- Wealth PMS (50L+)
This time we took a loss on the MA20. The indicator did well last time with a 23,000 profit, but this trade is a Rs. 5,000 loss.
What is the MA20? Scroll further down.
On 28 Jan, the MA20 had turned and we took a pre-emptive call, to get into the 7600 call at 67.5. The MA20 was still at -33 but looked like it would advance fast. Why did we choose the 7600 – the answer is that we like to be close to the money, and the index was around 7450. The choices would have been 7500 or 7600; we saw that the 7500 call was close to Rs. 110. Given that the 7500 call would go in the money in a small move, and that would make it very volatile as the market moved we chose a higher call. (We could have chosen 7500 just as well)
Position size: We bought just a 150 quantity, to get the first leg into the position. It was half of the 300 we were going to buy for the position. Why 300? Because the regular position size is 600, and this time we would only do half because the MA5 was looking down, while the MA20 was looking up.
When the market moved up to 7500 – we added another 150 of the 7600 call at Rs. 90. That increased our buy price to Rs. 78.75.
On 1st Feb, the MA20 and the MA5 were looking up, and the index was at 7600. We then decided to buy the 7700 call – again, the first leg of 150 quantity. This time, the price was Rs. 70. Now we had a 450 Nifty exposure, with 300 on the 7600 call and 150 on the 7700 call.
On 2nd Feb, after the RBI policy, everything came crashing down and we exited the 7600 and 7700 calls at 76 and 42 respectively. Tough market indeed!
As you can see the loss is in what we did when we added to the position again – otherwise the position is flat. The loss was:
• Rs. 2.75 in the 7600 call (300 qty) for a loss of Rs. 825
• Rs. 28 in the 7700 call (150 qty) for a loss of Rs. 4,200.
• Total loss of Rs. 5025
Overall the losses are controlled.
We like to keep losses low and let profits run.
A quick note: When we did this trade the market reversed (it was at 7500 then) and went back up to 7525. It seemed like we were thrown off by the stop, but then the market crashed all the way to 7440, and the exit saved us a big packet. What we’re trying to say is: there’s no easy way to time exits, and sometimes we’ll win and sometimes we’ll lose. If we focus on keeping metrics tight then the system will make money.
It’s already made, in the last one year and three months, Rs. 300,000 in profits on an investment of Rs. 100,000 which is not too bad.
You can see the entire past performance and details on this strategy at: https://www.capitalmind.in/how-to-
The current performance is:
• From November 2014 to Current, profit of Rs. 300,158
• 25 trades: 19 winners and 8 losers. (70% win ratio)
• Approximately 2 trades per month.
• Average winner: Rs. 18,355
• Average loser: Rs. 6,073
• Expectancy per trade: Rs. 14,715 or 14.7%
• Max drawdown : -6%
• Max allocation has been Rs. 100,000 at any time
• Average holding period of 5-6 days per trade.
Note that this strategy can scale since it uses Nifty options which are very liquid. However the allocation we use is very high (which is why returns are this good). Above a certain level – say 20 lakh – the loss ratios can be quite high and we would recommend a lower allocation, since here we easily plan to lose 50% of what we trade.
We’d like to maintain this performance going forward. It’s been kind to us in recognizing market turns.
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:
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 100,000 rupee portfolio. Since Nifty options are highly liquid, this strategy can be increased in quantity to higher allocation numbers fairly easily.
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. Now on Slack in #actionable.
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.