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CM Strategy

Optionalysis: MA20 Turns Around With a 50% Gain

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The last MA20 trade had a quick turnaround. We exited the call option (7900 call at Rs. 97) at Rs. 154 on average. Since I was on holiday in a beach in Kerala, I wasn’t easily able to see charts. But on Friday I noted on Slack that the call had jumped to Rs. 163 and that we should exit, given that:

a) There’s a weekend coming up and

b) the time value is very low (the Nifty was at 8030 then and the 7900 call was at 164, meaning a time value of only Rs. 34)

AP mentioned that we should get only by half, and leave the rest for a stop at 145. And the stop triggered the same day.

This is a decent 50%+ return in two days. We took a half position as the MA5 was not helpful (it was going downwards) 

Why do we exit so early? Because by nature this is a fast decaying instrument – options. And the fact is that MA20 is a breadth indicator – it givs you a trigger for a quick move, and should work fast, otherwise it’s not very useful.

Note: we had also suggested, as an alternative, shorting the 7700 put at Rs. 93.35. That put option too would be at a profit (and we wouldn’t actually have exited on Friday because short options only gain from losing time value). It’s at Rs. 5.8 today.(Which is a good exit – why take the stress for just Rs. 5.8 gain from here)

The Trade History

MA20 trades

This does look quite good. We have had:

• 11 trades.

• 9 wins and 2 losses (the third “negative” you see on 22 jun 15 is simply part of a bull call spread we created)

• Average win: 26432

• Average loss: -9000

• Maximum time in a trade: 30 days

• Average time in a trade: 6.5 days

• Max money at risk at any time: Rs. 85,000

The profits are ludicrous – over Rs. 240,000 in about 10 months. Most of course came from two large trades – The 8400 put in November 2014 that generated 3x (or 81.5k) and then teh 8600 call in March 2015 that generated a 2x return or Rs. 55K.

Even if you removed the two trades, the remaining trades show a profit of Rs. 100,000 on a max risk of Rs. 85,000, in 10 months.

This is not magic, every single trade has been recorded in Capital Mind Premium. There’s no rocket science here. 

This begs the question:

If It’s So Good, Why Are We Revealing It?

It’s a little difficult to believe the results at this point, even for us.

The results are decent – the past back test too suggested excellent returns (over 70% win-loss ratios with a substantial edge). The last 10 months have also been kind. but remember this system provides one trade a month or so. If you’re edgy you will find this difficult to deal with. And there’s a tremendous amount of risk.

The system also doesn’t have a well defined exit strategy yet. We currently exit as we see fit.

Position sizing too is discretionary and non-compounding. We will consider compounding after a year.

We aren’t scared of revealing strategies. Our aim is not to give tips – it’s to explain the concepts and help build discipline and a thought process. This is not a “holy grail” system either – it has to be constantly researched and tweaked. And we are sure that it will stop working too.

The problem comes when the discipline is not followed (and we are, by ourselves, guilty of that!). Most times, systems that are simple and easy-to-understand, work well. Complexity is the enemy!

Note carefully: there is no guarantee that future results will be the same. It’s been a good streak. Please understand that the risk is a 50% loss on every trade.

A Recap of MA20

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. We then take a further four day MA of the resulting number to smooth it out.

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 it crosses +30 from above to below, or -30 from below to above.

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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.

 

Next Gen Financial Analytics

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