F&O Radar: Deploy Iron Butterfly strategy in Nifty to benefit from declining implied volatility

The biggest Dragonfly Doji formed on the weekly chart as the market found itself perplexed with the kind of volatility during the entire previous week as many indices shredded 10% and recovered to mark new all time highs.

Markets have recovered from their losses of the election outcome week and have resumed heading in the upward direction, making new all-time highs of 23,411 for Nifty and 77,079 on Sensex.

The India VIX is now down to 16 levels but with the announcement of the ministries in the Modi cabinet, traders may see some minor volume coming back. Despite that, Monday’s close indicated selling pressure at higher levels as the index closed 0.13% lower at 23,259.

A shooting star is an indication of caution when formed at higher levels.

As per the weekly OI data, Nifty has witnessed highest oi change in Calls at 24,000 and 23,500 while on downside at 23,000. The highest concentration points build up at 23,500 – 23,000 and this may also be a possible technical range since 23,000 is pre-election high made in the last week of May.

On the upside, in the uncharted zone, 23,500 may be the first line of resistance as it is also the highest call writers’ zone with an outstanding OI of 2,70,514.

“ADX continues to tread below 20 meaning we may be more in a zone kind of play, RSI is in the sideways zone of 60 – 40, at 58.75 while ATR is at 402 levels, similar to 2020. We believe volume will mean revert and we may witness a sideways market going ahead. ATM IV at 19.98 points to a +/- 1.25% of a move in the underlying as well,” says Shrey Jain, founder and CEO of SAS Online.

In such a situation, Jain recommends deploying an Iron Butterfly strategy.

Iron Butterfly Strategy

Iron Butterfly is an options trade that uses four different contracts as part of a strategy to benefit from stocks or futures prices that move within a defined range. The trade is also constructed to benefit from a decline in implied volatility.


Source: SAS Online

Below is the payoff graph for the strategy:


Source: SAS Online

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)