In the realm of derivative trading, Short Straddles have emerged as a popular choice, renowned for their unique versatility. While they are often labeled as having limited returns and unlimited risks, a closer look reveals a different reality. The risks associated with Short Straddles are minimal for those who possess a deep understanding of risk-reward ratios and breakeven levels.
In a landscape where trading volumes in the options segment, particularly in indices, have seen a remarkable surge, the onset of the trading week witnesses premiums reaching astonishing heights. Weekly options, known for their time value decay or Theta erosion, offer a distinctive advantage. We seize this opportunity by employing these elevated premiums to construct a Straddle.
At the commencement of the trading week, the At the Money (ATM) Call and Put premiums collectively span a substantial range, typically ranging from Rs. 1100 to 1400 or higher in certain cases. This implies that, even in the face of a Banknifty move spanning a colossal 1100 to 1400 points in either direction, we remain poised for profitability.
Historically, data tells us that over 70% of the time, the Banknifty moves within a thousand-point range on a weekly basis. With the exception of exceedingly volatile market conditions, such as a post-budget surge or a “Sitaraman candle,” this historical range analysis becomes a pillar of our strategy. In the face of exceptional circumstances, we adapt our option strategy accordingly.
Reflecting on history, the market demonstrates a tendency to trend only about 30% of the time, leaving the remaining 70% characterized by sideways movement. Leveraging this historical insight, Short Straddles become an attractive proposition for profitable trading.
Our pièce de résistance lies in the ability to transform the Short Straddle into a Strangle at a later stage. By wisely exiting our profitable positions and hedging potential losses through the sale of another option, typically at the money (ATM), we ensure a prudent approach. While exiting a profitable position may seem counterintuitive, in this scenario, it is a strategic move. When the option premium dwindles into single digits, retaining the position is no longer advantageous. At this juncture, we exit our profitable position and establish a hedge by selling another ATM option.
So, my fellow traders, Short Straddles are the hidden gems of history, and when employed with precision, they become a formidable tool in our trading arsenal. Profit awaits within the annals of time, and our mastery in transitioning to a Strangle position, when opportune, safeguards our dominion in the dynamic world of options trading.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.