Bank Nifty likely to see a bounce: Deploy ‘Long Call Butterfly Spread’ this week

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The July expiry week kept traders on the edge. The market has been under pressure since Budget 2019 and benchmark indices closed the week with losses of over 1 percent each.

The rollovers to the August series, especially in the indices, remained low by around 3 percent and as a result, we did see a 7 percent drop expiry-over-expiry in the Nifty futures and an approximate 20 percent drop in the futures open interest of the Bank Nifty .

This open interest activity, alongside a reduction in price, can be reasonably termed as long unwinding.

The equation on the stock futures side was not a lot different, either with almost 36 percent of the participating stocks unwinding longs, while about 40 percent of the stocks added short or either carried forward short positions.

In the series which saw Nifty dropping by about 5 percent, sector-wise secularism on the long side was not visible.

If we were to slice the stock futures open interest data, Jindal Steel from metals, RBL Bank from private banks, Bajaj twins from the NBFC space were major drags on the short side, while PVR pushed the media sector into the long side.

One more notable observation is that the slow and steady fall did bring a lot of strong long heavy structured futures, especially on the banking side, closer to their respective heaviest Put OI base.

Amid recent weakness, the Bank Nifty has come down reasonably closer to the Put congestion. For the first time in recent weeks, the OIPCR for Bank Nifty is on the bullish side of neutrality, which indicates an expectation of longs to be reinstated, hence a Long Call Butterfly is advised.

Long Call Butterfly Spread is a moderately bullish strategy when executed with higher strikes than the current market price. It offers decent risk-to-reward ratio for investors with a low cost.

In this, we are selling two Calls close to the expected level on the higher side and Buying equidistant Calls, one of the higher, and one on the lower side of the strike sold.

As we are trading weekly options, faster time decay will be beneficial to the strategy. Maximum profit is made if the index closes at the strike of the option sold.

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