On the sidelines of the recent trade carnival in Bangalore, Jegathesan Durairaj, aka Jegan, shares his self-made story and how he managed an annual return of around 60-70% by selling Bank Nifty options using an algorithmic strategy. Jegan also runs the CapitalZone platform to mentor other traders.
Edited excerpt from the interview:
Please take us through the journey from engineering to transaction.
I come from a humble background. My father was a mason and my mother was a housewife. I have been working since I was 13 years old when my salary was close to 12 rupees a day. Later, I became a software engineer and my salary was Rs 1 lakh.
But in 2014, I read ”
rich dad poor dad‘ Author Robert Kiyosaki explains that salaried people are working for other people, like ‘coolies’. If you want to get rich, you have to do business. I ended up choosing the stock market. After reading a lot of books and attending workshops, I decided to imitate big boys because Kiyosaki’s book emphasizes imitating rich people. Since large institutions are selling options, I also decided to sell options from my first day in the market.
I get the extra time decay advantage that works to my advantage when selling options, whether directed or non-directed.
I entered the market at Rs 3 lakh and now I am getting Rs 4 crore by selling options. My annual compound annual growth rate is 60-70%.
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Can you share some strategies you use?
There are two popular strategies for option sales. The first is short strangulation, which is to sell currency options, and the other is to sell currency options. The sell level is a risky proposition, and the sell level is less risky.
You also use an algorithm to sell options. Can you tell me how you decide which strategies to use and how often do you change your algorithm?
Currently, the most commonly used programming language for algorithms is Python. Every broker provides a Python API. For example, if you want to go long or short at a certain level, you can trigger it using the API. I test the logic using backtesting with data from the past 5-10 years. If it gives good results then I implement it in the algorithm. Once I’m ready, I don’t need to sit in front of the system and the algorithm does its job.
I keep upgrading my strategy every three months. My goal is simple. I want to get some extra return, but even if I don’t get some extra return, I want to cut my losses. This is how I manage the algorithm. My research is based on controlling my losses rather than looking for profits.
For example, if the market has been in a tight range for the past four days, there is a very high chance of a breakout today.You also have to look at volatility by studying ATR (Average True Range) and ADR (Average Daily Range), which will tell you how many pips the Nifty moves on average per day
So in terms of profit, what kind of goals do you have?
When you take a non-directional approach when selling options, you don’t have a view. You sell the option and adjust the position. Of which you are trying to get 3% per month. But my algorithm works for both directed and non-directed. If the market is trending, then you will be rewarded enormously. But otherwise, you’ll get a modest return.
What happens to your algorithmic strategy when unseen events affect the market?
My algorithm has been backtested for five years. RBI or Fed events have also happened before, so the impact of all such events is taken into account. I have a fixed portfolio stop loss and hedge. For example, if the market had a big flash crash, then for every put option, I would buy. So my losses are limited at all times, be it intraday trades or position trades.
How did your portfolio react during the March 2020 market crash and the Covid lockdown that followed?
Since I trade with a lot of capital, I avoid trading when the market is too volatile and illiquid. During the epidemic, I sat in my hometown for 8 months without doing any transactions at all.