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Option Buying Algo Strategy Sample

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These strategies are for demonstration purposes only and are not intended for actual trading. AlgoTest is not responsible for any profit or loss arising from the use of these sample strategies.

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Option Buying Strategy Defined​

An option buying strategy is a trading approach in which the trader profits from rapid market movements in one direction. In simple terms, with a buying strategy, traders are making bets on the market moving either up or down. Therefore, if the market moves significantly, the trader makes money. These strategies have lower accuracy compared to option selling strategies but offer a good risk-reward ratio.

Meet AlgoTest​

AlgoTest is an advanced platform for algorithmic trading. It allows traders to test trading strategies, simulate trades without using real money, and execute strategies accurately. This platform combines market complexity with user-friendly technology.

Pre-built Option Buying Strategy Template​

Having trouble creating an option buying strategy? Don't worry! AlgoTest provides a pre-built template to help you learn how to create a buying strategy and understand what it looks like. 

This sample strategy is offered by AlgoTest to guide its users in creating their own option buying strategy.

Access Buying Strategy Template in AlgoTest​

To get a sample of a buying strategy, just follow the straightforward steps outlined below.

  • Click on the saved strategy button as shown in the image below

  • Click on Buying Strategy under sample strategy under #920 straddle as shown in the image below.

  • It will show you a strategy as shown in the image below.

  • You can backtest the strategy by clicking on the "start backtest" button as shown in the image below.

Logic Behind the Option Buying Strategy​

Having a ready-made strategy is just the starting point for a trader. There is no one-size-fits-all strategy in the market, but each strategy comes with its own set of risks and rewards. It's crucial for a trader to fully understand the strengths and weaknesses of their strategy and how it performs under different market conditions.

If you monitor the market daily, you will notice significant movement during morning trading hours. Therefore, we plan to enter the market in the morning. The key question is when to enter. Since we intend to take a directional trade, we want to enter when the market is moving either up or down. Therefore, we will only enter a trade when there is a specific movement in one direction. This approach allows us to trade in line with the market movement.

We will select an ATM call option and ATM put option in the morning at a specific time and wait for them to move approximately 20% higher. If they move in that direction and satisfy our momentum condition, we will take the trade. Since option buying is less accurate, we will use small stop losses to minimise losses and implement a trailing stop loss to capitalise on market movements in our favour.

Strategy Entry & Exit Conditions​

First, we need to determine whether this is an intraday or positional strategy. This will be an intraday strategy to avoid overnight risk, so we will exit the strategy on the same day. Now, we need to select the index on which we want to trade. Although we have selected BankNifty, you may choose any other index. Clearly defined :entry and exit rules are essential in trading.

Entry​

We will monitor the price of the ATM call and the ATM put at 9:17 am and will buy them when they give a 20% momentum upside from the price we calculated at 9:17 am. Market movement is typically high in the morning, which is ideal for a buying strategy. Therefore, we have selected 9:17 am as the entry time for our sample strategy. To determine the best time to do so, you can backtest your strategy at different times using AlgoTest. As this is an intraday strategy, we will also exit our positions at 3:15 pm on the same day.

We can add an ATM CE and ATM PE leg using the leg builder by clicking the Add Leg button.

We have enabled a 20% upward momentum for entering, as indicated in the image below.

Exit​

After entering a trade, it's important to manage our risk in case the market moves against us. We will set our stop loss (SL) at 20% below our entry price for each Call Option (CE) and Put Option (PE) leg. Since option buying has low accuracy due to theta decay, we have used a smaller stop loss. You may also backtest your strategy with different types of stop losses.

Protecting our Profit​

In an option buying strategy, it is essential to protect our profit once our trades move in our favour. Therefore, we can add a trailing feature to our strategy. For example, if the market moves 10 points in our direction, we will trail our stop loss by 10 points.

Conclusion​

There is no holy grail in the stock market. Every strategy we create has its pros and cons. No single strategy can guarantee profits every day. Therefore, it is always better to use the sample strategies provided by AlgoTest to get an idea and create your strategy based on your risk tolerance. You can try different permutations and combinations and backtest your strategy using AlgoTest to understand how it will perform in different market scenarios.