Money Control Pro Interview - Manikandan Ramalingam (bse2nse)

Q: Currently how do you trade – a brief description of the strategies

A: I have a long term Equity Portfolio. I pledge it to get limits to trade on expiry day. The Thursday expiry day trades are my bread and butter trades and have worked consistently over the last 2 to 3 years.

Here is how I work towards executing the trade on expiry day:

I note down the first 15-minute range on Monday – high and low made in the first 15 minutes in Nifty. If Nifty is above it - bulls are in charge and below it then bears are in control. If the market is between the range then it’s in a neutral zone. For me, this reflects the week’s trend. The price movement till Wednesday will give me an idea of what kind of market we are in – a strong or choppy trend.

On Thursday I also track the Bank Nifty. I track the square values of Bank Nifty – like 176 X 176 = 30976 and the next square value is 31329 and so on. These act as support/resistance zones. I write down the 3 or 4 relevant square values for the day around 9 am on Thursday.

The idea of using squares came to me from reading about WD Gann and some of his books. I use both square and cube values and have found them to be very useful.

Again on Thursday, I will note the first 15-minute range for both Nifty and Bank Nifty. The same rule of bullishness above the range, bearishness below it and neutral if the market is between the range applies. I start applying my trade only after 09:30.

The ratio of buying versus selling options contracts is an integral part of my strategy. I always maintain a ratio of say buying 1 lot of ITM (in-the-money) option buy versus selling 10 to 20 lots of OTM options. The strike price of the OTM option will depend on the volatility as represented by India VIX. I am constantly watching India VIX on the expiry day.

The nearest OTM strike is at least 100 points away no matter how low the VIX is. My stop loss for the OTM option is 6 – 10 times the price at which they were sold. I shift the stop loss sharply lower just before 3 pm when spikes tend to happen. I may even choose to exit if my overall position is in good profits for the day.

Here’s an example of the strategy I just spoke about.

Let's say on a Thursday - Nifty spot is at 12,050 by 10 am and I am sensing a bullish sentiment for the day – that is the market is above Monday’s 1st 15 min range as well as it is above Thursday 1st 15 min Range.

Assuming I have a trading margin of Rs 50 Lakhs, I will buy 6 lots (450 quantity) of 12000 call at say Rs 70 – (ITM Buy).

I will then sell 60 lots (4500 quantity) of 12200 call at say Rs 3 with a stop loss at Rs 18 – (OTM Sell).

I have a provision of selling 9000 more quantity of margins to short later in the day if need be.

The third leg of the transaction is I buy 60 lots (4500 quantity) of 12300 call at say 30 paise.

This acts as a cover to 12200 Call short position so that max loss is restricted to 100 per lot in case of a Black Swan event.

Now let's assume that the market moves to 12200 and my stop loss for the calls sold is hit. Here is the maximum loss my trade will incur.

Net Loss = [450 * (200 - 70)] - [4500 * (18 - 3)] = 58500 - 67500 = Rs 9,500 Loss (Minus 0.2% loss on a trading margin of 50 Lakhs)

Assuming spot moves to 12,150 and the stop loss is not taken out.

Net Profit = [450 * (150 - 70)] + [4500 * (3 - 0.20)] = 36000 + 12600 = 48,600 Net Profit (1% profit on trading margin of Rs 50 Lakhs)

The above profit and loss is just used to explain the best and worst case scenario. Variations on trades and volatility will make it a little more complex. I may add the remaining 9000 quantity in OTM shorts later in the day depending on if markets go down or not. I may bring the OTM shorts closer if needed, although this is not too efficient considering the added risk. I may also start by only buying ITM option and add OTM shorts (Defence) only if needed or later in the day.

Numerous variations can be played around this - based on the conditions on that day. Unlike this example, I mostly buy ITM options in Bank Nifty and OTM Shorts in Nifty mostly (gave ITM buy here in Nifty for easy understanding).

My focus always is on the overall risk – that is the OTM selling part and how to reduce it if the market move is threatening.

Profits tend to take care of themselves as the play is solid. I don’t focus on how much profits I can make on the day. If I am in profits by 1 pm, I tend to finish the day well. I start cautiously and try to be in decent gains by 1 pm. I feel 0.5 percent return on the overall margin for a day’s work is a good return for me, especially since it is generated on virtual margins – that is from the equity portfolio pledge and not from incremental cash.

I have had days when 99 percent of a Thursday is going well when OTM options hit SL on a freak spike - even though spot price is not close (mostly in OTM PE) and I end up with a net loss of max 2%. I have also had many Thursdays when I make 1% - which is big for me and has been the most satisfying days.

Q: What are your trading statistics?

A: In the current financial year 24 Thursdays out of 29 were profitable. In FY19 28 out of 35 expiry days were profitable while in FY18 out of 25 days traded 18 were profitable.

Q: Apart from expiry day trading are there any other strategies you trade?

A: I keep on experimenting with various strategies and discuss them on my YouTube channel. The ideas I share on YouTube are meant to kindle thinking of the traders and I believe one should experiment and paper trade and take baby steps at trading.

Like one can trade the range breakout of Monday by buying a Bank Nifty Call option if at 3:15 pm on Monday the Bank Nifty is above its 15 min high range. Exit the trade if spot breaks below Monday 1st 15 min range low. Similarly buy a Bank Nifty Put option if at 3:15 pm on Monday the spot price is below its 15 min low range and exit the trade is spot rises above Monday 1st 15 min range high. The above strategy has a good risk-reward ratio, but can still have minor variations.

I believe that any trader should have various kinds of strategies for various kinds of markets. A strategy which works now or over the next 2 years need not always work.

A strategy which works when VIX is below 20 need not work when VIX is at 30. One should realise this and quickly tweak or play a different strategy altogether.

When I think of combining options buying with Options Selling OTM (Intraday / Positional), I can be overweight as a buyer or neutral or defensive. This may need to change according to market conditions. For this reason, I don’t want to pursue Algos and want to trade manually. Someone who takes Manual trades is in constant touch with the markets and can adapt and evolve.

Q: Any advice to new traders

A: One should realise that the first five years will go in learning and understanding the markets. The problem is most traders I interact with are unrealistic in their early years (I was too) and look to make profits way too soon and think too much about profits and the end result.

When one is learning to swim they do not go and jump in 15 feet deep water, but when it comes to trading we are ready to jump into a 15 feet deep pool when it comes to markets and trading. One should start at a very low capital, which can be refilled every month if it is completely wiped out. One can be the world’s richest man by earning 5 percent a month over 40 years starting with just Rs 1 Lakh as capital. But, when one witnesses the day’s low and low range of options we tend to think that making 30% a month should be easy.

For someone who wants to start options trading work on strategies which can make 1 percent returns a month or even less, begin with by trading options spreads. The risk involved in this strategy is also less. Then try and push to 2% a month kind of trades by tweaking and later push for 3% and 4% and so on. Gradually you will reach 5 percent in a month. As you try to increase returns made per month you will be taking more risk. It would be difficult as uncertainty increases and you begin to sweat. At this point, fall back to a lower return and keep practicing and once you are comfortable at a return of say 2 percent a month - push forward again for 3 percent. I also keep experimenting to make jackpot trades but that is on capital of say Rs 5,000 as compared to my trading margin of Rs 50 Lakh for expiry trades