- Wealth PMS (50L+)
The MA20, Capital Mind’s proprietary indicator (*) shows the signs of another big move as it turns from just under 30 (from 29 actually) back downwards. While we usually take a trade on above +30 to below, a turn from +29 is not that bad either.
As luck would have it, the Chinese market crash seems to have set the world up for a big down-move, which might favor us since the MA20 has told us to go short.
* Proprietary means we developed it. It’s a well known formula because we have been talking about it for years now.
Given the setup it makes sense to take a trade. But which one?
• We choose the January 7800 Put Option to buy
• But Implied volatilities have spiked up – the VIX has rushed up from 13 to 18
• So we also take advantage by WRITING call options at 7900.
• Effectively, we are long the 7800 put and short the 7900 call. This is like going short on the Nifty but with a 100 point “rest” gap in the middle.
• Prices were: Rs. 120 and Rs. 90 respectively
• So effectively we pay Rs. 30 for this entry. (We pay 120 and receive 90)
We take TWO lots of Nifty, or 150 Nifty each on the long put and short call side.
Why two lots? The typical trade size is 600 Nifty puts or calls, when we buy options. The shorting of options requires more margin, and 600 Nifty would need Rs. 500,000 as margin (nearly) which is way above the average capital deployed in this strategy (max before this trade was Rs. 75000 deployed)
This strategy will need about Rs. 90K for the short options (two lots) and 5K for the net premium on the puts. Let’s assume Rs. 100K.
Stop Loss: We don’t want to lose more than 50K on this trade. We have already made money – by the end of the day, the put was at 125 and the call at 83, giving us a 12 point profit. On 150 Nifty that’s about Rs. 1800 mark to market gain. The stop loss will change over time.
Tail Risk: If the market gaps up on open and crosses 8200 the losses here are also likely to be heavy – for one the 7800 put could go close to zero, while the 7900 call can trade at 300, for a net loss of Rs. 330 – which, for 150 quantity will involve a loss of nearly Rs. 50,000 or half your capital. (But that’s a decent risk to take – how often would we have a gap up that closes in on 8200?)
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
You can see the strategy and full trade list here:
Also, the MA20 indicator is updated at real time here:
(Not Including The Current Trade)
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 (Now 100K due to the short side)
• 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 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).
Note that the quantities are meant to be for a portfolio of a person who doesn’t want to expose herself to more than 100,000 rupees of allocation. Since Nifty options are highly liquid, this strategy can be increased in quantity to higher allocation numbers fairly easily. However we recommend you start small to build confidence. You might get a trade only once a month.
This is a very risky strategy. Don’t try it unless you’re willing to lose a large percentage of your investment. We haven’t provided back-tested 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.
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.