One of the widely popular option trading strategy is 920 short straddle strategy, but do you know more than 75% of its overall profits will come from trades when one sided stop loss gets hit. Since we are shorting both call and put option with minimal stop loss, once side we are coming out with a minimal loss and other side of the leg tends to decay as long as market moves in one sided direction. But if we can figure out with higher probability which side of the option leg is going to get hit with stop loss in advance, then we can make it as a directional option selling strategy by placing trades only on one leg with a fixed stop loss.
For example, consider Bank Nifty trades at 35000, as per the 920 short straddle strategy, we will short 35000 ce and 35000 pe. Consider market is bullish and started making up move and our 35000 ce stop loss is hit, so our put leg will continue to decay and make profits. But what if we could say that CE option has higher probability of hitting stop loss and hence don’t place CE order, place only PE order. Based on option data if we can figure this out in advance, then we can avoid placing the trades which is going to get hit with SL. Though we can’t be 100% sure, but still we went ahead and did a option data analysis with 920 straddle live results.
From Nov 2021 to April 2022, this is how 920 straddle with 25% fixed stop loss worked, for one lot it made around 17500 profits.
And the max drawdown during the same period was around Rs.20,000.
Now we analysed the last 6 months of option tick data and tried checking what’s the overall trend looks like by end of every day, we will conclude if the day end data shows if its bullish trend or bearish trend. Then next day around 9:20 am, we shall again check based on real time option data, how is the trend looks like, if the trend remain bullish, then we will only short ATM put option, if the trend looks bearish, then we will short only Call option. Thus instead of taking a short straddle trade, we will end up taking a directional trade with 25% stop loss.
And when we tested this condition and checked the results, the over all returns were three times higher than normal 920 straddle
Even the over all drawdown is lesser than the 920 short straddle drawdown during the same period
We have implemented this as a new trading bot to all our https://squareoffbots.com users. Its been running live since June 2022.
This can act as an uncorrelated system to our existing 920 BNF Straddle trading bots since it makes a directional trade.