Nifty likely to consolidate in a range; deploy Iron Butterfly Spread

After a strong run-up seen in the second half of the May series, from 11,100 to 12,100, Nifty in June series remained sideways. The index traded in the range of 11,600-12,100 and closed the series at 11,843, down 0.8 percent.

Bank Nifty saw a swing of nearly 2,000 points between 30,000-32,000. The index failed to keep the momentum going and closed 0.8 percent lower at 31,274.

Rollover for Nifty and Bank Nifty remained above 3-month average at 80 percent with incremental expiry built-up of 0.2 percent and 8 percent for Nifty and Bank Nifty, respectively. However, open interest or OI on an aggregate basis remained lower as 34 stocks exited from the F&O segment.

June month saw selling acceleration in media, pharma and energy stocks (except Power Grid, NTPC) while buying was seen in select metal stocks.

Shubham Agarwal

CEO and Head of Research|Quantsapp Private Limited

• Strategies for investment, trading ahead of Budget 2019

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• 'Bank Nifty to trade in a range this week; deploy Call Butterfly Spread'

Diving deeper, stock wise open interest built-up shows good accumulation in PSU banks along with power stocks like NTPC and Power Grid for July series.

Sharp sell-off was seen in midcap stocks like Reliance Capital, Reliance Infrastructure, Yes Bank, DHFL, Arvind and Glenmark Pharma, and most of them carried forward short positions in July series as well.

As far as directional build-ups are concerned, front-line stocks in most sectors added longs, viz., IT (Infy, TCS), private banks (ICICI Bank, HDFC Bank), capital goods (L&T), NBFC (HDFC, Bajaj-twins).

Union Budget along with the onset of the result season could keep indices and stocks volatile. India VIX is trading near 14.9, and a move beyond 15.5 could result in a spike in volatility.

Participant data shows interesting observation for the July series. Foreign Institutional Investor (FIIs) have left a major short position on expiry and are net long of 43,000 contracts beginning July series. In index options, the bet is relatively lowest in the last 1 year with long to short remaining nearly equal.

Nifty options data for the upcoming weekly expiry has support at 11,700 while at the higher end, the resistance is placed at 12,000.

The market is consolidating in a narrow range, and with dips near 11,600-11,700 being bought indicate that the range is likely to hold for the next week too.

In lieu of base formation near 11,700 with 12,000 as a strong hurdle in the near vicinity, Nifty is expected to consolidate at the current level of 11,850 for coming week before Budget. Thus low-risk Iron Butterfly Spread is recommended.

Iron Butterfly Spread is rangebound strategy that offers decent risk-to-reward ratio with low cost. It is a combination of Bull-Put Spread and Bear Call Spread thereby generating net credit at the initial phase.

It is apt when we expect the price to remain confined near the current levels. As we are trading weekly options, faster time decay will be beneficial to the strategy. In this strategy, we are selling ATM Call and Put and buying OTM Call and OTM Put to hedge.

The author is CEO & Head of Research at Quantsapp Private Limited.