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
- Buy Put option — (Option Buyer)
- Sell Call option- (Option Seller)
There are only three possible outcomes, market can
- Move up
- Move down
- 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.
If you liked this article, please do share share it (Whatsapp, Twitter) with other Traders/Investors.
When we have exit,
On expiry day 3.10 Pm ??
yes right
What about overnight black swan effect. Stop loss only we can provide intraday right.
over night black swan events if its gap up beyond your stop loss level, then you need to exit at open price
Go for Next Week calender Hedge
This is where one will make money for many months and then in just a couple of trades give it all back since the opening next day is 10x or 12x what you sold it for initially. Been there and been burnt. Slightly shocking that it will be recommended as a strategy in these volatile times. Simple principle stops for option selling are only effective for intraday. For overnight only hedging works!
In last 13 years, the biggest gap ups and gap downs has happened between 2018 to 2020, and this strategy was tetsed during the same phase, all such scenarios are considered, where you short at 100 and exit at 1300, inspite of all such gaps, this strategy has given positive returns.
please suggest alternate strategy to make weekly profits
Let’s say you sold Call and Put at 500 each. Next day morning there is big crash of 1000 points. What will happen ? Options move only 50% of underlying move. So, your put will go up by 500 points (not 1000 points). So, you will lose 500 points on Put but gain 500 points on call. your net loss is zero even after great overnight fall.
Such scnearios are already considered in back test, in face you lose more when market crash, since IV goes up and the put option you sold for 500 will be trading at much higher price next day and call you option you sold wont decay much due to rise in VIX. Inspite of all such scenarios, over long run this system ends up in profits
how about simple shorting of OTM strangle (3.5 % on either side). please, enlighten on this,please
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
We use stockmock platform to backtest, you can use the same.
key here is when you have taken the trade as well as your stop loss. so, read the article again and again.
Hi
If I sell CE for 300rs & PE for 350rs, then stop loss for CE would be 600rs & 700rs for PE. Is it correct.
That’s right
what if it hits both SLs
just need to exit when sl hits, that’s all
Could have been better if it is updated till March-2021 before posting message in T-Channel
Dear Kiru,
Kindly let me know Max DD and Return to MDD Ratio.
Hi, you can caclulate the same based on the BT results posted above
Sir, we have an option to not execute this strategy when conditions are unfavorable. Like in case of short strangle, it might be NF/BNF breaking a range with IV 20+. So what would be the unfavorable condition in case of this short straddle strategy? Kindly let us know.
Yes, you can avoid placing the input to bots whenever you do not want to trade.
Are square off strategies also linked to a broker where we can directly take the trades?
Can you kindly elaborate on the stop loss stuff.
100℅ of premium received means?
If I get 100 for pe and 100 for ce then stop loss will be 200 or 100?
Stop loss will be 200 on each
This seems very simple and easy, then why don’t you implement a bot for this? Instead of intraday straddle with risk of stop loss hunting and paying brokerages on every day.
Development already in progress, should be implemented soon
During low vix time this is really tough to adjust Trade
Looking good as compare to daily intra short straddle, thanks for such LOGICs.