BANKNIFTY Option Selling Strategy (Backtested)

Most traders make this mistake with straddles

Most traders short a straddle expecting the market to be rangebound. As soon as the market starts giving some directional movement, say a 200-point up move, their stop loss is hit. They close the position and short a new straddle again, not expecting the market to rally further. But again, a stop loss is hit and a new straddle is shorted.

Imagine the losses that are accumulated if there’s a larger movement in the market, but the straddles keep rolling.

There’s a way this strategy can be managed to generate good profits though. It just needs a few tweaks…

A backtested options selling strategy

The Rolling Short Straddle Strategy is an options selling strategy that solves the above problem.

This strategy involves selling a short straddle using ATM calls & puts on BANKNIFTY while setting the stop loss 200 points above and below the strike. If the stop loss is hit, one is allowed to re-enter the trade only thrice a day between 9:20 AM and 3:20 PM.

Here’s how it’s more effective than a simple short straddle:

1) The strategy is applied only to Bank Nifty since the premiums are much higher compared to those of other index options. Narrowing the number of instruments eliminates the problem of selecting the right instrument.

2) This strategy limits the number of trades you should take in a day. This helps avoid steep losses and aids capital protection.

3) It is suggested to use this strategy on expiry days. Trading only on expiry days vs. all five days of the week has proven to improve performance significantly, as is evident from the backtested results ⏬

You can see how small tweaks to a simple short straddle strategy can have such a massive impact on returns 🤩

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