Month: September 2021

sep21w5

Sep21-W5: Nifty momentum forewarns of a correction (Sep27 to Oct1)?

Exactly as written last week, Nifty did remain below 5 EMA for initial couple of days but resumed its uptrend subsequently. The reversal till 15 EMA did not happen.

Now the following is my analysis for coming week based on what I am looking at (You may want to open image in new tab or save it for better view)

Even though Nifty is galloping ahead, the momentum indicators are exhausted now. There remain 3 parallel channels on my chart. The blue and green channels may only act as resistance from here on. Eventually, Nifty should settle after correction somewhere near the middle of black channel. This can happen either during coming week or next week.

Scenarios for the week ahead (highlighted as yellow box with red and greeen lines dissecting scenarios)…

ScenarioAnticipated Price Action
ConsolidationBetween 18150 and 17700
DowntrendIf breach below 17700; to drop somewhere till 17250
UptrendIf breach above 18150; to rise somewhere till 18450

Metals, steel and realty have been booming these days. I wonder if this is a good time to exit equity and invest in real estate?

DISCLAIMER: I am not a SEBI registered adviser. All the information provided on this website is for educational / informational purposes only and should not be taken as investment advice.

u-turn is prescribed, austria, street sign

Sep21-W4: The edge is in selling ATM options during mean reversion

Since I began wannabebull model, the biggest skepticism which I have been having is that option sellers win 90% of the time but lose it all during bad time. I know I am human and I will make the mistakes which will make me lose all profits. I have already made many such mistakes and this website has kept track for all of them.

The only way to counter this inevitability is to make an equivalent big gain once in a blue moon. The conventional approach of traders is to trade with trend. Basically, hold something and watch it grow over time. This does not work during option selling. Even if I roll-in strikes, the ROI will not be extraordinary.

There is only one way to make extraordinary returns in option selling. Sell as many near the money strikes as possible when you know mean reversion is inevitable. This is easier said than done of course. It literally means catching the top which is a mission impossible.

But high-risk-high-reward is the name of the game. I think I can play this game with following couple of hypthesis  

  1. If price is above average on both higher timeframe and lower timeframe. Additionally, EMA crossover on lower timeframe should not have happened recently. Target here is smaller EMA of intra-day timeframe
  2. Divergence on higher timeframe with target being smaller / bigger EMA of higher timeframe depending on divergence indicator’s look-back period.

Both above hypothesis require some more back-testing and custom indicators. I shall be doing that next week. This is worth the effort because ROI is sky-high. Such occasional ROIs can super help in the long run. Also, if I get good at trading mean reversions, I shall be day trading with such setups.

The only catch here is that no matter how thorough I get with my mean reversion setup, I won’t be able to catch top. Therefore, the trade will have multiple entries. I will have to build my short positions. one after the other. Here, ATR can help in knowing when to average my entries.

The theory is fail-proof only if I have unlimited capital. I hope I never again run into a situation when I hit the tilt.

reversion result

Sep21-W4: Nifty mean reversion trades give me highest ROI till date

My memory is not serving me correctly as to when I started building up short positions for mean reversion. I should start using tag feature of Zerodha for effective tracking. The strike was 17700 CE which was sold upon every 50 points rise of Nifty since September 16 for sure, if not September 15. I bought hedges with objective to squeeze more margin.

On September 17, the price of option had breached 100. I then started selling more lots on rise of every 10 points of option price. I hit the tilt and did not have funds to sell more even though Nifty continued to rise. The unrealized loss was over Rs. 50,000. I moved away from the screen. I think I came back to screen by 1130 AM and things started moving in favor. I exited half quantity by noon when LTP was 80ish. The remaining quantity was exited sometime later.

The rest of the week was not easy to trade. September 20 and 21 had long wicks leading to high VIX. Somehow, the trades just worked out. I wonder how much of this entire week was my skill and how much was luck.

So I took positions in a week whose candles were like this:

Here are the results:

Net Profit (after deducting brokerage)Capital deployed (approx)Week’s ROIAnnualized ROI for this weekTotal no. of weeks traded till todayAnnualized  return till today
Rs. 24703.95Rs. 7,58,2933.25%429.66%1518.73

The following is breakdown of week’s positions

DISCLAIMER: I am not a SEBI registered adviser. All the information provided on this website is for educational / informational purposes only and should not be taken as investment advice.

momentum

Sep21-W4: Nifty to perform mean reversion this week (Sep20 to Sep24)?

Last week, I had written about 2 possibilities for mean reversion setups. Either momentum indicator keeps reversing or it makes a lower top while price makes a higher high. On Mondya, Nifty gave an impression of former scenario. Wednesday, however, made it clear that Nifty was not done yet. The big red candle on Friday now leaves everyone in a perfect climax.

Now the following is my analysis for coming week based on what I am looking at (You may want to open image in new tab or save it for better view)

This is the second time Nifty has tried to go beyond the black parallel channel. It is interesting to note behavior of various momentum indicators

  1. RSI does not show any indication of divergence
  2. Stochastic is relatively flat but it is showing slight indication of exhaustion
  3. CCI can be treated as a case of divergence

So what’s the conclusion? I can’t conclude but best guess is that Nifty will revert to 5 EMA. Since momentum is still quite strong, I do not expect a reversal till 15 EMA

Scenarios for the week ahead (highlighted as yellow box with black lines dissecting scenarios)…

ScenarioAnticipated Price Action
ConsolidationBetween 17800 and 17350
DowntrendIf breach below 17350; to drop somewhere till 17100
UptrendIf breach above 17800; to rise somewhere till 18050

Earlier we heard an Evergreen was stuck in Suez Canal and now there is an Evergrande stuck in China. Will the Nifty get stuck, ever?

DISCLAIMER: I am not a SEBI registered adviser. All the information provided on this website is for educational / informational purposes only and should not be taken as investment advice.

hand, write, regulations

Sep21-W3: Trading option spreads is confusing in this SEBI’s world

With great enthusiasm, I bought hedges against short options on Monday. The whole idea was to trade more number of lots. The downside was additional brokerage and bearing sunk cost of hedges. I had a hunch that the payoff would be bigger.

After buying 700 quantities of hedges for calls, I decided to sell some additional call options. However, I hit my margin limit and could only manage a total of 600 quantities on short side. Now, it was the turn to do the same trick on put side.

However, Zerodha blocked me to buy hedges for puts. I kept getting this error that buy orders are blocked due to OI limit prescribed by SEBI. I tried all permutations and combinations but to no avail. I then turned to my know-it-all wifey who explained that Zerodha’s algorithm is perhaps factoring the extra hedges which I have on the call side.

To test the theory, I exited the extra hedges on call side and voila, I was now able to buy put options. I was dumbfounded by this and wrote them a tweet to seek explanation. I did get a reply with the same reason that my wife gave me.

I am however dissatisfied with the reply. It is impossible to know beforehand how much margin will option spread trading or iron condor really need. Zerodha’s margin calculator does not have facility to compute weekly option margins. For the same set of positions, I cross-checked margin requirements on Opstra and Upstox. Surprisingly, the margin requirement values were different.

How can margin requirements differ from broker to broker? Isn’t there a standard prescribed formula by SEBI? To mess things further, SEBI gives a SPAN file 5 times a day to broker and margin can vary by a lot during the day.

How am I supposed to know capital requirement for trading? The only solution for now is to follow cycle of sell some options à buy hedges à sell more options à buy hedges and so on. After each cycle, keep checking if my margin is within limits. While the approach may work for optimally using my margin, it is a disaster in terms of cost as I will end up paying a lot of brokerage.

Is this how SEBI envisioned the process of weekly option trading? Is this how a retail trader is supposed to work and that too after paying enormous tax for all of this? While Zerodha has an alternative based on its tie up with Orbis, I stand to lose my facility to pledge holdings. All this is very discouraging, to say the least.

Sep21W3 spread ROI

Sep21-W2: Nifty Option Spread Trades Give Same ROI

I was carrying a strangle from last week. I began converting it into an iron condor on Zerodha as per the new hope I had in mind. I had used margin calculator to estimate the number of hedges I am allowed to buy. However, the reality was much different and I had a hard time managing positions. For some reason, Zerodha factors hedges on both sides. Checkout this tweet for details:

Contrary to my perception, iron condor did not give higher ROI than strangle even though the number of lots were more. I think this is because the number of lots was not more enough. This needs to be experimented further. Also, I found that margin calculators vary from broker to broker. I wonder if there is a standard calculator from SEBI. It is really challenging to trade effectively without knowing margin requirement for positions.

So I sold OTM options from Sep 13 to Sep 16 whose daily candles were like this:

Here are the results:

Net Profit (after deducting brokerage)Capital deployed (approx)Week’s ROIAnnualized ROI for this weekTotal no. of weeks traded till todayAnnualized  return till today
Rs. 3,941.08Rs. 7,54,3520.52%31.12%145.6

The following is breakdown of week’s positions

DISCLAIMER: I am not a SEBI registered adviser. All the information provided on this website is for educational / informational purposes only and should not be taken as investment advice.

top

Sep21-W3: Nifty to finally top out this week (Sep13 to Sep17)?

As expected, price did enter the blue channel zone only to revert back below it. The reversion though was not immediate. It was slow, gradual and painful for all trapped bears. I believe there are still a lot of bears who wish to exit their positions and that is why it may take a bit longer for price to come down to 21 EMA

Now the following is my analysis for coming week based on what I am looking at (You may want to open image in new tab or save it for better view)

The typical setup of reversal is double top at price such that second top is higher than first top, while momentum indicator’s second top is lower than previous top. This has not happened so far. But this is not mandatory either. The price as well as momentum may simply slide their way lower. Let’s see which scenario happens now.

Scenarios for the week ahead (highlighted as yellow box with black lines dissecting scenarios)…

ScenarioAnticipated Price Action
ConsolidationBetween 17500 and 17250
DowntrendIf breach below 17250; to drop somewhere till 17100
UptrendIf breach above 17500; to rise somewhere till 17700

Dow has been falling consistently, perhaps due to Apple. On the other hand, our market has Reliance pushing it up.

DISCLAIMER: I am not a SEBI registered adviser. All the information provided on this website is for educational / informational purposes only and should not be taken as investment advice.

caricature, imagination, hand drawing

Q1Y1: Nifty Option Trades need more introspection

It is time for introspection. This is a business and will be reported as such on my ITR as well. I am expected to make advance tax payments also every quarter. Thus, 13 weeks is a logical time to take a pause and look back at what I have done.

The 13 weeks of trading correspond to following candles on weekly timeframe.

And the following is a representation of result:

The correlation is crystal clear. The returns were good when market was consolidating during the months from April to July. As the market went in uptrend in week of August, I was never quite in control of situation. Even though profits were posted in 10 out of 13 weeks, the 3 loss making weeks were good enough to wipe out all the gains.

There is a saying: “Option sellers eat like chicken and shit like elephant”

I ended up vindicating that saying, even though I knew this problem all along. It is for this reason that I have kept my target CAGR at 15% for the time being. The idea was that if I am able to beat this target, I will raise it up. For the time being, I have failed to achieve target. The next step is to aggregate my learning and trade better from now on.

So I learnt:

  1. Make strike adjustments whenever gap-up / gap-down happens
  2. Check charts twice a day
  3. Keep SL-M orders
  4. Keep taking as many SLs as warranted
  5. Keep charts tidy
  6. Be mindful of candle behavior across timeframes
  7. Roll-in strikes aggressively during trending market but not more than adjusted ATR during consolidating market
  8. Stop counting money
  9. Pre-empt SL positions and close them early (simple to say, tough to do)
  10. Exit positions when volatility compresses a lot

Last week, I realized that I should be doing iron condors instead of strangles. I earlier used to think that brokerage and cost of hedges would not compensate for additional gains via more lots. I think that theory is wrong and deserves a trial. If theory holds true, I would effectively be multiplying my gains by 1.5 to 2 times. That would be a huge boost to CAGR. I would be testing the theory in coming weeks.

But the whole point was to trade in direction of market. That is written loud and clear on my website’s home page. Yet, I ended up taking positions on both sides. The urge to eat laddoos on both sides needs curbing. I must respect trending market and stay directional.

Also, I need to stop sharing these posts here and there. I may not acknowledge consciously but my subconscious mind is asking me to keep this website as a log only. I am not gaining any feedback by sharing posts anyway. While log is an absolute must as it helps me in bringing clarity to my thoughts, the log deserves solace at least for now.

step, path, shoes

Sep21-W2: Time to move on

The entire objective of this week was to compensate last week’s loss of Rs. 11,500 and make some more if possible. The objective was noble but the methodology was abject. I myself knew that the momentum was tremendous and was not confident of mean reversion happening soon.

As my fears started becoming reality, the next resort was to hold on. Basically, I went into an unchartered territory. I was not trading anymore. This was sheer gamble. Either I was going to recover everything or lose a lot.

The writing on wall started going in favor of latter. By Tuesday morning, I was sick and tired of this trend. I have seen such scenarios earlier so many times. ITM options bleed money like a deep cut on forearm. I now had unrealized loss of close to Rs. 30,000. I knew I needed to close the position.

It was around 1030 when Nifty made the day low and my position was showing a loss of Rs. 3000 to 5000. The temptation to break-even was so high that I ignored the risk of pullback. Due to office calls, I was not able to completely focus on charts anyway.

The market pulled up fast and how. It made day high and I admitted defeat. The swing of emotions and money was too much to take. I booked a loss of over Rs. 35,000. I informed my wife who responded by saying: “So it is ok not to book loss of 3,000 and even better to book loss of 30,000?”

I did not have answer to the question. How could I tell her that I was gambling and I did not have a plan B if things went wrong? Having positions on the other side of trend can only be managed by averaging out. And I did not have the funds to do all that.

Eureka!! Spreads. I sold ITM call option spreads and found that only 25% of capital was being used. I could now do averaging if market still went against me. Fortunately, there was no need for it as Nifty fell a bit on Wednesday and I managed to recover around Rs. 25,000

Eventually, I ended the week in loss but not all is lost. Amidst all this commotion and despondency, I have realized that I need to use hedges to make the maximum of margin availability. I am super excited to trade iron condors and option spreads from next week. Let bygones be bygones. It’s time to move on.

loss

Sep21-W2: Nifty Option Trades could not recover last week loss

This trend is not my friend. As I was carrying ITM positions, Friday’s gains made my P&L go redder. The problem continued on Monday and I started to panic. My unrealized P&L was crossing Rs. 30,000. Forget last week’s loss, I just wanted to breakeven on this unrealized loss now. On Tuesday, I was only at hairline difference of that breakeven moment when the market reversed and again went back to high. At that point, I gave up and booked loss of around Rs. 35,000. I checked charts and figured reversion is not done yet. I sold some ITM call spreads and recovered whatever I could. Damage to P&L continues.

So I sold OTM strangles and call spreads from Sep 3 to Sep 9 whose daily candles were like this:

Here are the results:

Net Profit (after deducting brokerage)Capital deployed (approx)Week’s ROIAnnualized ROI for this weekTotal no. of weeks traded till todayAnnualized  return till today
Rs. -3,023.65Rs. 7,55,676-0.4%-18.82%133.64

The following is breakdown of week’s positions

DISCLAIMER: I am not a SEBI registered adviser. All the information provided on this website is for educational / informational purposes only and should not be taken as investment advice.