Trading in a systematic and unemotional manner yields best results. Here are three simple strategies

Discussion in 'Traders Corner' started by Michael Gonsalves, Jul 17, 2022.

  1. Michael Gonsalves

    Michael Gonsalves Member Staff Member

    Jun 26, 2016
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    Experts say that a mechanical and unemotional approach to trading, if followed systematically, yields the best results. Three such simple strategies are available with impressive win rates and impressive return on capital.

    One of the main reasons newbie traders fail hopelessly in the stock market is because they approach it without any system. They buy or sell on random tips and let their emotions influence their decisions.

    Instead, if they approach trading like any other regular business and buy or sell with defined stop loss and price targets, they are likely to succeed in the long run.

    Simple Bull Call spread yields CAGR of 35.6%

    The Bull Call spread is one of the simplest option strategy one can implement. It involves buying a Call and selling a higher Call. The amount paid for the spread is the maximum loss one can suffer. The maximum profit one can derive is the difference between the spreads and the amount paid for the spread.

    A researcher named Chirag Babulal Shah conducted a back-testing study of the Bull Call Debit Spread on the Nifty Index options over a period of 6 years to see whether the results are positive or negative.

    "The objective of this study is to back test the Bull Call debit spread strategy for a time period long enough to cover the various practical scenarios of the capital market. Hence, a period of 6 years is taken into consideration and a algorithmic method of back testing is used. The study does not look at any other factors such as market sentiments, the global scenarios, macro or micro economics, etc. The study focuses only on the price of the Nifty index. The open price of Nifty index futures for a particular expiry month is the start point and the close price at the expiry ie. The settlement price is considered to be the end point. The maximum cumulative loss over the period is considered the maximum investment and the cumulative profit at the end of 100 months is considered as the return," he said.

    "The significance of the study is that it gives importance to simplicity and practicality for the retail investor. A retail investor can simply execute the strategy without any complex calculations and reap results after a considerable period," he added.

    The back-test was conducted in the monthly options of the Nifty by buying an At the money (ATM) at the start of the month and selling a Call 100 points above it.

    The results are quite impressive with 38 profit months and 34 loss months and a net CAGR of 35.6%.


    "Looking at the data, one can observe that the market has behaved in quite random manner. In some months there had been extreme movements and in some there was no movement at all. The direction of the market has been up in 38 months and down in 34 months from its starting point of the expiry period. However, due to the payoff return or risk vs return of the strategy, and the leverage obtained by trading options, the returns are considered excellent," the researcher concluded.

    The pdf copy of the back-test report can be downloaded here.

    Simple Bull Put spread yields CAGR of 47%

    Another researcher has shown that selling a Put credit spread with 7 days to expiration yielded a 604% return on capital during a 5 year period. The strategy involves selling a Put with a delta of 35 and buying a Put two strikes below.

    To minimize the loss, the spread was closed if the Index closed below the short strike. This helps avoid large losses and keeps the average winning trader closer in size to the average losing trade.

    The strategy has a 65% win rate and generated over $13k with just one lot in the 5-year period.

    The CAGR of the trade is about 47%.

    Iron Condor yields 2% per week

    Saketh, a noted trader, conducted a back-test of the Iron Condor strategy on the Bank Nifty. The study shows that the strategy, if done consistently and if implemented with simple rules of adjustment and stop loss, yielded an impressive return of 2% per week, which translates to a 100% gain on an annual basis.