Trader’s Edge | An all-weather, low-risk strategy from an early bloomer

In a volatile market, usually the probability of you losing money is much higher than making money. Thus, some relatively conservative traders are always in search of successful, direction agnostic or bidectional market strategies.

Direction agnostic market strategies, as the name suggests, do not depend on any direction of the market to make money. Some non-directional strategies such as Straddle make money when the market remains sideways. Bidirectional strategies tend to make money no matter where the market moves, in most cases, at least.

Mumbai-based Rahul Ghose uses such a strategy for his day-to-day trade. He claims the strategy makes money eight out of 10 times. Rest of the times, losses, if any, are limited as the strategy has in-built stop loss.

He calls the strategy Bidirectional Cross Calendar Spread, a type of calendar spread strategy.

Early boomer

Ghose started trading when he was 17, when most young people just entered college. His inspiration to enter the market was the Forbes billionaires list. He realised that most of those featured on the list had their worth measured in terms of stocks they held.

Now 35, Ghose comes from a business family. His close association with business from an early age had groomed him on the fickleness of the market, he says.

Trade setup

Ghose, who also runs an algorithm-powered advisory platform called Hedged, said he created an algo for the strategy that he uses. Hence, the machine directly picks up the trade when the conditions are matched.

For the sake of understanding, let us assume that the Bank Nifty (as of mid-March) is trading at 39,200 and futures are trading at a premium of 150-plus points. There are certain steps to deploy Ghose's formula manually.

Step 1: Check if the Nifty or the Bank Nifty futures are trading at a premium of at least 100 plus-points. Also check if the implied volatility of calls and puts and see which one is higher. If the index you want to trade is at a premium, you will be taking a position on downside and vice versa.

Step 2: The strategy involves two legs. The first leg involves buying the first slightly out of the money strike – 39,000 puts. You need to enter the strategy with at least 30 calendar days to expiry. That means in March, you will be taking a position in the April series.

Step 3: You need to take a position in the nearest weekly expiry as well. In our example, for Bank Nifty, you need to sell 38,500 puts of April 6 (weekly) expiry.

Step 4: You need to rollover your weekly position as we draw nearer to the monthly expiry with the same leg to get back or try to get back the complete debit of the bought put leg.

Step 5: Target 5-10 percent profit each month depending on how early you enter into the strategy. Once done, you can square off your positions and take another fresh positions.

This strategy makes money irrespective of the market movement, Ghose claims. Only scenario the strategy loses money when the market has seen a very large and swift movement in a single day, which is rare.

Risk management

Typically, Ghose says, the strategy makes money for him in most market conditions. However, traders should be aware of risks associated with the strategy.

He warns traders should employ prudency in how much capital they are employing. He warns that when the market moves sharply, and if you are not able to square off your trades, you may end with big losses if your position size is big.

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