Algo Trading in India |
  • June 7, 2020
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Here’s the option selling positional trading strategy which doesn’t require any adjustments at all. Just one trade every expiry, so on an average it triggers only 4 or 5 trades a month with high accuracy.

Market trends only 30% of the time, remaining 70% of the time it stays in range bound. This is the normal distribution chart of daily returns of the index, that clearly shows most number of times, the returns were between -0.3% to +0.3% which denotes market stays range bound mostly.

As an option seller, this is a statistical advantage one has, but usually what happens in 70% of the time option sellers make money, and end up losing all during the remaining 30% of the time those who don’t have proper risk management, when market trends big time.

Traders who lack risk management, blow up their account when market trends, and traders who have large capital, they keep pumping in more money and fire fight against the markets and try to adjust their option selling positions to control the loss.

Consider you have a bearish view on markets, so we have two options

  1. Buy Put option — (Option Buyer)
  2. Sell Call option- (Option Seller)

There are only three possible outcomes, market can

  1. Move up
  2. Move down
  3. Stay in sideways

When market moves up, both buyer and seller of options lose money, since their direction is wrong. When market moves down, both buyer of put option makes money and seller of call option makes money. But when market neither moves up nor moves down, the buyer of put option will lose money due to premium decay, where as seller of call option can make money.

Two out of three scenarios favors an option seller, where if one controls risk, he can make consistent returns. Let me explain an option selling strategy with defined risk

Short Straddle: (with Stop loss)

Bank Nifty:

Enter ATM short straddles two days before expiry at 9:30 AM (enter on Tuesdays) with weekly expiry and exit on 15:10 on expiry day. With 100% stop loss on premium paid, we keep such wide stop loss to give room to markets for more fluctuation against us.

It has given consistent profits over the last 2 years, with over all profits of more than 2.5 lacs with 61% winning accuracy. Even in the year like 2020, with such extreme volatility in markets, it ended up with more than 68000 Rs. profits so far and in the months like March/April 2020, it ended up in profits when markets tanked.

Out of 30 months, it has given negative returns only 5 times so far.

As you can see, on monthly basis, most of the time is has ended up in profits, even when loss occurred it is very minimal.

Nifty:

We tried applying the same strategy in Nifty as well, from the date weekly options is introduced in Nifty to till date.

It has given accuracy of almost 60% with over all profits of around Rs.1.2 lacs for last 1 year where only 4 months it ended up in negative zone. Month on month it ended up in consistent profits. It even ended up in profits during the highly volatile month like March and April 2020.

I have used StockMock platform to test both the strategies, as i mentioned earlier, we really don’t need complex systems to make money in markets, keep it as always simple, it does wonders if one follows proper risk management. And you really don’t need any adjustments at all, if you have proper quantified Trading systems. The above data is the proof for that.

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9 comments on “Option Trading Strategy without adjustments

  1. what is ATM short straddles means ? lets say if nifty price is 15335 then we need to short 15350 PE and 15350 CE.i have backtested it in the past some months, like in march 2020.But figure of profit are different in my backtesting.i can’t see the profit in majority of months.on your site it shows profit in majority of month but in my backtesting i can’t find the same.please reply

  2. If I sell CE for 300rs & PE for 350rs, then stop loss for CE would be 600rs & 700rs for PE. Is it correct.

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