One day, I met a medical shop owner who was investing in the stock market. Curious about his approach, I asked him, "How do you invest?"

He replied, "I look for stocks that have given good returns over the past year. I select those which have performed well and invest in them." His simple yet effective strategy intrigued me. Essentially, he was buying high and aiming to sell even higher, embodying the core principle of momentum investing.

This anecdote highlights the intuitive appeal of momentum investing—identifying stocks with strong past performance and banking on the continuation of their trends.

Identifying Momentum: Tools and Indicators

There are several tools and indicators that traders/investors use to identify momentum, such as moving averages, RSI, MACD, ROC (rate of change), and Bollinger Bands, among others.

Building a Momentum Portfolio: The Medical Shop Owner's Approach

Let's build a portfolio using the medical shop owner's style of investing and see how it works. Below are the conditions and assumptions for this momentum-based portfolio approach:

Stock Universe: NSE 200 (consists of large caps and mid caps stocks with fairly good quality of price data)

Type of Data: Close price adjusted for dividend, split, bonus, etc.

Risk: 1/10, i.e., each stock carries a maximum risk of 10% on the capital invested.

Allocation: Equal (10% of the capital would be invested in each stock)

Formula: Returns = (Price today - Price nth day) / Price nth day * 100

Approach: Take the average of 60 and 120 days returns to identify momentum in each stock

Below is a chart showing the price of RIL along with its average return computed using this method.

As you see, when the prices are rising, the return graph remains positive, and when the prices of RIL are falling, returns are negative.

Calculate their average returns: (60 days + 120 days) / 2; & > 0.

Rank the stocks based on their returns (higher return, higher ranking).

The model generated an annual CAGR of 23.3% over 9 years with a 42% drawdown during the COVID market crash, beating the Nifty 50 Index by a good margin.

Addressing Volatility: Improving the Model

Let's plot IDEA and RIL's price, returns, and volatility:

On July 31, 2020, IDEA had a 164% return against 105% volatility, while RIL had an 82% return against 40% volatility (almost 70% lower compared to IDEA). Volatility indicates the fluctuations in prices; IDEA would vary by 100% annually.

The model would rank IDEA above RIL considering the returns, ignoring the volatility. To account for volatility, we introduce the Momentum Ratio:

Momentum Ratio: Return / Risk (Volatility)

Risk: Std Dev of log-normal daily returns for 6 months * Sqr Root(120 days)

This adjustment doesn't change the returns but reduces the risk—drawdown and daily value at risk reduced to 36.6% and 2.2% against 42.5% and 2.5% previously.

A Different Perspective: Sustainable Growth


Let's re-look at IDEA and RIL during 2020.

If you look at both the price Charts, Idea has moved in the initial period and its return has been flat post Jun 2020, while RIL has been growing consistently.

The perspective we are trying to get here is to identify the stocks which move consistently over the period like RIL. The thought process behind this is to capture the growing stocks and not the one which has already grown but the one which is growing consistently.

R Square is an amazing tool which could tell us the consistency in the data points. Lower R sqr would mean data are far scattered from the line of best fit (Regression Line) and a R Sqr closure to 1 would mean the data are consistent and close to each other.

Our strategy here is to compute a Ranking mechanism where the prices are growing but with consistency. Let’s name it as Momentum Score

R Sqr - Explains how well the stock Prices fit with the Reg. Line

Now Rank the Stocks based on Momentum Score and Invest in the top 10.

Here is a python snippet of the formula if you are looking to code one

Good improvement in the model giving a CAGR of 27.7% with 34.4% drawdown and 2.5% daily VAR.

Below are the detailed metrics if you wish to know more data over the period.

Momentum Investing

Generating a return which coincides with a broad index can just be done by buying an Index Fund which tracks the particular Index. ETFs aim is to replicate the performance of the underlying index by holding the same stocks in the same proportions as the index itself. In India there are several fund houses which offer investing to track the return of a particular Index like Nifty50, Banknifty among others. Most of these Index tracking funds are actively traded in stock exchanges - NIFTYBEES, BANKBEES etc., which enable the investor to buy and sell like stocks of any listed company. This strategy provides investors with exposure to a diversified portfolio of stocks within a particular market segment or index.

Nifty Bank Index compared with Bankbees ETF. If you see the graph, ETFs are efficiently being able to track the underlying Index.

Bank Nifty has given a return of 85% since the beginning of 2018 to end of 2023. Investors would have got the return just by Investing in an ETF, which translates to 12%-15% CAGR.

Is it possible to generate alpha over Index returns at same time minimizing the risk?

Let’s explore options contracts to see if we can get an Alpha.

The premiums available for BANKNIFTY ATM (At the Money) Call weekly contracts is around Rs.520 (45900 strike). The premium would vary based on the market volatility say from Rs.400 (low volatile market) to Rs.550. Let's assume Rs.450 as an average weekly premium.

This would translate into Rs.23,400 (450*52 weeks) per year, that is 50% of the underlying value. It means if BANKNIFTY remains at same level throughout the year, one could just gain 50% return assuming the premium would also be at Rs.450 every week. That’s hypothetical, what's fun in the market if there is no action!

But what will happen if we buy the ETF and sell ATM Call option contract and roll it over every week.

So to implement the strategy we would buy BANKBEES worth Rs.632,950 (25318*25 lot size) which translates to 2,455 qty of Bankbees.

Idea is to buy and hold Bankbees and sell and rollover weekly ATM call option contract. To sell an options contract you do not need additional margin as you can pledge your Bankbees. We would probably need 50% of the margin required to short an option contract in cash to meet brokers margin requirement and for withstanding MTM fluctuations (that is, approx Rs.100,000). Total investment we considering for the model is Rs.8 lakhs (Rs.6.33 lakhs +1 lakh+buffer).


Bingo, the simple rollover strategy generated the return of 100% since 2018, an additional 20% over the Index.

As the idea behind writing a call option is to protect the downside by the tune of the premium. In case market moves up, it would restrict the gains up to the premium of the contract.

Let’s see how much downside was protected?

During covid crash the index lost up to 60% whereas the strategy was able to restrict the loss to 33%.

Let’s try managing the options contract. In this approach, we try to improve upon the above strategy by incorporating a directional bias. Instead of rolling over the ATM call every week and limiting our profit potential during rallies, we intend to sell the call only when there is a loss of upside momentum and refrain from it during substantial rallies. The rationale behind this is to follow the prevailing market trend and hedge our investments only when it is required. This approach can be useful in reducing the hedging cost of our portfolio, thereby generating more potential profit. Let's look at the performance of the strategy over the same 5-year period:

We used our internal short term momentum model to identify the market cycle.

Note: Income generated through selling the call option is not re-invested

The modified model generated 130% return against 80% in benchmark and 100% in simple rollover, while the max DD remained at 33% during covid but slightly improved in other times. Unutilised cash gains at the end of period is Rs.4L (8L*50%(130%-80%).

In conclusion, both the approaches showcase their effectiveness in managing drawdowns through the strategic use of selling call options. However, the second approach stands out for its ability to generate superior alpha while keeping drawdowns at the same level as the first approach.

At Inuvest, we research quantitative models to generate alpha and protect capital at the same time.

 to know more about our models and how we leverage technology to generate an alpha.

Generating Alpha on broad market Index

The allure of options trading has been historically irresistible to many traders, both institutional and retail. The sale of options can generate immediate income, leveraging the time decay factor intrinsic to all options. In India, a growing number of market participants have embraced options as an integral part of their trading strategy. However, recent murmurs suggest that selling options may not be as rewarding as it once was. Let's delve into the reasons behind this sentiment:

: Over the past few years, algorithmic and high-frequency trading have become dominant in global markets, including India. Of late, there has been a rise in the number of retail investors who were historically buyers of options and are now writers of options.

: India's financial markets have witnessed periods of heightened volatility during COVID-19 and a few years following it. Option selling is highly rewarding during panic or times of uncertainty. Currently, the markets are at an all-time high and the India VIX is at an all-time low. India VIX is been consistently below 12 since June 23. During such times, option ppremiums being lowest which makes it difficult for sellers are there is little decay impact. A small move in the underlying could impact the seller's profit by a larger extent. 

: SEBI (Securities and Exchange Board of India) has periodically introduced changes to margin requirements, making it more capital-intensive to sell options. Higher margin requirements mean traders have to commit more capital for the same positions, impacting returns on capital.

: As the Indian markets mature, there's a proliferation of sophisticated traders and institutions in the options segment. Increased competition invariably leads to reduced premiums and narrower spreads, diminishing the rewards for option sellers.

: With central banks globally maintaining low interest rates to boost economic recovery, the opportunity cost of committing capital to options selling is reduced. However, the reduced rate also impacts the risk-free rate component in option pricing models, leading to slightly lower option premiums.

: As the Indian market matures, information asymmetry decreases. The advent of information technology, financial literacy campaigns, and general market awareness means that retail and institutional traders are often on a more level playing field, leading to compressed premiums.

While the landscape for selling options in the Indian market is certainly evolving, it doesn't necessarily mean that it's no longer profitable. Instead, it suggests a need for option sellers to adapt and evolve their strategies. Here are a few considerations for modern-day option sellers:

: Always prioritize risk management over potential returns. Use stop losses, hedge where necessary, and be aware of the potential for black swan events.

: The market landscape is ever-evolving. Keeping abreast of changes in market dynamics, regulatory environment, and global events is crucial.

: Consider diversifying strategies to include both option selling and buying, or even look at other financial instruments.

In conclusion, while challenges persist, like all trading methodologies, it requires adaptation, continuous learning, and prudent risk management to navigate the ever-shifting sands of the financial markets.

Selling Options No Longer Rewarding in the Indian Markets?

In the fast-paced world of finance, Algorithmic Trading, or algo trading, is gaining momentum as a powerful tool for both seasoned investors and beginners. This comprehensive guide will walk you through the basics and help you navigate the intricate landscape of algo trading.


Algorithmic Trading, or algo trading, involves using pre-programmed software to execute high-speed trading strategies in financial markets. These algorithms analyze market trends, make decisions, and execute trades, all at speeds impossible for human traders.

Algo trading relies on intricate mathematical models and statistical analysis.

Automated systems execute trades at lightning speed, seizing market inefficiencies.

Algo trading operates 24/7, executing trades with precision and speed.

 Automated systems eliminate emotional decision-making, leading to more disciplined trading.

Algo trading allows for simultaneous management of multiple strategies across various assets.


 System errors and technical issues can lead to unexpected losses.

Excessive tweaking of algorithms for replicating historical performance may not translate well to live markets.

Algorithms might struggle during highly volatile or unprecedented market conditions.

Algo trading strategies come in various forms, each catering to different market conditions, themes and risk appetites.

Strategies that capitalize on market trends.

Techniques that anticipate a return to average prices after a deviation.

 Utilizing statistical models to identify trading opportunities.

 Harnessing the power of artificial intelligence for predictive analysis.

While a deep understanding of financial markets is paramount, specific skills enhance your prowess in algo trading.

 Familiarity with languages like Python is crucial for implementing and modifying algorithms.

Understanding statistical concepts is essential for developing effective trading models.

The difficulty of algo trading depends on various factors:

: Algo trading has a steeper learning curve compared to traditional trading. It involves understanding programming, statistics, and market dynamics.

 Markets evolve, and so should your strategies. Keeping up with the latest trends and technologies is essential.

: Dealing with complex algorithms and potential technical glitches requires a certain level of technical proficiency.

However, with dedication and a commitment to learning, many find the challenges of algo trading to be rewarding.

How to Begin Algo Trading Safely? Using Inuvest platform

For beginners, platforms like Inuvest provide essential features for a secure start-

: Simulate trading strategies with historical data to assess their viability.

: Practice trading in real market conditions without risking real money.

In conclusion, algo trading is a captivating avenue for those eager to explore the dynamic landscape of financial markets. While it demands a learning curve, the potential for increased efficiency and profitability makes it a compelling venture for individuals ready to delve into the world of algorithmic trading. Dive in, learn, and let your algorithms navigate the exciting waters of modern finance!

Algo Trading: Ultimate Beginners Guide 2023

Options can be effectively used to reduce the effective cost of purchasing stock, provided the trader is willing to take on certain risks and responsibilities. One common strategy to achieve this is the 

 strategy. Let's discuss it in more detail:

Using Covered Calls to Reduce Stock Purchase Cost

The Covered Call strategy involves two steps:

Buying shares (usually in multiples of lot size) of a stock.

Selling (or "writing") call options on those shares.

The premium received from selling the call options can be viewed as income or a discount to the cost basis of the stock purchase. The goal is to reduce the net cost of the stock, thereby providing a cushion against potential downside or enhancing returns if the stock remains stable or grows modestly.

 First, purchase the shares of the stock or Index ETF. Let's say you buy 250 shares (equivalent of 1 lot) of  RELIANCE (RIL) at ₹2452 per share, spending ₹6,13,000.

 Next, sell a call option with a strike price at the current stock price. For instance, you might sell a call with a strike price of ₹2460 that expires in a month, and for doing so, receive a premium of ₹40 per share, or ₹10,00 total.

The ₹10,000 premium received from selling the call option effectively reduces your cost basis in the stock from ₹613,000 to ₹603,000, or from ₹2452 per share to ₹2412 per share.

 If RIL rises above ₹2460 on expiry, the option will likely be settled in delivery, and you'll be obligated to sell your shares at ₹2460. In this case, you make a profit from the stock appreciation (up to ₹2460) plus keep the option premium, but you miss out on any gains above ₹2460. Please note that some brokers would square off your call option before the expiry to avoid delivery of shares. Please check with your brokers about their delivery policy. Another thing to note is if the call option is ITM then there could be possible liquidity issues and might lose money due to slippage or you may not be able to exit the option at the desired price. Make sure you deploy this strategy on highly liquid stocks or on Index ETF which are cash-settled.

 If RIL remains below ₹2460 until the option expires, the option becomes worthless, and you keep the premium. You can then sell another call option for the next period, continuing to reduce your stock cost basis.

 If the stock price falls, the premium you received provides a cushion. In our example, even if the stock drops to ₹2412, you'd break even because of the ₹40 premium.

 If the stock surges above the strike price, you miss out on potential gains above that price.

 The premium received provides limited protection. If the stock drops significantly, you could still incur losses.

 If your option is exercised, you must deliver the underlying stock, meaning your shares get sold whether you want to or not.

 This strategy tends to be more short-term since you're selling options that expire, requiring regular management and decision-making.

Using covered calls can be a smart way to reduce the cost basis of a stock purchase, but it's not without its risks. It's essential to understand the implications fully and be comfortable with the possibility of capping your upside or selling your stock if the options are exercised.

Always consult with financial professionals or conduct thorough research before implementing any options strategy.

Keep in mind, the numbers in the example are simplified for clarity, and in real trading scenarios, commissions and other factors might affect the net outcome.

Covered Calls to Reduce Stock Purchase Cost

The financial world is fraught with uncertainties. Just like an umbrella shields you from rain, hedging in the world of options can be a protective measure against unforeseen market movements. This blog post will explore the ins and outs of options hedging, its significance, and some popular strategies employed by traders.

Hedging is an investment technique used to reduce the risk of adverse price movements in an asset. Essentially, hedgers use instruments like options to protect against potential losses in their portfolio.

 Options provide the flexibility to hedge against both upward and downward price movements.

 Options often require a lower upfront investment compared to the underlying asset.

 With options, the maximum risk is the premium paid, allowing for better risk management.

 This involves buying a put option for an asset you already own. If the asset’s price falls, gains from the put option can offset the losses from the asset.

 Here, an investor holding a long position in an asset sells call options on that same asset. This strategy generates additional income (the premium) but caps potential upside gains.

 A collar is a combination of a covered call and a protective put. It offers protection from significant declines while also providing income through the sale of the call option. However, it also limits potential upside.

 For those with a diversified portfolio, hedging each stock individually might be cumbersome. Using index options, investors can hedge their entire portfolio against market downturns.

 This strategy aims to make an options position delta-neutral, meaning the position won't change in value for small changes in the underlying asset's price. It involves adjusting the number of options based on the delta.

 While hedging provides protection, it's not free. Evaluate the costs associated with the hedge versus the potential benefit.

 As market conditions and your portfolio change, adjust your hedges accordingly.

 External factors like interest rate changes, geopolitical events, or major economic announcements can impact the effectiveness of your hedge.

 Have a clear plan on when and how to unwind your hedge.

 Over-hedging can eliminate potential profits. Ensure you're using just the right amount of protection for your portfolio.

While the idea of hedging sounds appealing, it's not a one-size-fits-all strategy. It requires careful planning, regular monitoring, and a deep understanding of the instruments being used. Nevertheless, when implemented correctly, options hedging can be a valuable tool in an investor’s toolkit, offering peace of mind in volatile markets.

It's crucial to remember that all investment strategies, including hedging, carry risks. Always consult with a financial expert to understand these risks and develop a plan tailored to your specific needs and objectives.

Options Hedging: Safeguarding Your Investments

Options trading, while offering diverse strategic opportunities, carries with it a unique set of risks. Managing these risks is crucial for the long-term success of any trader. Here's a guide to understanding and navigating these challenges effectively.

 Before delving into advanced strategies, ensure you have a solid grasp of the basics. Recognize the intrinsic and extrinsic values, the Greeks (Delta, Theta, Vega, Gamma, and Rho), and how they affect an option's price.

 One of the most common mistakes is risking too much capital on a single trade. A general rule of thumb is to risk only a small percentage (e.g., 1-2%) of your total portfolio on any single options trade.

 Avoid putting all your capital into one underlying asset or one type of option strategy. Diversifying your options portfolio can help mitigate risk. This includes diversifying among different expiration dates, strike prices, and underlying assets.

 While more difficult with options than with stocks, setting a limit on how much you're willing to lose on a particular trade can prevent catastrophic losses.

 Options, by nature, offer leverage. This means that while they can amplify returns, they can also amplify losses. Always be conscious of the leverage you're employing in your options portfolio.

 Things like earnings reports, major geopolitical events, or central bank decisions can drastically affect an option's price. Always stay informed about events related to the underlying asset.

 Stick to your predefined strategy and avoid making impulsive decisions based on fear or greed. If a trade is not going as expected, evaluate it rationally rather than emotionally.

 Regularly review your trades. Whether you gained a profit or incurred a loss, there's always something to learn. By understanding what went right or wrong, you can refine your strategies and avoid making the same mistakes.

 All options lose value over time, a phenomenon known as Theta or time decay. Be mindful of the impact of Theta, especially when dealing with short-term options.

 If you're in a position where a potential loss might be too significant, consider hedging. This might involve using different options strategies or other financial instruments to offset potential losses.

 Having a portion of your portfolio in cash gives you flexibility. It allows you to take advantage of new opportunities and provides a cushion if things go south.

 While advanced options strategies can be enticing, they come with increased risk and complexity. Don't use a strategy unless you fully understand its implications.

Risk management is an ongoing process. It's not about eliminating risks but rather understanding and mitigating them. By incorporating these principles, options traders can make more informed decisions, protect their capital, and position themselves for long-term success.

Remember, options trading isn't suitable for every investor, and losses can exceed your initial investment. Always consult with a financial professional before diving into the world of options trading.

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