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Optionalysis: Risk Controlled MA20 Trades Hurt, But Not Much




MA20 gave us a bit of a shock this time. In two trades, we took the MA20 going up with the 7900 call option, and then the market remained iffy. The first trade, taken at 28 (300 qty, 7900 CE) then saw the option go to 42, where we added another 150 shares. That would give us an average price of Rs. 33.

The next day, the market opened close to the stop (which was at 21) but then ripped forward to as much as 64 in the day. Luckily many of you on slack are really good with timing and exited at that price. We didn’t. 

Since we have no targets, all we did was update the stop to about 33 (buy price). Toward the end of the day, the market reversed and we saw 31 get hit. The stop was just Rs. 2 so we said let’s take a second entry. 

Eventually, since MA20 still remained benign, we got into the same trade again at Rs. 26.6 with/ a stop loss of 13. And that got stopped out today.

Here’s how the MA20 looks. The index has been flat and that’s what’s killed our trade.


What is the MA20?

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.

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

This strategy has been up and down these last few months, but this trade brings it back into hugely profitable territory (over 1.9 lakhs in 2015). We’ve had a decent win-loss ratio, and will take this further. 

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The Lesson Learnt: Time Value Can Hurt

We still don’t have an exit strategy. We have an entry strategy. We have a fixed position size of 600, but we take positions based on the strength of the move (this was a 450 size move). But we exit in a discretionary manner. We must change this.

In today’s trade the issue was that the index didn’t move and there was less than a week to expiry when we took the trade. In earlier months taking the long month has been a horrible decision. But this time the time value dropped precariously.

We’re not afraid of getting stopped out – the risk is well controlled that way. 

Net-net, this trade is fine, because it’s a small loss.

At 3:15 pm if the MA20 is still at -10 as it currently is, then we might enter a new trade of going long the 8000 CE (December). Half quantity (300) with a 50% stop loss. (#actionable on slack)

Ma20 a strategy that acts reasonably fast (average holding period of 6 days) and seems to be doing well. It’s not something that triggers very often, though. Breadth is a good way to look at the market – if the majority of players are going down, the market is likely to follow.

Here’s the trades till now. We have 15 winners and 5 losers, and winning trades tend to win 3x more than any losses in losers.


This is a very risky strategy. Don’t try it unless you’re willing to lose nearly everything. 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.



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.

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