Monday was the day when all my loopholes of mean reversion strategy were exposed. The strategy which had been giving me windfall profits for past 13 weeks or so was almost showing me an unrealized loss of over Rs. 1,00,000. I need to write my experience clearly as it happened on Monday:
|Time||What I did||What I should have done|
|First 15 minutes||I knew that Nifty was not oversold yet on shorter timeframe but I still went ahead and did averaging since my P&L of put positions was deep red||I should have rolled in the call options without disturbing put options|
|Next 15 minutes||I purchased hedge positions which were expensive||I should have exited calls and averaged puts|
|Until 1015 am||I exited hedges to save losses on them but that made my margin go negative||I should have taken hedges with intent to avg a bit more and exit hedges immediately|
|Until 1145 am||I rolled in put options until then went ITM while ensuring that new premium > current premium||I should have rolled in only once while ensuring new premium > current premium|
|Until 1245 am||Hopelessness||I should have repeated the cycle until contracts went ITM|
The chink in armor of my mean reversion strategy is that hedges are simply useless if this strategy is being leveraged on any day before Wednesday (or maybe Tuesday, will need to check).
By God’s grace, market started reversing by 1 pm and I was able to hold my nerve until around 2 pm when I eventually exited my positions and ended the day at around Rs. 20,000 of realized loss. However, I was holding positions which if kept till expiry could have recovered the loss completely.
This was easier said than done though. During subsequent days, the market’s ATR was big and it kept swinging here and there but mostly in positive direction. I had to wipe the slate clean multiple times, meaning that I wasn’t gaining much.
It was only on Thursday that I got a chance to do another mean reversion when I sold ITM contracts to the tilt while keeping hedges. While I did earn profit, I could have milked more by rolling out the strike with same number of positions. The idea simply didn’t strike me then. I now need to remember that Wednesday and Thursday are golden days of mean reversion, if done properly.
All above has led to awesome learning. I had been taking this strategy casually which I can’t afford to do so anymore.
So I traversed through the following candles during the week:
Here are the results
|Net Profit (after deducting brokerage)||Capital deployed (approx)||Week’s ROI||Annualized ROI for this week||Total no. of weeks traded till today||Annualized return till today|
|Rs. 6870.59||Rs. 1058414.7||1%||67.83%||27||56.21%|
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