A short strangle is an options trading strategy where an investor sells both a call option and a put option with different strike prices, but with the same expiration date. The strike prices are typically out-of-the-money, meaning they are not close to the current market price of the underlying asset.
The strategy profits when the underlying asset’s price remains within a specific range until expiration. The goal is to generate income from the premiums received for selling both options. However, it comes with the risk of unlimited losses if the underlying asset’s price moves significantly beyond the chosen strike prices.
Now here comes the strategy:
Instrument: Bank Nifty next week options on expiry day
Entry: on Wednesday every week that is the expiry day. Entry can be at any time during the day, but it would be preferable to enter after 10.00am and before 1.00pm.
Strike Price: 1000 points away from the current spot price. For PE it will be current spot minus 1000 points and for the CE it will be current spot plus 1000 points.
Exit: on the day of expiry at 10.00 in the morning.
Adjustments: if premium for any of the option leg is more than two times the sell price then exit both legs and create a new short strangle on the same terms. For PE it will be current spot minus 1000 points and for the CE it will be current spot plus 1000 points. I check the prices at 09.45 am once and at 15.00pm once. I dont look at the prices in between.
This strategy has given me a return of Rs. 54416, i.e.,36% on a capital of Rs.150000 with one lot for the year 2023. Brokerage and slippages are not accounted for. Backtesting was carried out using the Opstra platform. I am doing the backtest for the previous years.
Points to remember: There is no hedge. There is a possibility of large losses if any black swan even happens overnight. But I found that the maximum loss has been Rs.6800 in one week during this period. There were 52 weeks in this year and out of that 12 weeks were in loss. In the remaining 11 weeks the loss was less than Rs.6800.