- Wealth PMS (50L+)
The recent up-move triggered an MA20 trade and we booked a small (3%) profit on it. Though there are multiple lessons to be learnt as we probably could have gained a lot more.
What is the MA20? Scroll further down.
On March 1, as the market recovered, the MA20 pushed back from -29.5. That’s close enough to our trend change point and we got into a Nifty 7300 – 7400 call spread at a net price of 38. (We bought a 7300 call, sold a 7400 call at Rs. 99 and Rs. 61 respectively). The idea was to target a small further upmove because nothing has really sustained in terms of upmoves.
We took a call spread that was 7300-7400, instead of a naked call at 7300 (or 7400) which would have been our natural choice. Why? Because nothing’s sustained on the upside recently. A few days back we took an MA20 trade (tiny one) where we got in at 44 (long call) and it immediately reversed after hitting 70 and we exited at 48. This is very small so we aren’t mentioning it (quantity of 150).
This time we took 225 quantity. Again, because this works to our limits – we use a Rs. 100,000 portfolio to mark, and three contracts will require a margin of around Rs. 100,000 in total.
The very next day, the market was up 2%. The problem with spreads is they never give you the FULL spread – and with nearly 29 days to go, the max spread you will get is around 58 to 60. That was the target.
With that we had already reached between 53 and 54 on the spread. The 7300 call went to 168 and the 7400 call was at 115. We exited with a net spread of Rs. 53.3 which is a profit of around Rs. 15.3 per Nifty.
For 225 quantity we make a profit of about Rs. 3,443 which is about 3.4%. That’s not a big deal.
We have been spooked by various losses so one thing that was wrong, perhaps, was to take a spread instead of a naked call. That is however part of the game – it’s psychological more than anything else.
Secondly we took a smaller spread – 7300-7400. That’s because the 7500 strike didn’t provide much in terms of premium for protection (about 30 rupees or less). A wider spread would have helped more.
Thirdly we exited because the market looked to top out and we were likely to see a VIX fall, which woudl cut into premiums. Plus we were close to the target. That was fine in retrospect, but if we had taken a naked call or a wider position we would have preferred to hold half for longer.
We will always be learning! But the important thing is to work through the discipline and keep at the trade. It’s about one trade a month!
Watch out for the next trade, which will be a long put option, in all likelihood. We’ll announce it at #actionable on Slack.
Past Performance of MA20
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. 303,600
• 28 trades: 20 winners and 8 losers. (71% win ratio)
• Approximately 2 trades per month.
• Average winner: Rs. 17,609
• Average loser: Rs. -6,073
• Expectancy per trade: Rs. 14,313 or 14.3%
• 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 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. 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.