Day: September 25, 2021

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.