Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
CM Strategy

Optionalysis: What An Awesome Trade With MA20!

Optionalysis

We exited the MA20 Trade today, with what seems to be a neat profit. We had multiple different trades this time:

[level-capmind-pro]

• We entered the 8200 put (October) with 1000 quantity at a price of Rs. 15. This was on Oct 26, and the expiry was Oct 29, so we took a larger position with a stop at 8.5.

• On Tuesday, Oct 27, we decided – perhaps too soon – that the time decay on the option was too much. So we exited at 18 (small profit) and entered the 8100 November Put at Rs. 80.

• Quantity changes for the November series meant that instead of our regular 500, we would have to do 450 (a multiple of the new lot size of 75).

• We exited half at 120 (on the 29th)

• The other half was exited today at Rs. 170.

This is a reasonable profit on this trade, in a week, of about Rs. 32,000 on our position sizes. Here is the past trade set.

MA20 Trades

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.

Remember the strategy is:

• Enter puts or calls when it crosses +30 from above to below or -30 from below to above

• Sizing of positions and exits are discretionary

• One exception: max 50% losses on the options

This strategy has been up and down these last few months, but this trade brings it back into hugely profitable territory (over 1.9 lakhs in 2015). We’ve had a decent win-loss ratio, and will take this further. 

Note: Real time notifications on this are on the Slack Channel that is for Premium members. If you’re not one, consider subscribing now!

What We Have Learnt

We should have stuck with the October PE. It went all the way to 75! That would be a profit of Rs. 60,000. All we had to do was wait. We are going to beat ourselves about this for a few minutes.

Okay, we’re back.

We still don’t have an exit strategy. We have an entry strategy. We have a fixed position size. (Which will, by the way, change to 600 next time). But we exit in a discretionary manner.

We have to do more work to set up a proper exit strategy. It’s not bad as it is, though, but with a systematic exit, we could easily back test the strategy.

But we would be foolish if we didn’t say this – it’s a strategy that acts reasonably fast (average holding period of 6 days) and seems to be doing well. It’s not something that triggers very often, though. Breadth is a good way to look at the market – if the majority of players are going down, the market is likely to follow.

This is a very risky strategy. Don’t try it unless you’re willing to lose nearly everything. We haven’t provided backtested results because the exits are discretionary and there’s no proper way to back-test a discretionary system. (Heck we could make up whatever exit we want). We’ve traded it in our accounts.

divider

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

[/level-capmind-pro]