Thread by @theBuoyantMan

I went long on BankNifty March04'21 35600CE on 24th February.

I couldn't exit before NSE halted.

IBKR didn't have an extended trading session.

I'll try to summarize my experience on managing that position's exit in this thread below. 👇👇

https://twitter.com/theBuoyantMan/status/1365150321761153031

1/ I was forward testing a system based on banknifty futures since September and was conservatively trading until Feb.

Between September and Feb, it made about 150%+.

I felt it was time to begin aggressive compounding, but kept postponing.

2/ After painfully letting go of the opportunity budget day and the next day's rally with conservative lot size, I got enough courage to not be chicken, and decided to aggressively compound from 24th.

I decided I'd start with 3 lakhs, 6 lots Futures.

3/ I also decided I'd trade 2xATM options.

Reasons:

Through the backtest period, 2xATM options over 50+ trades, gave 98% of points that futures gave.

This also depends on when you measure. If you measure just after new equity high, 2xATM option would have tracked with 100%+.

4/ Also, 2xATM options wise, the commissions & taxes, exchange transaction fees, etc., become lesser.

BankNifty Futures has 4 point spread on each side. Options have 2 point spread on each side on average.

So, I reduce the spread and slippage costs also.

5/ I also observed that the theta decay is severe on Wednesdays and Thursdays if we trade current expiry.

So, I have been trading next weekly expiry options on Wednesdays and Thursdays.

Current weekly losses near expiry has more than 140-150% losses compared to futures.

6/ Madan and others who trade like him stick with the current weekly expiry. That works for their system.

So, I still need to go back and backtest the current weekly options behavior around Wed & Thu days. Not doable without clean options data, so will do that sometime this yr.

7/ Of all days, I chose 24th to start the aggressive compounding process.

Why? God knows.

After missing few big moves (like budget day), I decided to just stop fussing and get started.

If I failed, I'll fail gloriously.

If it works, it will help a bunch of people.

8/ Between 10 to 11am on 24th, I entered a long on BankNifty 04Mar'21 35600CE.

12 lots was the size. My system's max drawdown was 49k odd rupees historically. So, I chose to start with 50k per lot of futures. So, 12 lots in 2xATM options.

9/ By 11.40am, my position went into profit and then came back to loss after that fall.

Then, the quotes froze. NSE notified that it had halted trading.

For the first 10 minutes, I was frozen. I didn't know what to do. There was nothing I could do.

10/ Then, I heard that NSE is reopening at 1pm, and 1.15pm trading would start. By 1pm I wasn't seeing any pre-open and no notifications by @NSEIndia.

Around that time it hit me that I am already on the wrong side (at loss) and if due to this panic selling happened, I'm done.

11/ The position was worth ~1.75 lakhs, about the amount of profits the system earned in forward test.

So, I thought if I end up in the wrong side - I might lose most of the money and have to start the system from scratch again.

12/ Two things that I felt were good decisions:

I entered the Mar04 contract and not the Feb expiry contract.

Had I been on the wrong side, and I had the Feb expiry contract, I'd have sureshot lost all the position value in theta decay.

13/ By 3.30pm, it was reported NSE would have an extended hours session between 3.45pm to 5pm.

At 3.45pm, I was looking at IBKR terminal and it wasn't refreshing and I wasn't seeing quotes.

That's when I began to panic and contact IBKR support on chat (quite responsive there)

14/ By that time, I also got to know this private bank embargo lifted by NSitharaman, and banknifty started rallying.

I spoke to customer care on chat and asked them to give me a callback. They arranged a callback, but for some reason it went to missed call.

15/ I called them at around 4.25pm, and kept the call open until connecting, but I was on the call till 5pm, and didn't connect.

The closing was strong, so I wasn't desperate to close either. I knew that the next day could be a gap up or continue higher after opening at level.

16/ My entry price was 571 rupees in the options and by end of day, the premium was 1130 odd rupees.

So, I was quite confident that even if theta decay happens, I can exit without much damage.

The next morning, before market, I checked out one of my trader lists.

17/ I saw this tweet the very first thing that morning.

And of course, intense long bias set in after seeing this.

Remember, I have no clue how to trade discretionarily. I am not good at chart reading. So, this created immense confirmation bias.

https://twitter.com/SunderjiJB/status/1364772629085790218?s=20

18/ Market opened, and my position shot up like 200%+ ROI. At one point, the profits on the position was around 3.9 lakhs rupees.

I was long biased, plus I felt that the market could take a breather and close higher with the news.

Plus the bias that tweet created went high.

19/ My wife asked me to take the profits out and exit. I told her I'll take care of it. She told me "this is great for the first day of the experiment. Don't stretch your luck. Get out."

I told her I knew what I was doing.

In reality, I didn't.

20/ I didn't have an exit plan. The prior day, I felt I'd exit upon open if I saw bearishness. If I saw bullishness, I'd keep it open until end of day on 25th.

I saw bullishness, but that was the trap.

21/ From 3.9 lakhs profit, it came down to 3L, went back upto 3.5L. Then it came down to 3L, went back up to 3.3L.

In one corner, I wanted to get out with whatever was there. In another corner, Sunder's tweet was making me FOMO.

In between prices started to dip.

22/ The profit dipped below 3 lakhs. Then it went back to 3.3 lakhs again.

Then I saw this tweet. Again this created further long bias.

https://twitter.com/yogeshnanda1/status/1364812721280086021?s=20

23/ The end result was that - I let the profit dip until 2 lakhs, and when it went below the 2 lakhs mark, I exited, albeit painfully.

The profit for the position and for the system was an outlier. I should have been happy. But I wasn't. I was over-excited, but also was frozen.

24/ The brain freeze and bias didn't let me think clearly.

After exiting the position, I went to take a leak, in pain. And then it hit me.

"Oh man! I could have pyramided out of the position, sold a lot or two at the top, and sold a lot at every 5% dip".

25/ Throughout the day, this idea didn't even strike me as something I could do.

That's how mentally frozen I was.

I have never traded aggressively and have never seen such PNL in one day.

Losing 2 lakhs from the top and booking profit 50% down from peak was painful.

26/ The system made profit. It gave 65% in a day. But it was fluke.

It was complete blind luck.

I can't imagine what would have happened had I been short BankNifty.

27/ Few lessons I took away from the episode:

If you're following a system, always make contingency plans and measures for situations like Feb 24th with NSE glitch.

Most people think exchanges can't have glitches, but they do and will have such instances in future.

28/ Always have an exit plan - even for such outlier circumstances.

Whether we are in loss or profit, an exit plan is mandatory. Otherwise we'll be like Abhimanyu, knowing how to get in, not how to get out - in chakravyuh.

29/ Before market hours and during market hours, don't watch other people's tweets or news.

If you're stuck in a position like this, do not ask anyone else's recommendations or analysis to exit or manage your position.

30/ Always consider scaling out of your position if you're seeing profits at a level which your system usually won't see.

Or better yet - in your contingency plans, keep these as one of the tools in your exit planning arsenal.

31/ Being in next weekly option cost me 20k (I could have ended up with 20k more profit in current weekly). But this is only one case.

Had I been short, and I had current weekly, I'd have wiped out 50% capital in the first trade of the experiment.

So, I was INCREDIBLY LUCKY.

32/ Luck isn't a strategy. I can't and won't rely on this. Having next weekly options saved my ass even otherwise, by making the overall risk adjusted return of the trade much better.

Always focus on risk first, reward later.

33/ Even if you know your bias, sometimes when you're facing something for the first time, you'll have brain freeze and emotional rollercoaster.

That is exactly why systematic trading is important, and exactly why a plan for everything is important.

Without a plan, you fail.

34/ I also realised I absolutely suck at discretionarily managing my positions. I knew this long back is why I switched to systematic trading.

But yesterday's event only helped me understand how much I suck. So, I will spend the next two years honing my chart reading skills.

35/ For those who want to track my compounding experiment, this is the excel I am using to track the trades.

I'm also attaching remarks so that I can mark the mistakes I do, and what I did.

docs.google.com/spreadsheets/d…

36/ Why this experiment publicly?

Madan's experiment has helped me immensely in gain confidence in attempting this.

Also, his students like Guhan, Pavan, etc., have done something similar.

So, if I can do it too, I believe it would help people.

37/ Why do I believe it would help people?

I don't have even 1/5th of the experience that Madan has in years of trading. If considering the effort put in, I have less than 1/10th of the experience as him.

I want to see if even I can do it.

38/ So, in a way, it's a way to prove to myself that whatever I have learnt and tried conservatively so far works practically when approached aggressively.

If it works, it will at least 2-3 people.

If it doesn't, I'll fail gloriously and we can all laugh about it.

39/ So, I'll update the experiment results on my blog also. Will set up a blog section/post to track this and update my understanding of what's happening with the process.

The blog and telegram link are on my profile bio.