Deploy Put Butterfly Spread to beat volatility till February expiry

With Market data point suggesting cautious stand, it is imperative to hedge the portfolio for any further downward risk. Thus a hedge strategy, Put Butterfly Spread in Nifty with higher Reward to risk of 3.65:1 is recommended.

  

Volatile increased by each passing day leading to alternate bouts of buying and selling in the market. The Nifty50 index on closing basis lost 2.8 percent to end the week at 10,495. It made a swing low of 10,276.30.

Volatility is getting recovered. Nifty futures saw continued shedding in open interest of 2 percent in the week carried over from the previous expiry.

Option data suggest highest Put concentration is at 10000 strikes while highest call concentration is at 11100 strikes with OI of 57.6 lakh shares each.

Option players remained significantly active on both calls and Puts as a notable increment of ~20 lakh shares was witnessed in call strikes of 10400 to 10700 and on the put side from 10400 to 10000 strike.

Put Call Ratio open interest wise for Nifty trades at 1.09 cooling off from the highs of 1.89 registered in the last series. The ratio indicates 1.09 Puts for every 1 call signifying nearly equal position at both calls and puts.

Lower bound for the ratio is near 0.90 indicating cautious stand on the market. The considerable spike in volatility across global indices led to a global meltdown in Equities with India being no exception.

Spike in Volatility Index to 19.23 percent raised the panic among traders & investors as they look forward to protect their portfolio from probable downside risk. A negative correlation between India VIX and Prices further puts downward pressure on the prices.

Decoding Participant activity for last week depicts FII were net sellers of 6257 crores in the Index Futures with OI increase 62802 contracts on the short side.

In Index Option, FII increased their bet on the short side by adding cumulative 164,173 contracts in Index Put Long and Index Call Short while Clients added nearly equivalent quantity of 163,670 contracts on Index Call Long and Index Put Short indicating FII negative bias and Client(Retail) positive bias for the market.

With Market data point suggesting cautious stand, it is imperative to hedge the portfolio for any further downward risk. Thus a hedge strategy, Put Butterfly Spread in Nifty with higher Reward to risk of 3.65:1 is recommended

Under this strategy, we need to Buy Nifty Feb series 10400 PE 1 lot, Sell 10100 PE 2 lots and Buy 9800 PE 1 lot.

Put Butterfly Spread helps in participating in high yielding trade with relatively lower cost. Being completely hedge one can hold on to the position up till expiry to provide a cushion in any further adverse movement in the market.

Also, as trade is hedged, jump or fall in Volatility will not impact the strategy significantly.

MORE WILL UPDATE SOON!!