This is by far the most popular Option Shorting strategy for Intraday traders as well as positional traders. The strategy will be successful based on the following conditions:
- Volatility is moderate
- Market is expected to be in range, neither much uptrend nor much downtrand is expected.
- In case of any one side move, there is a probable loss.
As my main focus in on intraday, hence I would prefer to explain the benefits and plans you have to do while designing Short Straddle for Intraday trade.
- Short Straddle shall not be much profitable when premium erosion is expected to be low, specially during the beginning of a week (i.e. Fridays and Mondays) considering we are trading on weekly options.
- Our target shall be on Banknifty option short Straddle design, where volume of trade is high and probability of slippage is low.
- What can go wrong when market starts moving either direction. As we are planning to discuss short Straddle for Intraday trade, hence in sharp movement towards either side can incur loss.
- Short Straddle is profitable during expiry day as the premium erosion is maximum on the weekly expiry i.e. on every Thursday for Indian market.
Approach: In Short Straddle, we short both Call and Put ATM options. As we are shorting we shall get the premium credit immediately. However the margin requirement is higher for Short Straddle compare to Long Straddle. Though we are shorting Both Call and Put option mitigating the risk up to a certain extent, moreover we are discussing about Intraday Straddle, hence risk is minimum.
While placing Straddle we shall try to choose premium price of Call and Put almost similar, if there is a huge difference of premium price of Call and Put then the strategy might not be in our favor. Let us see how does this work.
Today Banknifty is trading at Rs. 31,975/-on 7th January 2021. Below is the OI data, based on which we shall do our analysis.
Suppose Banknifty Spot price is 32020. We have shorted ATM Call of strike price 32000 at Rs. 105 premium and ATM Put of strike price 32000 at Rs. 111 premium. Our combined credit received Rs. 105+111 = Rs. 216
Scenario 1: If Banknifty closes at 32000, then both the premiums will become worthless, and we can earn total 216 points.
Scenario 2: Banknifty closed above 32000, at 32100. Then Put Option will expire worthless, with a gain of 111 points, but Call option will end up with 100 points, as our strike price was 32000 and Banknifty closed at 320100, so 100 will be the intrinsic value. So our earning for the call option will be 105-100 = 5. Hence combining Call and Put we could earn 111+5 = 116 points.
Scenario 3: If Banknifty closes below 32000 at 31900. Then Put Strikeprice 32000 option will become in the money with an intrinsic value of Rs 100 (i.e. 32000 – 31900). Hence the earning from Put option will be 111-100 = 11. But Call option of 32000 will expire worthless, hence we get the entire premium of the call option. Combining both our total gain is 105+11 = 116
Scenario 4: Banknifty closed above 32000, at 32300. Then Put Option will expire worthless, with a gain of 111 points, but Call option will end up with 300 points, as our strike price was 32000 and Banknifty closed at 32300, so 300 will be the intrinsic value. So our earning for the call option will be 105-300 = -195. Hence combining Call and Put we could earn 111-195 = -84 points.
Scenario 5: If Banknifty closes below 32000 at 31400. Then Put Strikeprice 32000 option will become in the money with an intrinsic value of Rs 100 (i.e. 32000 – 31400). Hence the earning from Put option will be 111-400 = -300. But Call option of 32000 will expire worthless, hence we get the entire premium of the call option. Combining both our total gain is 105-300 = -195
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