It will fetch you more than 60% annualized return which are much higher than any investing instrument.
5 min read · Nov 3, 2022
Let me briefly explain the short straddle first. We have to understand this before we dive into the actual strategy.
Short straddle consists of selling an ATM call and put at the same time. Most of the traders use it for positional trading. However, a majority of the traders use it for intraday trading too.
This strategycanbeappliedto anycountry’sindexoptions. Since I trade India’s Bank Nifty options, I have back tested results of this strategy for Bank Nifty only. So, let’s start.
The “9:20 AM” time in the strategy name is the execution time. India’s share market opens at 9:15 AM. So, just after 5 minutes, this strategy is executed. For other countries too, the execution time will be 5 minutes after the market starts.
In India, this strategy is called “920 Short Straddle”. So, for the rest of this article, we will call this strategy with the same name.
In this strategy, we sell an ATM call and put at 9:20 AM every day with certain stop losses which I will explain later. The exit time is 3:15 PM, 15 minutes before the market is closed. I know you have a question now. Why 9:20 AM? Right?
The simple answer is that we get very high premiums near around this time. This is because the market is very volatile in starting, and traders are not sure where the market would head during the day. So, due to uncertainty and volatility, the premiums become high. This is what we want as a seller. Right?
Now the most important part. We can’t just trade naked selling. We will lose if any large one-sided move occurs. To avoid this, we put 25% stop loss on both the call and put legs. The % stop loss can be any number between 25 to 35. The most preferred is 25%.
During large trending days, one leg is cut off early while other leg will keep adding into the profit. If the market remains in a range, both the legs will fetch into profitduetothetadecay.
After looking into the above figure, you will think that this strategy has 100% win rate then. Right? That is not the case. Although, the market is trending or range bound most of the time, it may have V, N or W shape movements too. In these three conditions, both the stop losses are hit, and we have to face losses. Now let’s see the back tested result of last six years.
Let’s check the statistics of the result first for 2017 to 2023. After statistics, we will look into the equity curve and monthly profit. The lot size is 15 these days. For 1 lot, the total capital deployed in this strategy will be near around 0.9 Lakhs in India Rupees.
The overall return is 510% in six years which means the capital would have become more than 5 times during these years. The assumption here is that the profit is not re-invested. Otherwise, the profit would have been much higher than is shown in the result.
The annualized return can be calculated as more than 70% in the last six years. This result includes 0.5% price slippages but does not include the brokerage. If we remove the brokerages, the annualized return will still be more than 50%. Can any index fund or mutual fund give this much of return?
The equity curve is smooth and up trending. The first five years have been fantastic. However, only during the last two years, it is flat. We will see the reason later.
If we see following monthly profit, we notice that this strategy has not performed well in the last two years.
In 2022, we are in negative. The reason is that the nature of the market has changed drastically after 2020. It had many V, N and W shape movements in 2022. As we saw above, these movements reduce the win rate and the average profit.
To minimize the effects of these irregular shape movements, I modified few parameters and tested the strategy again. The result was fantastic. You may read about this modified 920 strategy in the following article.
If you like the article, you can buy me a coffee 😀. You can follow me if you want to get notifications about more articles like this.
