Option Trading Strategy without adjustments

  • Jun-07-2020

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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  • profile
    Ashok Bhosle
      3 weeks ago

    Nice idea. Only problem is huge gap up or gap down.

    Reply 0 comments
  • profile
    M Jain
      4 weeks ago

    also the comment should have been option premium received right not paid ? 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.

    Reply 0 comments
  • profile
    M Jain
      4 weeks ago

    Insightful strategy Kiru ! Wanted to ask your advice what can we done in case of gap up/down ?

    Reply 0 comments
  • profile
    Prasun Majumder
      4 weeks ago

    This methodology is 100% wrong

    Reply 0 comments
  • profile
    Bosu Babu
      1 month ago

    How to copy to my mail

    Reply 0 comments
  • profile
    Vijaya
      1 month ago

    Sat we sold @100 it entvto 250 and came back to 10. Did u consider it as SL ?

    Reply 0 comments
  • profile
    The Known India
      1 month ago

    Very loosely written.. where is hedge? Can you get out of a sold position with SL equal to premium paid? By the time SL will be triggered and order is placed, both side premium would be gone.. hedge it with monthly option of same strike where time decay will be lesser and your probability of profit will rise because you are hedged.

    Reply 2 comments
    • profile
      Square Off
        1 month ago

      This is plain simple rules given to start with positional trading strategy for options, you can include your own rules and make it more robust,

    • profile
        1 month ago

      A valid point and only solution to above strategy, I feel. As risk reward ratio is good, I think we can try without hedge also

  • profile
    Sujal Ajmera
      1 month ago

    How is the SL equal to premuim paid if we are shorting options?

    Reply 3 comments
    • profile
      Square Off
        1 month ago

      Say, you enter at Rs.100 in call option, Rs.150 in put option, then stop loss for call option is Rs.200 and stop loss for put option is Rs.300

    • profile
        1 month ago

      Because in short, ur premium increases, so if u short at 100 then SL will be 200

    • profile
        1 month ago

      If combined premium received is 100 for the straddle, if the premium goes to 200. Exit

  • profile
    Ratnesh Singh
      1 month ago

    Please check nifty options backtest. It banknifty atm call.

    Reply 1 comments
    • profile
      Square Off
        1 month ago

      Its corrected now, thanks

  • profile
    murali
      1 month ago

    sir we can use hedge with monthly buy call and put? Because overnight position, please advice

    Reply 1 comments
    • profile
      Square Off
        1 month ago

      Yes, you can backtest with monthly options and see if its profitable, and then you can use that

  • profile
    Ramanan Gurumurthy
      1 month ago

    In the second example you used Nifty in one leg and BN in another. How can that work out??

    Reply 2 comments
    • profile
      Square Off
        1 month ago

      Its corrected, thanks

    • profile
        1 month ago

      Great observation...

  • profile
    prem oberoi
      1 month ago

    How will you hedge your overnight risk? Can you post a payoff chart? Thanks.

    Reply 1 comments
    • profile
      Square Off
        1 month ago

      We are not hedging with other leg of options, instead we use stop loss, when that is hit, we exit, if market gaps up or gaps down and move above our stop loss, we exit at open itself

  • profile
    Ram
      1 month ago

    Wonderful article can sir use this strategy for boots?

    Reply 0 comments
  • profile
    Nilesh Parab
      1 month ago

    Excellent work by THE Mr. Kirubakaran Rajendran

    Reply 0 comments
  • profile
    LAKSHYA TAMBI
      1 month ago

    What is the SL in this strategy...???

    Reply 1 comments
    • profile
      Square Off
        1 month ago

      Stop loss is 100% of your entry price.

  • profile
    Umesh Singh
      1 month ago

    Here the 100% premium stop loss in overnight changes might not work as stop losses are canceled after market close. Is this captured in the strategy?

    Reply 5 comments
    • profile
        1 month ago

      You are right.

    • profile
        1 month ago

      In Zerodha, GTT SL can be used

    • profile
      Square Off
        1 month ago

      Hi, stop loss always gets cancelled by end of the day. You need to place the same stop loss every day at 9:15 after market opens. As per the strategy, you enter on tuesday and place stop loss, and again wednesday, you place same stop loss and on thursday morning you place same stop loss.

    • profile
        1 month ago

      Same Question..

    • profile
        1 month ago

      True same doubt i also have when analyse in detail - But anyways to overcome that, one can consider OTM put or call buy considering total premium received to protect that week loss. Ultimately will make money. (lets track to build upon our own strategy ) Excellent work by THE Mr. Kirubakaran Rajendran


  • Tags | Option Trading Strategy without adjustments,Option Trading Strategy,how to adjust options position,how to adjust options trading in zerodha,options trading,positional option trading,positional option selling,option selling strategy