Those of you in the trading room would already know the changes that we have made to the existing Opening Spike trade by using OTMs instead of ITMs.

The Thesis - This strategy is about capturing the opening volatility, its a direction agnostic strategy and we aim to capture statistically optimal moves, with a fixed target and risk. We use NIFTY Weekly OTM Strikes to execute this strategy.

Here is the performance of the approach for the current month (As executed live in the Trading Room)

So what’s so great about it?

Well, several things.

Low Capital Requirement - Typically the OTM Premiums that we use are in the range of Rs. 20 to 25. We keep 4x of which as the allocated capital for this strategy.
Low Transaction Costs - Low premiums has a direct impact on STT and as you can see the strategy itself is designed to take very few trades. So on all counts low costs. *Example of a contract note below to give you a sense.
High Win Rate - Yes this approach has a very high win rate, we have statistically tested it.

So whats the catch?

Like all good things in life, this one comes with a few catches,

Time Dependent - This trade occurs at a specific time window, you need to be there to capture it.
Execution Skills - Yes, this one is the most challenging one, being a scalper its easy for me to execute this, but if you are new there could be a learning curve of close to a month at least to get this right.

* Contract Note Example / Broker SAS Online

Warning!

Don’t attempt this by yourself. Unless you know what you are doing.
It looks simple but its not easy.
We factor in several variables to take this trade, its not a Price only thing.
Past performance is no guarantee of future results!

Context - As a Scalper / Day trader, mornings are very important for me. Some of you would have noticed in the room that my position sizing in the morning is at max, the reason for that is simple - The probability of range extension + linear price moves (Opening Drive) is more in the morning than in the afternoon.

Now lets delve into the specifics of a setup. Remember the moment we use the word setup you need to be sure of the following elements before hand

1. What determines entry?

2. What is the probable - max favorable excursion - reward?

3. What is the probable - max adverse excursion - risk?

4. Trade Management Approach? Is it

a) Fixed Size Buy - Scale Out

b) Fixed Size Buy - Fixed Size Sell - All in / All out

c) Scale in - Scale Out

d) Scale in - Fixed Size Sell/All out

While we would visit each of the above issues by themselves, we will now see how visually how does the opening spikes look like and is it worth trading them?

Look at the image below, it's a NIFTY slight ITM Strike - These are two days of Opening Spikes

Do you see a trading opportunity here? Scalpers typically would do their "Johnny One Lot" as Tom Sosnoff calls it here. Knowing very well that the direction of the spike may or may not be the Opening Drive. If you can afford to loose no harm in warming up with a lot or two here. Typically this Occurs between 9:16 to 9:30 IST

Next comes the main Opening Drive trade which is where we expect around 50 to 60% of the day's range to form. The high of this Opening Spike or the Day High till that time becomes an important reference for a breakout trade for the Opening Drive. Typically this occurs between 9:30 to 11:30 - Read it as 1 hour of up move + 15 mins of consolidation at top / retests of high + 45 mins of Mean reversion. The below pictured represent the above two days and their Opening Drives.

Coming to the specifics of the setup

1. Entry Criteria

You define the candle closing time, for entry, you can define anytime, like close of 9:16 candle? - esp. if you want to trade the Opening Spikes. For Opening Drive its better to wait for 10 to 15 minutes at least. So the entry for Opening Drive would be the high after 15 or 20 minutes, you can define it or take it based on momentum at that time. Whatever approach you choose, understand that this is a breakout trade and its safer to enter a bit higher instead of lower, a bit higher would mean 1 or 2 points on NF.

Since this is still the open, the probability of a range extending is fairly high. (In this para I am talking from a Options Long perspective, it can be CE or PE)

Also look for any previous day's price levels which can act as support/resistances.The following are the key - Previous Day High/Low/Close/VWAP - If you are keen you may also want to mark similar levels for the previous week - High/Low/Close/VWAP. (In this paragraph I am referring to NF Nifty Futures)

The reason its important to keep these levels as a reference, is because larger time frame traders would use these levels as references (for Buy or Stop Loss) and that may create a flush/volume spike.

2. What is the Reward - Max Favorable Excursion?

Now that we have defined the entry criteria, the next thing we would need to know is, what is the best and worst that can happen. Lets start with the best things first. Here I would borrow John Sweeney's concept of MFE (Maximum Favorable Excursion) which mean's if the trade works in our favor what is the max gains that we can expect from it. To understand that let me take you through some back-tests that we have done.

The first / second images tell us - what to expect if the price crosses the day high or day low formed till 9:17 on Nifty Futures?

Since we are direction agnostic, lets see what happens when the price crosses the Day Low till 9:17

The above data tells us what is it that we can target, obviously if you are using options as a trading instrument you would need to factor in delta of the strikes which you are trading. Nevertheless, we now how a probabilistic sense of what to expect.

The above information is relevant more for trading Opening Spikes. In the next update to this post, I will share the MFE for Opening Drive.

When thinking about Opening Drive we need to keep three factors in mind to understand the market structure at that point in time.

1. Define a reference - In our case we will use the mean or ATP or VWAP as a reference.

2. We need to understand the mean excursion from the ATP/VWAP- Look at the chart below. Which gives us an important data point -

This chart tells us the mean percentage of the intra day range that gets formed before 1:30am . As you can see it says 60%, if for e.g. the intra day mean (high-low) range for the index for a given period of time is 70. 60% of 70 i.e. 42 is what gets formed before 1:30pm.

3. The next aspect that we need to determine is, how does the 42 points range gets formed (between 9:00am to 1:30am).

In the chart below, what we see is, it takes about 83.4 minutes (apox. 1.5 hrs) from 9:15am to the point of Max excursion (high or low) during the first half .

So we have 3 references to work with, a) We know the mean/ATP/VWAP at a given point of time, b) We know the mean (H-L) range that gets formed in the first half 42/25 ish. c) We know that it happens in about 1.5 hours. Creating probabilistic frameworks like this is the key to scalping, its helps us understand where we are at a given point of time and how the odds of wins stack for or against us.

Feel free to comment and ask questions in the room. Would be happy to clarify.

Opening Spike | NIFTY Weekly OTM Strike Based Strategy | Performance

NIFTY - Scalping Set-up - 01 - Opening Spikes & Opening Drive