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Learnings

Day one

1. Always use market orders. What we are doing is trading in a very short term trend. The only way to do it successfully is if the trend has already started and we are expecting continuation. Limit orders are perfect when we are expecting a reversal, as we are expecting the price to move in an opposite direction and then follow the desired direction. Market orders are perfect when we expect continuation of trend.
2. EMA(14) over 2 minute chart is the new stop loss and trade indicator.
3. Don't get emotionally involved with the trade. Don't expect the trade to reverse after you take a position or second position.
4. Reduce trading size to 20,000.
5. Trade option price of around 100 and target 5 points. Do multiple trades if required. If the market trends then increase the target. Do not increase stop loss.
6. Put stop loss.

Day two

1. Trade when there is no movement.

2. Always note the position of highs and lows before you trade.\

3. Trade by Invested amount, not lot size.

4. Try to buy when the stock is at low and sell when the stock is at high.

5. No trading in first and last 15 minutes.

6. Trade with the trend. If higher lows and higher highs are being made, then buy at low. Sell when a high of the same level is made.

7. Expect to capture one-third of the movement.

Good trade turns bad

Following Business Plan 4,I went short the minute the market opened on Wednesday. The market went up immediately hitting my stop loss. I reversed direction immediately, and waited for the market to rise up by 33%. Everything went perfectly as planned till now. Now came the problem. I did not follow the EMA(14) sell signal when the market fell below the line after a long time. The market unfortunately did not rise back up and kept falling till it hit my stop loss. I ended up loosing 11000 on 40000. A very bad day. At least found the importance of EMA(14) line.

Another horrible day. Target was not reached. Made many losses. Brain fried. Trade on diversion from EMA(14). Will trade on 20,000. from tomorrow. Don't need more money. Target 1000 per day. Strict stop loss reversals tomorrow.

Amadeus Trading - Business Plan 3 & 4

The details for Business Plan 3 are given below:

Invested amount - INR 40,000
Vehicle - NIFTY ATM Options
Split up - 6-10 lots of price 50-150 each
Time - 1 day
1 month - 100% with Probability of profit as 75%
1 day - 10%
Reentry - Next day
Stop Loss - 10% or 1 day
Cool off period - Same day. Only 1 trade per day
Max profit - 100% over a month
Max reduction - 88% of portfolio
Test period - June-July
Trade Idea - Follow Slow Stochastic on this chart. Add SSTO(14,3) and EMA(14).


The details for Business Plan 4 are given below:

Invested amount - INR 40,000
Vehicle - NIFTY ATM Options
Split up - 6-10 lots of price 50-150 each
Time - less than a day
1 month - 200%
1 day - 15 points
Reentry - Immediate
Trailing Stop Loss - 5 point
Stop Loss - 10 points
Cool off period - Same day. Only 1 trade per day
Max profit - 200% over a month
Max reduction - 10 trades to reach 0.
Test period - June-July
Trade Idea - Follow Slow Stochastic on this chart. Add SSTO(14,3) and EMA(14).
Have a trailing stop loss of 5 points when target is reached.Reverse on hitting stop loss. Don't trade if stop loss is hit multiple times. Wait for breakout and then enter in direction of breakout.

Cost basis reduction

The original value of an asset is called as its cost basis. The act of reducing the amount paid for the asset is called as Cost basis reduction. The stock prices are assumed to move randomly when no new information is added to the market. The assumption is that stock prices will move in a log normal fashion around the current market price. If this holds, then the stock price would have a lower probability of touching the outer extremes. The is can be used to our advantage to reduce the cost basis.

The cost basis can be reduced using mainly three techniques - Naked put, Covered call and covered call combined with a purchase of a further out of the money call, or as I like to call it, Covered call spread. All three have different advantages and risks. It is important to understand the scenario to choose which techniques to choose from.

Naked put
This involves a sale of an out of the money put option, with the hope that the stock will not fall below the option strike. The premium collected goes towards the cost basis reduction.

• When to buy - We have enough cash to buy 1 or more lot of the underlying. But we would prefer to reduce our cost basis.
• Choosing the underlying - As we expect the stock to not move below a price, we should choose an underlying which has formed a support and does not expect bad news in the future
• Choosing the put - We should choose a strike below the support level, or one standard deviation below the current market price.
• Calculating return - Return is calculated as premium collected upon cash kept aside to buy the stock.
• Booking profit - The position is held till expiry.
• Managing loss - If at all the stock price touches the support level, it can either mean the stock is cheap in which case, we buy back the put at a loss and buy the stock. A further out of the money put can also be sold to collect more premium and cover our losses. Or it can mean the stock is not worth buying. In which case an out of the money call can be sold.

Covered call

This involves a purchase of the underlying and sale of an out of the money call option, with the hope that the stock will not rise above the option strike. The idea is that we are capping our profits to reduce our cost basis. The premium collected goes towards the cost basis reduction.

• When to buy - We either already hold the stock or would like to buy the stock as we are bullish on the stock, but don't know when the stock would rise. Also we have enough cash to buy 1 or more lot of the underlying and enough to hold for margin. 
• Choosing the underlying - As we expect the stock to not move above a price, we should choose an underlying which has good fundamentals and are quite sure of stock not falling down.
• Choosing the put - We should choose a strike above the resistance level, or one standard deviation above the current market price.
• Calculating return - Return is calculated as premium collected upon cash invested in the underlying and the margin kept aside.
• Booking profit - The position is held till expiry.
• Managing loss - If at all the stock price touches the option strike, it means the stock is moving well. Best idea is to book a loss on the call option and sell an out of the money put to cover the loss. Another way to deal with it is to convert the position to Covered call spread and finance it with a out of the money put.

Covered call spread

This involves a purchase of the underlying and sale of an out of the money bearish call spread, with the hope that the stock will not rise above the option strike of the sold call. The idea is that we are capping our profits to reduce our cost basis and protecting ourselves against any large upward movement. Although the safest of the three, it also gives the least return.

• When to buy - We either already hold the stock or would like to buy the stock as we are bullish on the stock, but don't know when the stock would rise. Also we have enough cash to buy 1 or more lot of the underlying and enough to hold for margin. 
• Choosing the underlying - As we expect the stock to not move above a price, we should choose an underlying which has good fundamentals and are quite sure of stock not falling down.
• Choosing the put - We should choose a strike above the resistance level, or one standard deviation above the current market price.
• Calculating return - Return is calculated as premium collected upon cash invested in the underlying and the margin kept aside.
• Booking profit - The position is held till expiry.
• Managing loss - If at all the stock price touches the option strike, it means the stock is moving well. Best idea is to sell an out of the money put to further extend the profit.

Vertical Spreads

As defined by investopedia.com, An options trading strategy with which a trader makes a simultaneous purchase and sale of two options of the same type that have the same expiration dates but different strike prices is called as Vertical spread.

To define in a simpler way, a vertical spread consists of two trades, one buy and one sell of with both either put or call. As both are opposite there is either a net debit or credit. Hence they are also called credit or debit spreads. And depending on whether the option is put or call, the names for the vertical spread are

• Credit put spread - A lower put is purchased and a higher put is sold. Typically has a higher probability of success and higher risk. This position is bullish.
• Credit call spread - A lower call is purchased and a higher call is sold. Typically has a higher probability of success and higher risk. This position is bearish.
• Debit put spread - A higher put is purchased and a lower put is sold. Typically has a lower probability of success and lower risk. This position is bearish.
• Debit call spread - A higher call is purchased and a lower call is sold. Typically has a lower probability of success and lower risk. This position is bullish.

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Kelly Criterion - I

The Kelly criterion is a formula used to derive the optimal size of a bet in a series of bets.In some investing scenarios, with some assumptions the formula will do better than any strategy in the long run.

The Kelly criterion says that amount of bet should be same as the ratio of expectation and gain per unit bet. To illustrate, say there is a 60% chance that an investment goes up by 5% and 40% chance that it goes down by 3%. Then,

f = Expectation per unit bet / Gain per unit bet

f = (0.6 * 0.05 - 0.4 * 0.03) / 0.05

f = 0.36

That is, we must bet thirty six hundredth of our portfolio to maximize our success. Any bet below is too conservative and any bet above is too aggressive.It is a recommended that the bet actually be only half of the Kelly fraction to avoid incorrect probability and give room for higher losses. Kelly criterion works well only for defined risk trades like vertical spreads, and will not work well for undefined risk trades.