Power of Simplicity – Part II

I wrote just a few weeks to you about the using simple indicators. That week Nifty witnessed resistance near 10500 and came off. The down move was slow but clear. The idea of resistance at 10500 came from a simple data point, the maximum Call build up there. I had mentioned at that time that, “during weak markets, the strike with maximum Call build up acts as resistance and during good markets the strike with maximum Put build up acts as support. One can surely adjust weighted premiums to arrive at refined numbers, which can act as stop losses.”

Since then negative news globally and locally have been harrowing the markets. Trade war between USA and China with India facing collateral damage, facebook issues, increase in crude prices, political news in India not in favor of BJP, selling from FIIs, rate hike in USA and so on. This time it seemed to be clear that 10k was under threat. As it would have been with any important level, it comes out with a gap these days, so happened with 10K. On 23^rd March we opened with a gap down below 10k.

Again, a trade point for me as 10k Put strike had the maximum Put build up. With around 58 lakh shares in outstanding position, it was by far the largest position in the system. The day we broke below 10k, the unwinding was ~7 lakh shares. Undoubtedly, it was not very heavy as compared to the extent of panic in the market. A 10%-15% reduction in open interest is a given as lot of weak hands tend to hide behind such buildups. They tend to panic during such times.

Next day Nifty continued its journey staying below 10k, but was not breaking below previous day’s low. It seemed worth taking a Long Call position. Along with the build up at 10k, there were few other factors, which favored some upmove. Being the expiry week, there would be some recovery to facilitate rollovers, being year-end there would some relaxation in selling and buying would emerge, after a break below 200 DMA a retest of that would be possible and after around 500 points of correction, there would be some relief.

Therefore, I bought Nifty March 10k Calls as Nifty started recovering above 10k levels. The biggest issue with this trade was if Nifty came off the premium erosion would be sharp and I would have very little chance to recover the cost. The theta loss during the expiry week is non-linear and heavy. The cuts in Nifty these days are extremely sharp. Within moments, it loses 30-50 points and trade goes for a toss.

However, the recovery was smooth that day, as Nifty scaled back above 10,100 levels that gave a decent cushion to my trade (these days it is very important). The day after that was again a strong one on open, though 200 DMA could be the best case. In addition, I was not interested in holding my position going into expiry day. It was the last day of the year and post the LTCG regime in place, there was a possibility that there could be sharp unwinding by arbitrage funds. Hence, I covered my position with near 80% returns.

Again, simple indicators and weighing of odds in favor of my trade got me going this time. I continue to be a believer of simpler indicators and data points for such vanilla trades. Just list down the odds/ data points in favor and odds/data points against, it will create a trade set up for you. Then strategize and finally realize.

Happy Trading.

Cheers!!