Lessons from the Past - Mastering the Short Straddle (9:20)

Options trading offers a world of opportunities, and strategies like the short straddle can be a game-changer—when used wisely. In this post, we dive into the Short Straddle (9:20) strategy for BANKNIFTY and NIFTY, sharing key insights from five years of backtesting data. From win rates to average profits, we’ll uncover the story behind this strategy and explore what made it work—and where it fell short.

What is a Short Straddle (9:20)?

Imagine trying to profit from market calm. A short straddle involves selling both a call option and a put option at-the-money (ATM), capturing premiums from both sides. If the market doesn’t move much, both options lose value, leading to profits.

The 9:20 a.m. entry refines this by targeting the morning's initial market action. By this time, opening volatility has subsided, providing an optimal moment to capture premiums and let time decay do the heavy lifting.

For this analysis, we tested the strategy on BANKNIFTY and NIFTY indices, two of the most traded instruments in the NSE options market. Each offers unique characteristics:

• BANKNIFTY: Known for higher volatility, leading to larger premiums but also higher risks.
• NIFTY: Relatively stable, offering a more predictable environment for straddles.

What Did the Data Reveal?

Let’s dive into the backtested results from the past five years. Here are the highlights:

Banknifty Year Wise Key Metrics

Nifty Year Wise Key Metrics

Trends Observed

It can be seen that win rate decreased substantially in 2023. This could be explained by low premium resulting from low VIX in 2023.

Insights for Today's Traders

• Volatility is the Key to Success: The profitability of the short straddle strategy hinges on market volatility. High premiums are essential for this strategy to thrive, and periods of elevated uncertainty—like elections, the COVID-19 pandemic, or other major events—often create ideal conditions. However, the inherent unlimited loss potential means that systematic execution with proper stop-loss measures is non-negotiable to prevent catastrophic losses.
• The Power of Expiry Day: Thursdays, the weekly expiry day, have historically been the most profitable during periods of high volatility due to faster premium decay. Interestingly, in low-volatility environments, Thursday performance lagged behind other trading days, making it less attractive.
• Fine-Tuning Risk Management: Using independent stop-losses for each leg (call and put) consistently outperformed strategies relying on a combined stop-loss. This nuanced approach ensures better risk control and reduces the likelihood of premature exits.

Conclusion: Has the Edge Faded?

While the Short Straddle (9:20) showed signs of weakening performance in 2023, it remains a viable strategy under the right market conditions. The lesson is clear: the strategy isn’t dead—it’s adaptable. By aligning with periods of high volatility and employing disciplined risk management, traders can continue to unlock its potential.

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