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CM Strategy

Optionalysis: Yet Another MA20 Signal Shows Up, Take a Careful Option Position

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We’re back with the MA20 which has recently given a “buy” signal on the Nifty.

The MA20 is our proprietary indicator about market breadth. The MA20 is calculated by taking the number of Nifty stocks above their 20 Day Moving Averages, and we subtract from this number those that are below. Since the Nifty has 50 stocks, this calculation will oscillate between -50, when there are no stocks above their 20 DMAs, to +50 when there are no stocks below. We have found that trading opportunities exist when the indicator goes above +30, or below -30, and turns around.

It has just moved from below -30 to above, and is at -23 today. It was at -27 yesterday and we mentioned on the group that the index had moved up.

MA20

We Buy Calls (50%) Again

So at this point, we chose to add 8400 calls (mentioned on the Google group for full subscribers) for only 50% of the regular position size. We record a price of Rs. 62.

We chose 8400 because that was the point at which the Implied Volatility was the lowest (we are essentially paying the least time value for the position). This should work very fast, within a couple of days, otherwise it’s a dead deal. The stop loss will be 50% on a trailing basis.

We’ve done this trade very recently and the calls we bought went from Rs. 93 to Rs. 214. We booked half at 135, and got an average of Rs. 175 for a 2x return. Here’s the trades so far:

Trades

Quantities are indicative, and we have considered the fact that we used different position sizes for each entry.

Please be careful. We have had five continuous successful trades. This system is not meant to be perfect. It’s going to take a loss sometime, and that sometime might just be now. The index is gyrating madly and we can’t be sure this trend will sustain.

The Nifty: A Technical Note

The technical cue on the Nifty is a partial reversal of the move down. This is the move:

Nifty

If we go back up to the 61.8% reversal of just the last move (8800 down to 7991) we should go to 8513. That matches a short term trend line. There is also a recent MACD crossover (blue line in lower panel crosses over the red line). This is all short-term bullish.

Targets: This time we see this going double or more. We’ll take numbers as they come, but there’s no predefined target for this trade.

Stops would be triggered if the index went back to 8,000, of course.

(We are not bullish, fundamentally. But prices talk better than opinions most of the time.)

Note: This is not a recommendation – we’re just putting forth a strategy; there is tremendous risk in trading and we encourage you to paper-trade first before you put any real money on this.

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Disclaimer

Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion. 

Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.

Capital Mind for ZD

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