Introduction
Jegathesan Durairaj, popularly known as IT Jegan, is a legendary trader and Twitter icon. A mathematician by qualification, and an Ex-software professional, he is now a full-time trader.
We got the opportunity to sit down in a conversation with him recently. The idea was to capture his journey and psychology and gain insights into his approach towards trading. This was a fun-and-learn conversation. Here is a brief of how the conversation went ahead.
Transition from Positional Trading to Intraday
Jegathesan Durairaj, aka IT Jegan, started his journey with Positional Trading, mainly because of the margin benefit obtained from the payment of just the Span Margin. It all started in 2016, with shorting monthly Strangles in Nifty and doing once-a-month expiry day trading. Monthly trades because back then weekly expiry trades were not a thing yet.
These Strangles were safe and earned him good enough profits. Intraday trading back then was easier as well, as there was no need for margin allocation, and intraday exposure made intraday trading easier and financially more viable.
Around 6 months after starting his trading journey, he happened to watch an expiry day strategy video. This video was about selling options, initiated at around 3 PM. Coincidentally, Right around that time weekly expiry trades were introduced. This combination of exposure to a solid intraday strategy, and the hype that surrounded weekly expiry trades, motivated IT Jegan to switch to weekly expiry trading.
IT Jegan’s Introduction with the Intraday 920 Straddle
While the 920 Straddle existed since 2017, IT Jegan shifted to it only in 2020.
The motivation? Complete utilization of the margin. The strategy he utilized before jumping to Intraday selling is called In-Stocks. In this strategy, you sell the stock options because they have a higher Implied Volatility. And in an equal proportion, you buy the monthly Banknifty options. But this strategy did not offer any margin benefit, which became the reason why he moved away from it.
As of now, It Jegan has partially moved away from the In-stocks strategy, and he gives 2 reasons for it:
- The In-stocks strategy does great in a high-volatility market. This is because when the volatility is less, the premium difference between stock and index options is not much. This is in line with Volatility Risk Premium Harvesting.
- Doing high-volume trading with the In-stock strategy is tedious, as it deals with stocks. “While retail trading with this strategy works, once your capital goes above 1 Crore, you will have a huge impact cost,” he says.
These became the main reasons why IT Jegan shifted to the 920 Straddle. And while he still backtests the In-stocks strategy, he doesn’t implement it in the live market.
Understanding the Sizing Associated with the In-stock Strategy
AlgoTest CEO, Raghav Malik, wondered what would the position sizing look like for the In-stock strategy, to which IT Jegan noted, “It’s a simple calculation.” He went on to explain that if the total number of stock options contracts sold is X and the total number of Banknifty option contracts bought is Y, then Y should be greater than X. So the index options contracts bought should be more than the stock option contracts sold. This would work rather well if the market is moving violently.
“It is somewhat a Back Spread strategy,” Jegan observed. “Someone might go the route of buying stock options, and selling index options, but generally, the volatility is higher in stocks than indexes. So, I started selling stocks and buying indexes,” he further noted. To keep a check on the movement of the stock involved in the In-stock strategy, he puts a stop-loss. “Until it moves in the 1 standard deviation range, it will not hurt you. Beyond that you have to put a stop loss,” he explained.
Encounter with Reality – the Year of 2023
In his publicly available profit & loss data, we observed that the 2020-2022 period was profitable and peaceful for him. However, things changed in 2023. While the first 4 months gave him good returns of 12%, things changed in the middle of the year when a big drawdown started in May. May was a disaster with a 7% loss. June and July were negative as well. And all this happened to him while employing the rather safe 920 straddle. This was a trend that several of the AlgoTest users also experienced.
“For that, you need to properly understand the 920 straddle or any general straddle,” he said when asked about his explanation of this rough phase in the middle of 2023. He went on to explain the 2 categories in which he divides the 920 straddle into:
- 920 with a smaller stop loss – Which focuses on capturing the delta, that generally gives a profit whenever the market is trending. This can be called the trend-following strategy.
- 920 with a bigger stop loss – Which focuses on capturing the theta. This can be called the theta strategy.
As per his theory, the premiums were quite high right from the period of 2008, all the way till 2022, and the volatility was also very high in the 2020-2022 period. In such a market regime, where the volatility and ATR are high, the trend will also be high, and a strategy with a lower stop loss will work better. This is what happened in the phase 2020-2022, where the 1st category of 920 straddle – the one with a smaller stop loss- worked quite well.
Even the 920 straddle with a bigger stop loss did well in this period because owing to the volatility, the premium is big enough to give a profit when the stop loss is hit. “High volatility is always good for theta and delta,” he remarked, before going on to conclude that when the volatility is high, like the period of 2020-2022, both the categories of 920 straddle are going to make attractive profits. Now since 2022, the volatility started to go down. Thus, reducing the chances of making high profits, irrespective of the choice of strategy.
The second reason he gave for this fall in profits, was the increased awareness about selling the option strategies.
“In 2015, even I used to think that only the people driving BMWs and Benz can sell options. But with the increased knowledge and accessibility, now everyone knows how to sell option contracts. This has changed the demand-supply ratio as compared to earlier, resulting in reduced premiums, causing reduced margins of profit.”
It Jegan
He observed that close to 20% of the premium has come down due to the liquidity in option selling. This is purely a result of supply and demand.
How can Option Sellers Navigate the Current Low-Premium, Low-volatility Market Regime?
It’s a matter of fact that a higher ATR (Average True Range) results in a higher premium, and thus in higher profits. In the current scenario of low ATR and low premium, profits will be hard to come by. As per IT Jegan, in such a market regime, people will have to adjust their approach to backtesting and verifying their strategies. A vanilla backtest on the past 5-year data won’t help in the current scenario. This is because, as discussed before, the volatility and premiums were unrealistically high in the 2020-2022 period. At times, these premiums reached as high as 3% or 5% of the underlying. So, to avoid getting fooled by this uneven data, the backtesting should be done in the current volatility range. One way to achieve this is by applying the Vix filter to your backtest result. For example, in the current market scenario, putting a Vix filter in the range of 10-15, on your backtest results, would give you a better idea of your strategy’s performance.
He further states that since 2022, the market is trending mostly in the 1st hour, i.e., before 10 AM. and post that the market is not making a big move in general. This allows us to divide each day into the 2 categories of 920 straddle, as discussed before. One with a smaller stop loss that profits from a trend, and the other with a bigger stop loss that profits from the theta.
So, based on his backtesting conclusions, before 10 AM, a 920 straddle with a smaller stop loss would earn more profits, and post that, the 920 straddle with a bigger stop loss would work better. However, he also warned that applying the smaller stop losses may give you drawdowns as well, and profits will come by only when there is a trend in the intraday.
As a summary, in this low volatility period, the strategies adopted can be divided into 2 – one that focuses on that morning trend, and the other that is non-directional and focuses on the theta after 10 AM.
Focus on the Drawdown
IT Jegan states that one of his major learnings in this period of low volatility since 2023, has been to focus on the intraday drawdown and not the end-of-the-day drawdown. He has learned to not focus on making huge profits and to focus on how high the drawdowns may go during the day. This is called System Drawdown. He gives a loose example that if the drawdown reaches a high of ₹1,00,000 during the day, but comes down to ₹10,000 at the end of the day, the focus should be on the high of the ₹1,00,000 that was hit.
Managing the Psychology through the Losses
“So far I have made so much money in the market, so it didn’t bother me much,” he said cheekily. “However, it can hurt the retail trader,” Jegan observed. “It did confuse me though, that why are my profits down, and why are my portfolio stop losses getting hit multiple times,” he added further.
He then went on to explain that after realizing the shift in the market, he went into research mode, and came out with strategies that were optimized to make minimum intraday losses, rather than focussing on daily, weekly, or monthly losses. What he also did was reduce the position sizing, as a high position sizing can give higher profits, but also higher losses.
DTE Zero Trading – the New Reality
NSE announced a change in the expiry days of the different indexes, resulting in daily expiry. On being questioned whether this presents an opportunity or a risk, Jegan stated that there are 2 understandings of it – theoretical and result-based. Based on the results, people have felt that it has been quite difficult to make profits under the current setup of daily expiry. However, Jegan feels that the profits have been hard to come by not because of the daily expiry of derivatives, but due to the low volatility period we are in.
He then explains his theoretical understanding. “5 days, 5 expiries is good.” He elaborates on his opinion and explains that historically, the data speaks that expiry trading gives a better edge. So DTE zero trading ( i.e. Days To Expiry = 0 trading) will come out well over time. He further states that trading on other days is anyway not going to give any added advantage. So, it’s better to stick to DTE 0 trading.
“The slippages I am getting are quite high since the last few months,” he observed. As per him, this might be the result of the daily expiry trading, where stop losses are being hit in bulk. He also stated that the high position sizing he used to have in 2020-2022 is not a reality anymore.
“Buying strategies I have backtested. They don’t give profits if you hold them till the end of the day. They are profitable if you can capture the momentum,” he stated. However, since his expertise does not lie in capturing the momentum, he stays away from the buying strategies.
Conclusion
Through the course of the conversation, IT Jegan took us through his entire journey in the trading market. He shed light on how it all started, the switch to intraday trading, the initial burst of profit, the highs of the 2020-2022 period, the great drawdown of 2023 and how he adjusted to it, and managing emotion, expectations, and psychology while trading.
It was a conversation filled with pearls of wisdom and insight, that should surely benefit the readers. We will be back with more thought-provoking conversations. Till then, happy trading!
