We know that market trends only 30% of the time and remaining 70% of the time it stays in range bound, which immensely helps the option sellers because the more market stays in range bound, higher the decay of premiums.
The above chart is the daily return distribution of Index, we could see more number of times Nifty and Bank NIFTY moved between -0.30% to 0.30% on daily basis, only lesser number of days it has moved wildly on either side, if we follow ATM short straddle strategy, with a fixed stop loss, then we can control our risk when market moves wild and also we can continue to make profits when market stays in range bound.
We used stockmock platform to test this ATM Short straddle strategy
We short one lot of ATM options at 9:20 am every day with 25% stop loss on each leg,we will choose weekly expiry not monthly expiry as the decay is more with weekly options.
For example, if we short ATM CE options at Rs.100, then our stop loss is 125, when that is reached we exit ce, if not we exit by EOD only. Please note that we exit only the strike that hits the stop loss, not both legs. Here’s the gross result
When tested with one lot, the returns are really good.
It has ended up in profits almost every month
We tested the same with Nifty as well with same rules. We short one lot of ATM options at 9:20 am every day with 25% stop loss on each leg, For example, if we short ATM CE options at Rs.100, then our stop loss is 125, when that is reached we exit ce, if not we exit by EOD only. Please note that we exit only the strike that hits the stop loss, not both legs. Here’s the gross result
Returns are really good with Nifty options as well
On monthly basis returns are consistent as well
At Squareoff.in we introduced bots for the above strategy with Nifty and Bank Nifty . Users just have to login to https://squareoffbots.com/aliceblue/login bots page every day and update their lot size, our bot will automatically place entry and respective stop loss for you. The important element in trading short straddles are, you need to short both call and put options at the same time, with our automated bot, this is made easy now, and with stop loss already into the system, we don’t need to worry about any adverse movements in markets as we are completely protected against down side risk.
The Bank Nifty straddle bot has made 80% returns in last 6 months (as on April 7th 2021), however last two months were rough, due to market volatality back to back stop loss was hit and the strategy was in drawdown phase, but eventually it recoeved from drawdown and made new equity high today. That’s why we always say be disciplined and stick to the trading bot for longer period, users who see streaks of losses would stop trading the bot thinking it stopped working, and users who traded with over leverage would have blown up their capital during drawdown phase. But all bot users who traded with correct leverage(at least 2 lacs per lot) was able to sail through drawdown phase easily. Here’s the live pnl report