A Low-Volatility Overnight Gap Strategy for Indian Equities

Summary

This project describes a long-only strategy that seeks to capture overnight price gaps in Indian equities. It enters at the close after a session with a larger true range than the previous session, a positive close-to-open move, and a daily change within a two percent band. It exits at the next session’s open. A filter based on the Nifty’s average true range keeps the strategy out of periods deemed highly volatile, while the author favors stocks with low volatility relative to price.

A backtest on ten stocks over 2014–2024 reports portfolio annualized returns of about 24.9%, annual volatility of about 4.1%, and maximum drawdown of about 2.4%. The article attributes the strategy’s appeal to relatively stable portfolio returns and reports a Sharpe ratio above five. These are theoretical historical results: transaction costs are excluded, and reliably capturing the next opening price in live trading is a challenge. The document also notes that its conclusions depend on market conditions and stock selection, so the reported performance may not carry over to live execution.

Key ideas

• The strategy enters long at the close when the day’s true range grows and the close is positive.
• It exits at the following session’s open to capture the overnight gap.
• A daily move limit and a Nifty volatility filter are intended to avoid extreme market conditions.
• The reported backtest favors a portfolio of relatively low-volatility Indian stocks.
• Transaction costs and live access to opening prices may materially change the results.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.