Introduction-
- Mean reversion, in finance, suggests that various phenomenan of interest such as asset prices and volatility of returns eventually
revert to their long-term average levels.
- The mean reversion theory has led to many investment strategies, from stock trading techniques to options pricing models.</p>
- Mean reversion trading tries to capitalize on extreme changes in the price of a particular security, assuming that it will revert to
its previous state.
Weekly Percentage Returns Calculation for NIFTY on Weekly Basis:
In below Viz,Percentage Change is calculated based on "Closing Price" of Nifty on weekly basis from-
1. Each Thursday > Viz-1
2. Wed to Next Thursday > Viz-2
- Weekly Percentage Returns are calculated for last 1 year, Max- Last 20 Years of Weekly percent returns can be calculated for observation purpose.
- But 1 year data is sufficient to understand,how the weekly percent returns are varying.</p>
- Why only Weekly Percent Returns and not other timeframe such as daily,monthly,quarterly,yearl?
Because Delta Neutral Option Strategies are being built for Weekly Data for Weekly Expires.Though I calculate percent returns on different
timeframes but not sharing results currently.
Observations on Below Viz:
1. Weekly Percent Returns are varying mostly between -3% to 3% in both cases above.
2. When Markets are low volatile especially "vix" < "20",Weekly Percent Returns tries to revert to mean which is 0%.
Mean Reversion Returns is nothing but Prices trying to revert to its mean values once approach to the extreme high and values.
In this case,Weekly percent returns above range (-3.1% to 3.1%), will revert to mean.
For Daily Percent Returns of Nifty,the extreme values are -1% and 1%,calculated based of moving average of every last 5 days.
Viz-1
##Finding Probablity of NF mean_reversion_returns(Thu) are between -3.1% and 3.1% based on last 1 year Data-
nf_mos = nf_weekly_mean_reversion[nf_weekly_mean_reversion['mean_reversion_returns'].between(-3.1, 3.1)]
print("NF Rows and Columns",nf_mos.shape)
nf_range_pct = (nf_mos.shape[0]/nf_weekly_mean_reversion.shape[0])*100
print("NF weekly mean reversion returns between -3.1% to 3.1% is",round(nf_range_pct, 2),"%")
Output-
NF weekly mean reversion returns between -3.1% to 3.1% is 82.35 %
Viz-2
##Finding Probablity of NF mean_reversion_returns(Wed-Thu) are between -3.1% and 3.1% based on last 1 year Data-
nf_wed_thu_mos = nf_wed_thu_mean_reversion[nf_wed_thu_mean_reversion['wed_thu_mean_reversion'].between(-3.1, 3.1)]
nf_wed_range_pct = (nf_wed_thu_mos.shape[0]/(nf_wed_thu_mean_reversion.shape[0]))*100
print("NF weekly mean reversion returns between -3.1% to 3.1% is", round(nf_wed_range_pct,2),"%")
Output-
NF weekly mean reversion returns between -3.1% to 3.1% is 80.0 %
The Probablity of Weekly Percent Returns is nearly 80% for range between -3.1% to 3.1%
Probablity and Weekly Percent calculatios is useful in Building option strategis by keeping wider range > (-3.1% & 3.1%) to avoid losses.
Mean Reversion Returns of Nifty on Daily Basis-
Nifty Daily Mean Reversion Returns Oscillating between -1% to 1% based on last 1 year data. Once NF hits -1% or 1%, it's reverting back to 0%.
Delta Neutral Strategies-
- Delta neutral strategies are options strategies that are designed to create positions that aren't likely to be affected by small movements
in the price of a security. This is achieved by ensuring that the overall delta value of a position is as close to zero as possible.
- Delta value is one of the Greeks that affect how the price of an option changes, would strongly recommend that you read the below page.
If you aren't already familiar with how it works.
- Strategies that involve creating a delta neutral position are typically used for one of three main purposes. They can be used to profit from
time decay, or from volatility, or they can be used to hedge an existing position and protect it against small price movements.
Before Diving deeper into Delta Nuetral Strategies,would like to share some resources just to understand all the jargons used in the strategies.
Option Greeks-
- Option Greeks such as Delta,Gamma,Vega,Theta,Rho are all derived from complex mathematical calculation,Based on it the option price is decided/calculated.
- Option Greeks are not calculated for below strategies, but while execution strategy and getting calculated on dev env,but below stat's taken From
standalone colab notebook.
POINTS TO NOTE-
- Below are some Delta Neutral Strategies(Non-Directional) can be executed based on Implied Volatality and winning Probability.
- Currently working on 8+ Delta Nuetral Strategies,4 are stated below.
- All calculations/statistics are derived mathematically based on formulas,No assumption are being made.
- Below Strategies are executed after market hours on standalone basis for documentation purpose.
1. Iron Condor
KEY TAKEAWAYS-
- An iron condor is a delta-neutral options strategy that profits the most when the underlying asset does not move much,
although the strategy can be modified with a bullish or bearish bias.
- Similar to an iron butterfly, an iron condor is composed of four options of the same expiration:
a long put further out of the money (OTM) and a short put closer to the money, and a long call further OTM and a short call closer to the money.
- Profit is capped at the premium received while the potential loss is capped at the difference between the bought and sold call strikes and
the bought and sold put strikes—less the net premium received.
Below Iron Fly Strategy created on NIFTY-50 Index- Vertical Red Dotted line is "Nifty Spot" Price during the execution of strategies in all viz.
Statistics-
Strategy >>Iron Condor(IC)
Execution Time 13-07-2022 (Wednesday) 17:48:29
Expiry Date: 21-Jul-2022
Leg 1 CE Price ₹ 100.3
Leg 1 strikePrice CE 16150
Leg 2 CE Price ₹ 20.0
Leg 2 strikePrice CE 16500
Leg 1 PE Price ₹ 91.0
Leg 1 strikePrice PE 15750
Leg 2 PE Price ₹ 30.0
Leg 2 strikePrice PE 15400
lot size: 50
daily_volatality: 0.996%
Avg IV for Weekly Expiry: 2.635%
Upper Range based on IV: 16388
Lower Range based on IV: 15546
Net Premium Credit ₹ 141
NF Spot Price 15967
Lower Breakeven Point 15609
Upper Breakeven Point 16291
Upper Breakeven Range 325 Points
Lower Breakeven Range 358 Points
upper_breakeven_pct 2.03 %
lower_breakeven_pct -2.24 %
NF Range within the trade is profitable 15609 - 16291
Max Profit ₹ 7065
Max Loss at CE Side ₹ -10435
Max Loss at PE Side ₹ 10435
Risk Reward Ratio: 0.68
Probablity of Profit between range -2.24% to 2.03% is: 66.67 %
Probable Range of Nifty calculated from Implied Volatality based for 1-SD is 15546 to 16388.
2. Iron Fly/Iron Butterfly-
KEY TAKEAWAYS-
-The iron butterfly strategy is a credit spread that involves combining four options, which limits both risk and potential profit.
-The strategy is best employed during periods of lower price volatility.
Below Iron Fly Strategy created on NIFTY-50 Index
Statistics-
Strategy >>Iron Fly(IF)
Execution Time 13-07-2022 (Wednesday) 18:14:01
Expiry Date: 21-Jul-2022
Leg 1 CE Price ₹ 194.45
Leg 1 strikePrice CE 15950
Leg 2 CE Price ₹ 25.55
Leg 2 strikePrice CE 16450
Leg 1 PE Price ₹ 163.0
Leg 1 strikePrice PE 15950
Leg 2 PE Price ₹ 35.35
Leg 2 strikePrice PE 15450
daily_volatality: 0.436%
Avg IV for Weekly Expiry: 1.154%
Upper Range based on IV: 16151
Lower Range based on IV: 15783
Net Premium Credit ₹ 297
NF Spot Price 15967
Lot Size: 50
Lower Breakeven Point 15653
Upper Breakeven Point 16247
Upper Breakeven Range 280 Points
Lower Breakeven Range 313 Points
upper_breakeven_pct 1.75 %
lower_breakeven_pct -1.96 %
NF Range within the trade is profitable 15653 - 16247
Max Profit ₹ 14827
Max Loss at CE Side ₹ -10173
Max Loss at PE Side ₹ 10173
Risk Reward Ratio: 1.46
Probablity of Profit between range -1.96% to 1.75% is: 56.86 %
Probable Range of Nifty based on Implied Volatality based for 1SD 15783 to 16151
3. CE/Call Ratio Spread-
KEY TAKEAWAYS-
- A ratio spread involves buying a call option that is ATM or OTM, and then selling two (or more) of the same option further OTM.
- Buying and selling calls in this structure are referred to as a call ratio spread.
- There is a high risk if the price moves outside the strike price of the sold options,
while the maximum profit is the difference in strikes plus the net credit received.
Below is CE Ratio Spread Strategy created on NIFTY-50 Index
Statistics-
Strategy >>CE Ratio Spread
Execution Time 13-07-2022 (Wednesday) 18:37:56
Expiry Date: 21-Jul-2022
Lot Size: 50
Lot Size Ratio- 1:3
Leg 1 CE Price ₹ 43.0
Leg 1 strikePrice CE 16350
Leg 2 CE Price ₹ 82.0
Leg 2 strikePrice CE 16200
Daily Volatality: 0.865%
impliedVolatility Leg 1 CE: 16.37
impliedVolatility Leg 2 CE: 16.69
Avg IV for Weekly Expiry: 2.289%
Lower Range based on IV: 15602
Upper Range based on IV: 16332
Probable Range of Nifty based on Implied Volatality based on 1SD 15602 to 16332
Nifty Spot:15967.0
Upper Breakeven 16448
upper_breakeven_pct 3.01 %
strikeprice_ce_max_p 16350
Max Profit ₹ 9850.0
Min Profit ₹ 2350
Max Loss is unlimited as CE leg are not hedged.
Probablity of Profit between range -∞ to 3.01% is: 84.31 %
4. PE/PUT Ratio Spread-
KEY TAKEAWAYS-
- A ratio spread involves buying a put option that is ATM or OTM, and then selling two (or more) of the same option further OTM.
- Buying and selling puts in this structure are referred to as a put ratio spread.
- There is a high risk if the price moves outside the strike price of the sold options,
while the maximum profit is the difference in strikes plus the net credit received.
Below is CE Ratio Spread Strategy created on NIFTY-50 Index
Statistics-
Strategy >>PE Ratio Spread
Execution Time 13-07-2022 (Wednesday) 18:51:28
Expiry Date: 21-Jul-2022
Lot Size Rattio- 1:3
impliedVolatility Leg 1 PE 21.83
impliedVolatility Leg 2 PE 21.34
Leg 1 PE Price ₹ 41.55
Leg 1 strikePrice PE 15500
Leg 2 PE Price ₹ 58.0
Leg 2 strikePrice PE 15600
Daily Volatality: 1.13%
Avg IV for Weekly Expiry: 2.99%
Lower Range based on IV: 15490
Upper Range based on IV: 16444
Nifty Spot:15967.0
Lower Breakeven 15417
Lower Breakeven Range: 550 Points
Lower Breakeven Pct -3.44 %
Max Profit ₹ 8332.0
Min Profit ₹ 3332
Max Loss can be considered as unlimited as PE leg are not hedged.
Probable Range of Nifty based on Implied Volatality based on 1SD 15490 to 16444
Probablity of Profit between range -3.44% to +∞ is: 88.24 %
Currently in WIP-
All Strategies will be getting backtested periodically during Market Hours(Real Time) with different set of "strikePrices" only on Wed and Thu
for next weekly Expiry to get best Risk/Reward Strategy interms of Profits as well as Probablity of profit.
Profits and Probablity of Profits are inversely propertional but still Algo will find the right balance as per risk appetite and suggest best
probable strategy/trades to executes along with all other stat's to have better clarity.
My Thoughts-
"No Guaranteed" Returns/Profits can be expected,Even "No Strategy" offer "100%" Probablity of Profits.It's all depend on Market Condition's.
Atleast by above stat's we can set realistic expection's as we are getting probablity from the past and market tend to perform in similar manner,
but not the exact way we are expecting.
Even Further the risk can mitigated by hedging the position/strategies during the uncertainites, Mostly during "Black Swan Events".
Ex-Covid Lockdown Event after Mar-15-2020,though the "vix", started spiking above 20 even before 1'st Mar 2020 give's an idea of volatality can rise
in near future.
Another Black Swan Event on date- 24-Feb-2022 "Russia-Ukraine War",but again vix was above "20" from "14-Feb-2022" which can be refer as Tool-
to guage volatality.
"the eternal truth is: only two people can buy at the bottom and sell at the top – one is God and the other is a liar."