1% Short Straddle Option Selling Strategy

This strategy is designed specifically to make profits out of range bound days. Usually when trading a straddle strategy with a fixed stop loss, due to morning volatility/whipsaws the stop loss gets hit easily. If we dont use a stop loss then on trending days we lose bigger. So there should be a optimal way not to keep stop loss in the system, also there should be a way to exit earlier on trending days and cap the risk. So we came up with this 1% Short straddle strategy.

The rules of the game is simple. Find whats the Bank Nifty spot price at 9:30 am and short ATM CE & PE. Do not use any fixed stop loss. Instead follow Bank Nifty index values, if Bank Nifty moves +1% or -1% from 9:30 AM, then we simply exit our short straddle position. By not keeping a fixed stop loss into the markets, any sudden whipsaws will not hit our stop loss that will save us most of the time in the volatile markets. Consider Bank Nifty spot trades at 35000 levels at 9:30 am, so we short 35000 Call option and 35000 put option. We will exit both the legs when Bank Nifty moves +1%, that is 1% of 35000, which is 350 points, so if Bank Nifty moves above 35350 or if it moves below 34650 (35000–350) we will exit both Call and put options, if not exit by EOD. As long as bank nifty trades between -1% to +1%, we will end up in profits.

Basically we take the open, high, low and close values of Bank Nifty spot. The opening values we consider is value as of 9:30 AM. Then instead of doing range analysis like High — Low, we did a volatility analysis by calculating Open to Low, that is from 9:30 am how much percentage Bank Nifty went down. Similarly did Open to High analysis, that shows how much percentage Bank Nifty went up from 9:30 am.

This normal distribution chart shows Bank Nifty has stayed between -1% to +1% most of the times. It reemphasize the fact that Index trades in tight range most of the days and starts trending only few days. As long as we are able to control risk on trending days, we can make profit on range bound days with this 1% Short straddle strategy.

Similarly Open to High analysis also shows similar results, where Bank Nifty index stayed in -1% to +1% range most of the days. Only on fewer instances it went below -1% and above +1% on some days. But data suggest maximum no of days, it stayed in a tight range.

So if we have to find out what are the days our position ended up in loss, we simply have to find how many days Open to Low or Open to High has gone beyond 1%. Those were the days SL hit. From 2017 to 2021, more 55% of the time stop loss was not hit. So it denotes across all days, more than 50% of the time markets trades in tight range.