Dynamic ContractTM enables users to set the contract details while they create the strategy, based on which the system will select current relevant strikes. It simplifies the task strike selection process which would generally take some time and had to be done manually and changed more often when the market moves significantly.
So, if you want to trade At-the-money options (ATMs), it was difficult to set strikes and follow the underlying and changing the strikes when the market has moved by for example 100 points. At this point, the ATM might have become In-the-money (ITM) or an Out-of-the-money (OTM). The delta values have changed and so has the sensitivity of the option in relation to its underlying. Therefore a different strike should be used now if you were to take a trade on the ATM. But in the morning how do you determine what path the market might take the entire day and then plan your strike selection accordingly?
Dynamic ContractTM allows users to delegate the strike selection process to the platform. All they need to do is set some parameters using which the system will select the strike automatically. Here I want to highlight that, during execution, you will only receive a notification to place orders, same as trading Equities in Streak.
Of course, a Dynamic contractTM is only applicable for creating strategies and not for creating scanners.
So, how do you select a Dynamic contractTM?
Here are the steps:
- Select an underlying. For example, Nifty 50 Indices in Create page.
- Click on the underlying (here, Nifty), you will get a pop-up to convert it to a dynamic contractTM.
- Set the parameters for strike selection
And you are good to go…
But what about all these options? what do they do?
Here is the list of the parameters available
Contract Type: You can select either Call or Put of the underlying
Offset: This enables users to set whether they want to trade using ATM, ITM, or OTM. Offset ‘0’ will select the ATM and Offset ‘2’ will select two strike prices above the ATM strike price and Offset’-2′ will select two strike prices below the ATM. The general rule for Offset in Dynamic Contract is negative(-) is Lower strikes and Positive(+) is Higher Strikes.
Expiry: You can select whether you want to trade on the Current contract or the Next contract
Expiry Type: This enables you to select either Monthly contracts or Weekly contracts
Order Type: You can set whether you are Long or Short on the contract. This setting will always supersede the Strategy position i.e. Buy/Sell. This is because with Options you can short put and be bullish. Additionally, it enables you to create Spread, which may require you Long and Short on different contracts in the same strategy.
Change Frequency: This setting will determine how often you want the strike to be changed.
- Candle: This will choose the ATM/OTM/ITM strike price after every candle Close. The candle interval will depend on the base timeframe of the strategy.
- Day Open: This will choose the ATM/OTM/ITM strike price on the basis of the Day’s Open price. It will remain consistent throughout the day since Open will not change.
Creating a Banknifty Short Straddle
So using this feature I want to create an intraday short straddle on Banknifty(BNF), that I want to enter at 9:30 AM and exit at 3 PM. Here is what I would do
The dynamic contractTM has been set. This will short the weekly ATM CE and PE, at the close of the 9:25 AM candle i.e at 9:30 AM. The strike will be selected based on the Close of the 9:25 Candle. So if Banknifty is at 35154, the ATM strike will be 35200. Now I would not want to take any trade past 3 PM so I will set the settings accordingly.
I would receive the exit alert at 3 PM i.e at the close of 2:55 PM candle.
The Target and Stop Loss has been set as an aggressive 99%. This is because I have a combined Target and Stop Loss in mind and setting an SL might square off one leg if the SL is hit. When my SL-M notification comes after Entry I would reject it. Now, this is VERY RISKY and this is never recommended. I can monitor my position throughout the day and hence I don’t mind it.
As a safety, everyone should always keep a Stop Loss. But keep in mind that an SL of 1% or 2% is not enough for options, it might get triggered right away. If I have to set an SL and a Target, I can go for 10% and 20%. But risk is unique to every person and you should set this as per your risk appetite.
Then I’ll just run the backtest and deploy the strategy.
I had run the backtest for the above mentioned strategy and this is the result.
So the strategy lost money and that is because the Banknifty has been trending from the end of January to today, 23rd February. Banknifty went from 31507.15 to an all-time-high of 37708.75 and then took a dive to 35116.95 (as per www.nseindia.com).
And straddle works best in non-trending periods. On further observation, I saw that the Call side lost more money while the Put side made some money.
This is logically correct since Put sellers will make money when the underlying is bearish and falling while the call sellers would lose money. But because of the Vega effect, overall the strategy lost money.
You can try paper-trading this strategy in Streak to check its performance without losing a single penny. Let me know what you think about the dynamic contractTM feature. More updates coming soon…
Disclaimer: The information provided is solely for educational purposes and does not constitute a recommendation to buy, sell, or otherwise deal in investments.