for the week attributed to Long Unwinding.

Bank Nifty, on the other hand, started off with unwinding of longs, to the tune of almost 16%. Some of it did get re-instated. These longs along with tiny short addition in last session could not fill the dip created by the early week unwinding. This resulted in 11% drop in OI for the week attributed to long unwinding.

As far as aggregate futures are concerned, for the first time in many weeks number falling stocks outnumbered numbered of gainers. Also, in terms of fresh built-up based on Price-OI equation, almost 50% of the participating stocks added shorts. Almost equal number of stocks added longs and unwound shorts.

Slicing the futures into sectors we could see, most of the sectors this week had aggregate short reading for the week. Metals added shorts almost across the sector led by SAIL. Divis Lab led shorts in Pharma. Meaningful longs were seen in PSU Banks led by Canara Bank and IT led by Wipro. Auto witnessed short covering almost across the sector but Tata Motors added longs. Telecom saw short covering led by Bharti Airtel.

Sentimentally speaking, OIPCR for Nifty was upbeat for most part of the week. However, the weakness in last session took away the courage from participants to write Puts. This resulted in a drop in OIPCR by 50bps for the week.

Risk index India VIX was more or less on a rising spree for most part of the week. Part of this rise can be attributed to the on-going result season. However, this along with nervousness in Nifty resulted in 4 points rise in India VIX for the week, most in last few weeks.

Finally, Unwinding in Nifty futures along with large number of shorts in stock futures deteriorates the bullish aggression. Fall in OIPCR indicates expectation of bit of softening. Rise in India VIX also has raised caution. Thus, deterioration in futures landscape and sentimental indicators at this height advocates a hedge in Nifty via 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. 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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