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 short option risk
Shubham Agarwal
After a strong move, benchmark indices took a pause last week. The Nifty and Bank Nifty corrected by about 1 percent each. The overall set-up still continues as long – long unwinding for the month in both the indices.
Metals, IT, NBFC and energy were the most beaten-down sectors in last week. The volatility in crude oil and appreciation in Rupee/Dollar impacted some sectors.
IT and metals saw significant short built-up. Stocks like Infosys and TCS fell over 3-5 percent with the addition in short OI by 5 percent. Similarly, metal stocks too lost their shine as entire pack lost 6 percent with OI increase of 7.5 percent. NMDC, Tata Steel, Jindal Steel were the biggest losers.
The Volatility Index, a sentiment indicator to gauge greed and fear, saw a 1 percent upward tick to 19 level compared to 18 level seen last week. Forward-looking volatility is still signalling cautiou as state election results are scheduled in December.
Put-Call Ratio, another sentiment indicator which denotes extreme sentiments moved to extremes of 1.71 during the start of the week but corrected sharply to 1.46 towards the end of the week.
The Nifty options data saw increased activity in strikes of 10,500 to 10,750 rightly so with the expiry becoming more proximal. Call traders were most active at 10,600 strikes.
Highest Call strike moves down to 10,700 with OI built up of 38 lakh shares. Put writers stand strong at 10,500 strikes with OI accumulation of 30 lakh shares.
Options band of 10,500-10,700 could be crucial going forward for November expiry. Max Pain level in Nifty stays at 10,600 strikes indicating writers’ preferred expiry zone. Options buyers would stand to lose out the most at 10,600.
With option band placed at 10,500-10,700 along with PCR moving back to the average level of 1.46 and max pain signalling 10,600 as likely expiry, a choppy but rangebound movement in next week could be underway.
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 short option 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.
However one can exit the strategy at a much lower loss if the Index breaches 10,500 level on the lower end or 10,700 strikes on higher end during the upcoming week.
The author is CEO & Head of Research at Quantsapp Private Limited.
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