How to handle reversals in the market using Re-Entry & Re-Execute features in Quantman?

Let’s delve into how Quantman’s new re-entry/re-execute feature can assist options traders in handling market reversals. This feature is designed to allow traders to re-enter a trade after a stop-loss (SL) has been triggered, offering a solution for navigating volatile market conditions, especially during V-shaped, M-shaped, and W-shaped trends.

Understanding Re-Entry at Cost:

If the stop-loss is triggered for a leg, and the price returns to the original average entry price, the algorithm will re-enter the same leg/symbol. If the initial position was a sell, the re-entered position will also be a sell. The same stop-loss or target settings will apply to the re-entered leg upon re-entry.

Example of Re-Entry at Cost:

Consider a scenario where a user sold an at-the-money (ATM) call with a 20% stop-loss at Rs 100 (SL = Rs 120). If the stop-loss triggers, the system waits for the call’s price to return to Rs 100 (entry price) before re-entering the same option. The stop-loss will remain at 20% upon re-entry.

Understanding Re-Execute (Re-execute entry logic immediately after hitting stoploss):

When the stop-loss of a particular leg is hit, the algorithm will re-execute the entry logic and re-enter immediately. A different strike price may be selected for re-entry if the ATM has changed based on the underlying movement. If the original leg was a sell, the re-entered leg will also be a sell. The same stop-loss or target settings will be applied upon re-entry.

Example of Re-Execute:

For instance, if an ATM strike of 44400 CE was sold at a 200 premium with a 30% stop-loss setting (SL price 260), when the stop-loss hits, the algorithm squares off the leg at 260. It then immediately runs the re-execute condition, selecting the latest ATM based on the underlying. If the underlying’s price was 44460, the ATM strike of 44500 CE is chosen, and a new sell position is taken in 44500 CE promptly.

Practical Demonstration:

Back-test results of a Plain 9.20 Short Straddle:

The 9.20 Short Straddle is an intraday trading strategy that involves selling an at-the-money (ATM) call and put option at the same time shortly after the market opens at 9:20 AM with 25% Stoploss on individual legs. The strategy can generate significant profits if the market experiences a sharp move in either direction.

Backtest results of a 9.20 Straddle with Re-entry at cost Adjustment:

Let’s look at the performance of a 9.20 short straddle strategy with and without the re-entry feature. We’re comparing the basic strategy, without re-entry, to the strategy with re-entry at cost (twice for both legs). The results are clear: the 9.20 Short Straddle with Re-entry at cost adjustment shows better outcomes in terms of maximum drawdown, risk per trade, expectancy, and managing losing months.

Conclusion and Recommendations

In conclusion, exploring the re-entry feature is encouraged, emphasizing its potential to minimize losses in specific market conditions. While cautioning that re-entry is not a universal solution and should be combined with other strategies, the importance of testing and finding what works best for individual traders is highlighted.

Closing Thoughts

Deploying a basket of strategies to diversify and hedge against potential losses is suggested, promoting a holistic approach to options trading. The re-entry feature, when used thoughtfully, can enhance risk management and contribute to more resilient trading strategies.

Quantman, an algo-trading platform, provides comprehensive Re-Entry and Re-Execute features to effectively handle market reversals and enhance trading performance. These features enable traders to automate re-entry decisions, optimize order execution, and manage risk effectively, allowing them to adapt their strategies and capitalize on emerging opportunities despite market volatility.