Algo Trading in India |
  • September 10, 2019
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Not sure about market direction? But you expect a big rally or big crash? Then Long Strangle(Buying OTM Call & Put options) is the secret strategy that would make profits. That’s what I thought when I started trading many years before. Also it doesn’t require high margin, so many retail traders get into such strategy expecting to make profit if market either rallies or crashes. But does this really make profit in the long run?

I have tested this strategy for last 10 years with NIFTY historical data.

Long Strangle will yield good returns only when there is high volatility in the markets. Usually people do Long Strangle with OTM options. Let’s a consider a 5% Nifty option strangle.

If Nifty is at 10,000 we buy 10500 call option and 9500 put option. If market moves beyond this range, we can make profit or else we end up losing all.

I have tested this strategy for last 12 years. Initiate Long strangle at the start of the expiry and exit at the end of the expiry. As you can see in the below chart, period like 2008 October Lehman collapse, Brexit, and few other period resulted in huge profits. But what about other days? Consistent losses!

P&L Nifty Points — Long Strangle

You eat great meals once in a while but for the rest of the days, you starve to death. That’s what long strangle is. In order to make that one big profit, you would be ended up losing consistently.

The total profits, sorry the total loss was -1500 Nifty points for the last 10 years. So you cannot just trade Nifty Long strangle, its not an edge. May be you can trade long strangle on specific event days and avoid trading on other days.

Yearly Profits (in Points)

Some people just sell naked options and continue to make consistent returns every month but the one trade that goes against them will not only wipe out their profits, it will create a big dent in their account. Short strangle is one such option selling strategy, at least you would have end up making 1500 points for 11 years, which is around 130 points per year, that is just 10% to 12% per year. But again, to make such small returns, imagine losing 40% to 50% of your capital in just one trade when the trade goes against you.

So doing Nifty Long strangle strategy every expiry is not a profitable method.

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2 comments on “Is long strangle strategy useful/safe in nifty option

    1. Only 1 trade in a month.

      We buy NIFTY CALL and wait with it till expiry day. Close the trade and move on to the next series on the same day.

      This strategy has much higher drawdowns when markets dont trend and has huge impact cost as it deals with buying deep in the money option which isn’t scalable beyond certain lots.

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