'Deploy Call Butterfly Spread for Nifty as we head towards election result'

The Nifty Option for upcoming weekly expiry shows both calls and put are equally congested. 11,000 PE could act as strong support as it has the highest OI followed by 11,200 PE.

As the Lok Sabha election results draw near, volatility in the Nifty and the Bank Nifty has increased and is likely to do so further as we head towards D-Day.

The Nifty50 touched an intra-week low of 11,109 and closed near its weekly high of 11,423, up 1 percent on a week-on-week basis. The Bank Nifty followed the Nifty and also closed near its weekly high of 2,9550, up 1.36 percent on a weekly basis.

In the week gone by, buying was seen in NBFC stocks led by Bajaj Finance, which rose 13 percent, followed by Indiabulls Housing Finance and LIC Housing Finance which rose 3-5 percent respectively.

Selling pressure was seen in Pharma stocks like Strides Pharma, Lupin and Aurobindo Pharma, which were all down by more than 10 percent each.

Long Unwinding was seen in IT stocks like TCS, Tech Mahindra, which were down by 2-3 percent respectively, and their OI or open interest was down by 3-5 percent respectively.

Short covering was seen in FMCG stocks such as Britannia, which was up by 3 percent and OI was down by 6 percent. HUL was up by 3 percent and the OI was down by 0.5 percent.

Over the week major selling was seen in selected midcap stocks as PC Jeweller and Jet Airways as both were down by more than 11 percent each followed by InterGlobe Aviation which was down by about 4 percent.

Future data of Indices depicts short covering in Bank Nifty on a week-on-week basis as Bank Nifty was up by 1.36 percent and OI was down by 20 percent, while Nifty was up by 1 percent and OI up by 1 percent.

With the onset of Lok Sabha election uncertainty and ongoing tariff war between the US and China, India VIX, the fear gauge for Nifty continued its uptrend and, was up by 175 basis points at 28.08.

As upcoming expiry of 23 May is coinciding with result outcome, the implied volatility of weekly option has surged to ~39 percent.

The Nifty Option for upcoming weekly expiry shows both calls and put are equally congested. 11,000 PE could act as strong support as it has the highest OI followed by 11,200 PE.

On the upside, 12,000 CE has the highest OI followed by 11,800 CE so 11,800-12,000 can act as strong resistance.

With call and put are equally congested in a wide band of 11,200-11,800/12,000 and considering the reminiscence of longs before 2 weeks of unwinding, an upward looking strategy is advised of Long Call Butterfly to trade Long while surviving the volatility that comes after exit polls.

Call Butterfly Spread is bullish to range bound strategy that offers a decent risk-to-reward to investors with low cost.

In this strategy, we need to buy 1 ATM Call, sell 2 OTM Calls near target level and buy 1 further OTM call to hedge the risk.

The maximum profit in this strategy is at Call written strike. As theta decay is fast in weekly options, it is idle for deploying Call Butterfly Spread.

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