Smart SAR Short Options Bearish

Strategy Type: Intraday
Direction: Bearish
Instruments: Index Options Selling

You can define your own instrument, apply filters, decide the investment amount or quantity, and customise it as per your preference.

D-SMART is a proprietary trend-following indicator developed by Definedge. Unlike conventional indicators that rely on a single study, D-SMART synthesises multiple analytical dimensions into a single adaptive signal. It accounts for trend direction, trend strength, volatility, range-bound conditions, breakouts, and both temporary and major reversals.

A distinguishing feature of D-SMART is its adaptability: the indicator dynamically adjusts its slope based on prevailing market conditions and incorporates the underlying chart construction method into its formula. This makes it one of the few indicators that is fundamentally different across charting methods—behaving distinctly on candlestick, Renko, and Point & Figure charts.

PNF Charts and Signal Generation

Point & Figure (PNF) charts filter out minor price fluctuations and focus exclusively on significant price movements. For this strategy, we use a PNF chart with the following configuration:

• Timeframe: 1-minute
• Box Size: 0.05% (percentage-based)
• Reversal: 3-box reversal
• Price Type: Close Only
• D-SMART Period: 6

The trading signals are straightforward:

• Bullish Signal: The underlying closes above the D-SMART line, indicating an uptrend.
• Bearish Signal: The underlying closes below the D-SMART line, indicating a downtrend.

The Stop-and-Reverse Methodology

Stop-and-Reverse (SAR) is a continuous trend-following methodology in which the trader is always positioned in the market—either bullish or bearish—and reverses direction whenever the trend signal flips. There is no stop-loss in the traditional sense; instead, the exit from one position simultaneously triggers the entry into the opposite position.

Applied to D-SMART:

1. When the underlying crosses above the D-SMART line, enter a bullish options strategy and exit any bearish position.
2. When the underlying crosses below the D-SMART line, enter a bearish options strategy and exit any bullish position.
3. Repeat continuously, alternating between bullish and bearish strategies as the signal dictates.

Optimal Strategy Combination

Multiple combinations of bullish strategies (long call, short put, bull call spread) and bearish strategies (long put, short call, bear put spread) were backtested. The combination that yielded the highest profitability was:

D-SMART Signal	Options Strategy
Bullish (Above D-SMART)	Short ATM Put
Bearish (Below D-SMART)	Short ATM Call

Key Insight The use of short options (puts and calls) rather than long options capitalises on theta decay while following the trend direction—combining the benefits of trend-following with premium collection.

You can backtest this strategy on Optest and Algostra.

As with any backtested strategy, these results are historical and subject to market regime changes. Forward testing is recommended before live deployment.

Execution via Algostra

This strategy is executed on Algostra using the Options Strategies – Underlying Based module (2nd option). Because Algostra requires separate strategy instances for each signal direction, the SAR logic is implemented as two complementary strategies.

Strategy A: Bullish D-SMART (Above Line)

Entry Conditions

Parameter	Setting
Scrip	NIFTY-I
Action	Short
Strategy Type	Positional
Signal	Running
Chart Type	Point & Figure
Entry Condition	Above D-Smart Line (6-period)
Timeframe	1 min
Box Size	0.05%
Reversal	3-box Reversal
Price Type	Close Only
Options	ATM Put
Expiry Type	First Monthly

Exit Conditions

Parameter	Setting
Exit Condition	Below D-Smart Line (6-period)
Stop-Loss	Nil
Target	Nil
Trailing Stop-Loss	Nil
Filters	None

Strategy B: Bearish D-SMART (Below Line)

Entry Conditions

Parameter	Setting
Scrip	NIFTY-I
Action	Short
Strategy Type	Positional
Signal	Running
Chart Type	Point & Figure
Entry Condition	Below D-Smart Line (6-period)
Timeframe	1 min
Box Size	0.05%
Reversal	3-box Reversal
Price Type	Close Only
Options	ATM Call
Expiry Type	First Monthly

Exit Conditions

Parameter	Setting
Exit Condition	Above D-Smart Line (6-period)
Stop-Loss	Nil
Target	Nil
Trailing Stop-Loss	Nil
Filters	None

Conclusion

Both strategies presented in this guide share a common philosophy: combine a well-understood edge with disciplined risk management and systematic execution. The Modified TBS exploits intraday theta decay in a filtered volatility environment, while the D-SMART SAR strategy captures directional trends with continuous market exposure.

Key takeaways:

• Structure matters: Both strategies outperform their naïve versions through targeted modifications—delayed entry, volatility filtering, optimised strategy combinations.
• Backtesting is essential: Use platforms like OPTEST to validate assumptions before committing capital.
• Execution must be systematic: Algostra enables rule-based deployment that removes emotional decision-making from the trading process.
• Risk management is non-negotiable: Whether through stop-losses (TBS) or continuous reversal (SAR), every strategy must have a defined mechanism for managing adverse scenarios.

Filters

You can further enhance the strategy by adding filters: additional rules, indicators, or pattern-based conditions.

One effective approach is to incorporate a higher timeframe trend filter, such as the daily trend of the stock.

You can also apply intraday-specific filters to improve trade quality.

With the right filters, you can further refine and personalise it to suit your trading style.

You can modify it, test it, and deploy it on the Algostra.