Risk Management System (Options Algo)

Purab Kumar

• 3 min read

Options inherently carry high risk in trading due to the high volatility caused by multiple factors.

Stratzy’s Index Scalper, Index Scaler 2.0, AngelOne Option's algo, and any other option algo on Stratzy platform trades in Index’s options and aims to generate good capital gains for our clients, but due to its inherent risk, Stratzy has created this risk management system.

Trade Entry method:

Trades are entered into based on the execution method selected by the user. The execution methods are- Market, Limit, and Limit before market. All of these have their pros and cons so please read about them on the app.

Capital deployment depends on the risk of the Trade. If the trade is low risk then the capital allocated by the user will be deployed. If the Algo prompts that the trade is a high-risk trade then only partial capital i.e. 50% of allocated capital in the case of Nifty options trade and 25% in the case of BankNifty options trade will only be deployed to lower the risk involved in options trading.
(Capital deployed is lower in the case of BankNifty due to its inherent trait of higher volatility than Nifty)

Example: If a user has deployed Rs. 10,000, then in the case of normal trade, Stratzy will try to allocate max of this capital. But in the case of high-risk trade, Nifty trades will only get allocated a max of Rs. 5,000 (50% of the allocation), and BankNifty will only get a max allocation of Rs. 2,500 (25% of the allocation).

Note:

  1. Sometimes trading will low capital can lead to NO TRADES taking place in case of high-risk trades since the capital allocation reduces up to 25% of full capital deployment.
  2. Trades are generally prompted as “high risk” when trading is done near or on expiry days.
  3. Capital deployment can also vary since there are multiple aspects like Risk:Reward ratio, Delta of the option, etc. and this shall not be limited to a minimum 50% allocation.

Trade Exit method:

Option Algos by Stratzy follows a simple partial exit method to lower the risks involved in trading.

In this exit method used, 50% of the number of options lots is exited at every target.

Example: Mr. X deployed Rs. 25,000 in algo. On Monday Index scalper gave a trade which bought 5 lots of nifty call options for Mr. X. Then during the trade when 1st target is hit, 3 lots will be exited from his portfolio (half of 5 is 2.5 but one cannot exit 0.5 lots). Now the remaining portfolio consists of 2 lots. So, when target 2 is achieved 50% of the remaining lots will be exited i.e. 1 lot and since now Mr. X is only left with 1 lot then it’ll be exited at target 3.

Thus in the above example even if the price falls after achieving target 1, the user’s chances of ending up in net loss minimizes since there have been some profit bookings done near target 1.

Note: This method is used to reduce the risks involved in option trading.

Automated Target and SL levels

The target and SL in the case of algos are automated similar to capital deployment based on risk involved in the trade.

Following can be the cases followed by automated targets and SL in the trade:

  1. Capital deployment >=75%: In this case, the risk involved in capital loss is high so the target is small as follows- T1: 8%, T2: 14% & T3: 18%, and the SL for this trade is fixed at 12%.
  2. Capital deployment >= 50% but < 75%: In this case, the targets are as follows- T1: 10%, T2: 17.5% & T3: 22.5% and the SL for this trade is fixed at 17%.
  3. Capital deployment < 50%: In this case, since capital deployed is less so the algo aims for a higher target as follows- T1: 13.2%, T2: 23% & T3: 30% and the SL for this trade is fixed at 19.5%.

Note: Since the market can be very volatile the mentioned SL and Target can differ in real time. Based on Stratzy's testing one can expect a variation on the mentioned level from +2% to -2%.