Call Butterfly Spread is a Bullish strategy where we buy 1 lot of lower strike Call, Sell 2 lots of higher strike Call near resistance and Buy 1 lot of higher strike Call to avoid unlimited loss risk.
Shubham Agarwal
Benchmark indices continued their positive momentum in the last week as Nifty and BankNifty gained 0.6 percent and 1.5 percent, respectively.
However, on an intra-week basis, indices came near vicinity of their lower gap and gave a smart comeback.
The Nifty saw an accumulation of 4 percent on a week-on-week basis while BankNifty is relatively strongly placed as built-up of approx 8.5 percent was seen in futures open interest (OI).
Falling crude and appreciating rupee against USD saw IT and Pharma correcting. Metals and automobile stocks underperformed last week. However, consumer goods, private banks, PSU banks along with aviation stocks saw outperformance.
Stock-specific activity was visible. Stocks like Jet Airways, Eicher Motors, BPCL, Bharti Airtel, Godrej Industries saw up move of 7-10 percent along with positive open interest activity.
The Volatility index, a sentiment indicator to gauge greed and fear, is trading near its lower band of a new regime of 17-22, close to 18 level.Gyration near its lower band could keep the momentum intact. However, a significant jump above 20 could act as a detriment for the rally.
Put Call Ratio (PCR), another sentiment indicator which denotes extreme sentiments moves higher to 1.64 level. Ratio trades close to its upper extremes. It depicts Put writers are using higher volatilities for writing, thereby proving strong support to the market.
The Nifty Option data saw support base shifting higher. Put writers of 10,000 have almost pocket in the entire premium and are now shifting base higher.
Over the last 1 week, 10,400-10,600 strike saw the addition of 7 lakh shares each. Higher-end Call writers are active at 10,800 strikes with OI accumulation of 34 lakh shares. Options band of 10,500-10,800 could be crucial going forward for November expiry.
The banking sector has been holding grounds for quite some time with PSU and private sectors participating firmly. Bank Nifty options data for next week suggests enhanced activity.
Call activity is spread across strikes of 26,500-27,000, while Put activity is at 25,700-26,200. Both PSU and private sector banks are poised well for an up move.
Long built-up in futures along with an upward shift in the band is idle for a bullish strategy. Thus, a low-risk hedged strategy Call Butterfly Spread is recommended.
Call Butterfly Spread is a Bullish strategy where we buy 1 lot of lower strike Call, Sell 2 lots of higher strike Call near resistance and Buy 1 lot of higher strike Call to avoid unlimited loss risk.
Maximum profit is at the middle strike. The loss is capped below and above to a maximum of initial outflow, making it best suited in a volatile market.
