Monday, 9 July 2018

Traders Can Adopt an Long Iron Butterfly Spread on Bank Nifty

Bank Nifty | Trade Nivesh

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The July series kick-started on a positive note with both the Nifty and Bank Nifty gaining 0.75 percent to 0.5 percent, respectively. However, the broader range for indices still remains intact. 


Option writers are using these alternate bouts of buying and selling to build positions aggressively both in the Nifty and Bank Nifty. 

Nifty options data depicts the highest congestion at 10,600 put while call writers are distributed across strikes 10,800 and 11,000. Volatility is relatively high for July, but the index is yet to witness a breakout in either direction.


With the onset of earnings season, sector and stock-specific movement will remain in the limelight. With IT majors like Infosys and Tata Consultancy Services and private sector banks like IndusInd Bank, Kotak Mahindra Bank, and HDFC Bank are likely to announce their results in the July series, stock-specific volatility could emerge. 


The Bank Nifty may stay in a range, with large oscillation in a heavyweight - HDFC Bank - also supporting the sideways movement.


Bank Nifty options data suggests highest call congestion at 26,000 put and 27,000 calls with an open interest of over 6 lakh shares. Volatility skew is flattish in the 26,000-27,000 band indicating further gyration. Thus, a low-risk oscillating strategy - Long Iron Butterfly Spread - is recommended in the Bank Nifty.


Long Iron Butterfly Spread is a rangebound strategy that offers decent reward-risk with low cost. It is set-up by selling at-the-money straddle and buying out-of-the-money strangles.


 Maximum profit in this strategy is made at the center point, while maximum loss is capped beyond the outer bounds both on the upside and downside.

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