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Oct21-W3: Mean reversion strategy needs some fixing

The week was dedicated to my indigenous and highly risky mean reversion strategy. It is highly risky because there is no stop loss. If I continue to be in loss by Thursday expiry, the idea is to roll over the trades. Also, there is no way for me (or anyone) to catch the top but I take trades thinking that the entry is the top.

Even though all of the above sounds like a plan of disaster, the above is the only method in option selling on which I am highly comfortable. It is because Vega and Theta play a vital role in making profits. The main problem that I face is position sizing. If I go wrong in catching the top, the next thing to do is to perform averaging. Therefore, the initial position size is quite important.

The inability to be in control of margin compounds the problem. Even though I deploy vertical spreads for this strategy, I never quite know when I might run out of money. This whole concept of VaR and SPAN and what not makes it impossible to guess position size. Even Zerodha’s basket order is quite useless as it attempts to place limit orders instead of market orders. Limit orders typically fail to execute or worse only 1 leg gets executed, which further compounds the margin problem.

Having said all of the above, I guess I just need to keep experimenting with my position size and identify the optimal solution. The facility to bring hedges closer to strike is a solution. However, when I already have a large number of spreads and I do not have sufficient margin, exiting a hedge can make me go out of margin. Managing all this is ridiculous.

Therefore, brokers and SEBI must figure out something to make life simpler for trading options spreads. Until, then I need to somehow figure it out. I gained 2 insights this week:

  1. Don’t let Zerodha’s Average LTP fool you because it is based on FIFO method and does not show the true picture in case some loss was booked the previous day
  2. Keep hedges closer to sell strike for gaining margin benefit  

This mean-reversion strategy is my hedge against the inevitable weeks when I will lose money. Thus, I must make the most of it whenever I am deploying it.

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