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CM Strategy

Optionalysis: MA20 Ends 2015 With a 375% Return in 14 Months

Optionalysis

We had to correct this post as the trade table was outdated. We’ve updated it here and are re-posting, apologies for the trouble.

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The MA20 trade is done. We started it a week ago, on December 16 on the note that the MA20 had crossed marginally off the 30 mark (it reversed from 29.5). The trade was of a full size (600 Nifty) and we exited in four stages:

• We exited 300 shares on the 17th at 63

• Another 75 shares was exited at 93

• The remaining 225 were closed today at 67

The net sell price was 68.25. We entered at Rs. 61.55.

This doesn’t sound much but it was a profit of Rs. 4,020 in a week, on an investment of about Rs. 36,000. (if we’d stayed till the end of today, we would have hit a stop at 55 on the last 225 shares which would have hurt us with a loss.)

Why did we exit? Honestly, this was a gut-feel kind of exit, and almost instantly we regretted it because the market moved up. But towards the end of the day the market had a semi collapse and our exit looked good. We need to work on this for a more systematic exit.

Also, btw, the MA5 seems to be showing signs of a reversal. This is usually an early signal for a turn but it’s also a good way to choose an exit (if the MA5 switches around from extremes)

MA20 MA5

What is the 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.

(The MA5 is simply the same thing with the 5 Day moving average instead)

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

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The Trade List

Trades

We started the portfolio in November 2014, but apart from the first trade, all the remaining trades are in 2015.

• 17 winners, 6 losers

• Average winner is +19K, Average loser is -7.2K

• Average number of days we hold a position : 5-6 days (5.3 is the exact number)

• Maximum money at risk at any time: Rs. 75,000

• Average money at risk: Rs. 25,000

• Total Profit: Rs. 281,865, for a return of 375% (on max money at risk) or 1102% (on average money at risk).

Even if you removed the biggest two profitable trades (81K and 55K) you would still have a system that returned a profit of 145,000 on a maximum risk exposure of Rs. 75,000 for a 193% return.

This is a ridiculously good strategy based on a simple algorithm that is not hidden. The power in the semi-system is a combination of good entries (through the algo), position management (semi-discretionary as we use the MA5 to determine position size) and reasonable exits (fully discretionary).

As we’re unlikely to see another MA20 trade in 2015, we should be saying goodbye to a lovely 2015.  We hope the year has been as good for you. From the Capital Mind MA20 Team, Wish you a great 2016!

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, and every single entry and exit above has been posted in Capital Mind Premium.

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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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