Testing Strategy for Breakout Trading through Future and Options

[rajputz]

Lately a thought came to my mind. And i am very sure that it would have caught the mind of many traders out there.

To catch stocks that are going to breakout.

For eg. I took a trade that broke out its trend and I know is going to make a huge gain at the same time I have to limit my losses. Following cases may arise.

1. Once I enter, I set a mental stop loss that this is the point where my stoploss is hit and no matter what I will exit. But lets say it hits the stop loss and then continues its breakout. I am literally screwed in money and psychological terms.

2. Once I eneter, It was rather a failed breakout and my stoploss is hit. I may exit and get a loss. I got psychologically trapped waiting for it to recover and even lose more.

So to counter it, lets propose a method and see if it works.

1. Paper fund of Rs. 5,00,000/-.
2. Traded value of LTP or the trade that occured between 3:15pm to 3:20 pm.
3. Buy/Sell a future in the direction we propose a breakout.
4. Buy a Call or Put with equal lots and money for stoploss.
5. Let the trade run till expiry/rollouttonextexpiry.
6. Take windfall profit where we are happy.
7. Or let them expire with Loss.

Some points worth remembering will be: -
1. Accumulation of distribution has to be real within a proper channel. I will my self consider rectangle breakouts that are rangebound for long periods.
2. Volumes will be considered during the breakout.
3. 50/200 DMA will be consulted for the basic average trend.
4. An indicator might be consulted for strength in the direction through divergence.
5. Overall market breadth or of the sector may be considered for reference.

Views or discussion appreciated to make it work.

Will refine it as with the learning and share the excel sheet of hows it going on. It is all hypothetical just to see if the method can work or any refinement can be done.

 

[rajputz]

Test 1

IBULHSGFIN

 

[Somatung]

Hi Rajputz

Nice to see you back with a good topic in a new thread. :thumb: A little add from my side: The strategy you mention is so far called: Long synthetic call, as you are long a put and long a future. If you short the future and go long the call, this will then be called: Long synthetic put.

Second point is a question: Did I get this right in your above sheet: You bought with 484.50 and your stop loss would be at 470.00 in this example. Now is this only a mental stop loss and if so, why not placing a stop loss order at this level with your broker? Did I miss the point? If market moves up again, you can enter again with the other derivative.

Take care / Dan

 

[rajputz]

Hi Rajputz

Nice to see you back with a good topic in a new thread. :thumb: A little add from my side: The strategy you mention is so far called: Long synthetic call, as you are long a put and long a future. If you short the future and go long the call, this will then be called: Long synthetic put.

Second point is a question: Did I get this right in your above sheet: You bought with 484.50 and your stop loss would be at 470.00 in this example. Now is this only a mental stop loss and if so, why not placing a stop loss order at this level with you

r broker? Did I miss the point? If market moves up again, you can enter again with the other derivative.

Take care / Dan

I really never understood what the names of the strategies are. Not good with them.

Everything in the setup is done for me. Stoploss is already placed. Only difference is that it is with the Put Option that I purchased. Not puting a stoploss at the future trade is because of the reason that market might hit it and run back with the breakout. Also the stoploss is not at 470 but 470-13.45 456.55 if my oral calculations are right here.

Lets say market falls. Then if the Future loses its value, then even if the put decays as far as it goes below 470, it will still be of value. If say ibulhsgfin goes to 450 then at the time of expiry future will be losing -34.50 and put will be gaining +20 - some brokerages that i am assuming with my system at lets say 200 rs for both the trades.

Whole point is that I wont be screwed by some sudden spike of a big fish's mischief. Till the point market is above 497.5 and the breakout is genuine I can be in unlimited profit with loss potential of 13000 approximately.

Any Inputs.

For closing at 450. Loss is at 14000.

For Closing at 500. Profit is at 825 Rs.

and if Breakout is for real and it closes at 520 then profit is at 13000

and if 550 then 26000/-

 

[Somatung]

Ok, I see. One input from my side and then let's see what others will add to your idea: As you can take otm, atm or itm options, you have different choices to expand or reduce your stop loss profiles. If you take otm options, your stop loss will be bigger as market first must move until the delta of the options starts to move good. If you take itm options, you can set a tighter stop loss, as the delta of the option is better to catch fast moves in the direction of the options. Here you can play around with the choices you have.

 

[rajputz]

I don't understand how. The itm option will have higher value that I will pay. Plus if the trade goes into my way it will just become 0 at expiry so let's suppose I would have purchased an itm of 490 then it would have costed around 30(assuming). Where as a little otm will be compared much less hypothetically as market is breaking iin other direction and the value of otm put will be lesser as compared to value of otm call if the stock was at 480.

My choice will be to pay least for stop as that is the cost adding up to me just for insurance

 

[Somatung]

What I mentioned is useful for the vice versa concept by setting the stop loss on the future and not on the option. Hope you also considered this aspect in the past before or may after my posting.

You have your insurance at begin of the setup, but after this you through away either of those two legs according to market moves and you are directional. This will reduce your insurance cost for the moment the market made the specific breakout. You still can add any other way of insurance again after the specific event had happened.

This just to expand knowledge in case you did not search in this specific direction. Will stop here as it probably slowly leads to far away from your first setup you may any way want to keep as it is. And this setup is ok. But as you asked for discussion, I allowed my self to post a bit in this direction. Hope you do not mind and

Take care / Dan

 

[rajputz]

What I mentioned is useful for the vice versa concept by setting the stop loss on the future and not on the option. Hope you also considered this aspect in the past before or may after my posting.

You have your insurance at begin of the setup, but after this you through away either of those two legs according to market moves and you are directional. This will reduce your insurance cost for the moment the market made the specific breakout. You still can add any other way of insurance again after the specific event had happened.

This just to expand knowledge in case you did not search in this specific direction. Will stop here as it probably slowly leads to far away from your first setup you may any way want to keep as it is. And this setup is ok. But as you asked for discussion, I allowed my self to post a bit in this direction. Hope you do not mind and

Take care / Dan

Elanor at with example on let's say on ibulhsgfin from here itself at ltp if you please. Might open some new thinking for me. They way you told is going above me. Sorry for that.

 

[Somatung]

Elanor at with example on let's say on ibulhsgfin from here itself at ltp if you please. Might open some new thinking for me. They way you told is going above me. Sorry for that.

Then let it be and any sorry is not needed in any way. Different traders have different setups and that's it. No need to start going in this specific direction if you haven't done it before. Stay with the setup you mentioned and let's see what can be done/improved in it in the future. :thumb: Will wait for a week or so on and then will check what you and others posted. I then will post other thoughts to the main setup you posted if it will make any sense.

Until then: Dan

 

[mmca2006]

I really never understood what the names of the strategies are. Not good with them.

Everything in the setup is done for me. Stoploss is already placed. Only difference is that it is with the Put Option that I purchased. Not puting a stoploss at the future trade is because of the reason that market might hit it and run back with the breakout. Also the stoploss is not at 470 but 470-13.45 456.55 if my oral calculations are right here.

Lets say market falls. Then if the Future loses its value, then even if the put decays as far as it goes below 470, it will still be of value. If say ibulhsgfin goes to 450 then at the time of expiry future will be losing -34.50 and put will be gaining +20 - some brokerages that i am assuming with my system at lets say 200 rs for both the trades.

Whole point is that I wont be screwed by some sudden spike of a big fish's mischief. Till the point market is above 497.5 and the breakout is genuine I can be in unlimited profit with loss potential of 13000 approximately.

Any Inputs.

For closing at 450. Loss is at 14000.

For Closing at 500. Profit is at 825 Rs.

and if Breakout is for real and it closes at 520 then profit is at 13000

and if 550 then 26000/-

good to see ur initiative but Just curious to know why you want to buy future and Buy put simultaneously instead of simply buying 480 call , in such case outcome is more or less same However considering the Call Option built up at 500 level , it seems that crossing 500 may be very tough ,