Simple Short Strangle Strategy for BankNifty Weekly Options for Regular Income. – Part 1

In the stock markets, it is all about remaining profitable in the long run. I have tried several strategies, in equity as well as F&O, that have given good returns initially but then turned sour.

However,  one strategy that I would always have in my repertoire, is the short strangle. Especially, after the National Stock Exchange(NSE) introducing weekly Banknifty options since last couple of years, it has become even more lucrative.

I will be explaining this strategy in 3 parts series, with this post being the the first.

Short Strangle basic construct is as follows :

Sell 1 OTM Call
Sell 1 OTM Put
Graph showing the expected profit or loss for the short strangle Banknifty Weekly option strategy on option expiration date.
Short Strangle Payoff

The payoff diagram above shows that the profit earned is limited while the loss is unlimited.

Hence, you have to be careful while executing this strategy, especially in banknifty as it can be very volatile moving more than 500 – 600 points in a single day. However, you can minimise the possibility of your trade ending in a loss by exercising caution and discipline. The odds of such a move in a day is very low, but it is advisable to be careful as even one such event can cause serious losses.

Also, this strategy requires significant capital for margin. As you are shorting options, you need to bring in lot of money as compared to option buyers as theoretically, loss is unlimited for writers. For my broker at current Banknifty levels of 25000 to 26000 it is around 72k to 75k per lot. So, for both sides it will be around 150,000 rupees.

You can read more about option shorting .

Now that you know the risks involved, here is the strategy. Make sure you understand it well and paper trade for at least 4 weekly expiries.

Basic strategy

  • Enter the trade on Friday(i.e before weekend holiday) before the market close i.e around 3.20 pm with 15 – 20 % as stop loss.
  • Check the Implied Volatility (IV) for BANKNIFTY options in the option chain section for the upcoming expiry on nseindia.com .
  • If the IVs are low (< 25-30)try selling strikes that are 400 to 600 points away from the underlying.
  • If the IVs are high(>30) sell strikes that are more than 700 points away.
  • My thumb rule is that, I would short strikes prices whose value is between 40 to 80 rupees.
  • Keep the position open till expiry and keep the premium as profit.
  • However if on any day, the difference between underlying and any strike price is less than 200 points, exit the position for that particular strike price. You can choose to exit the other position or keep it open.
  • Always, put stop loss at 20-30 % of the previous day close price on market open.( Many brokers provide After Market Orders to do this if you are unable to do it on market open). If the price has moved considerably in your favour, you can modify the SL during the day. Try to get the SL into the profit zone.

Strategy Variation (Risky)

  • You can enter into this trade for the next expiry on the last day of the current expiry. egs. if today’s is current week’s expiry, I’ll enter the position in next week’s expiry during the closing minutes for more premiums.
  • Anytime you are in profit zone with the premium having reduced significantly, you can choose to exit the current strangle’s open position and enter a new position in strike prices which has more value. However, be cautious while doing it. Selling too close to the underlying can be risky.
Short Strangle Returns
Projected returns

You can see from the above table that, though the profit seems less with the amount of margin you need to bring in for just 2 lots( 1 lot CE and 1 lot PE), even if you consider the minimum of 1000 Rupees profit it adds up to be a significant amount at end of the year, giving you returns much higher than Bank Fixed Deposits and even beats several mutual funds’ performances.

Using basic strategy, it is easy to achieve 2% weekly returns i.e. earn sum of 75 points of both sides (see third row in the table). On a good week, you can earn 100 points as well. However, to earn more than that you may have to use the strategy variation.

Remember:

The best part of this strategy is that you don’t need to have constant access to  trading platforms. Just  few minutes on Friday around closing and few minutes here and there on other days till expiry to manage stop loss is enough.

Always, have SLs in the system.

Avoid entering in position if there is any major news or policy decision expected after market hours or during weekends. If you enter into trade on friday, and there is a major policy decision expected say, on Tuesday around 2 PM. Make sure you exit all your position before that time on Tuesday. To be safe, exit on Monday itself, as market sometimes anticipates the decision and may make huge unidirectional movement on the day of the announcement.

All the figures given in this post are on the basis of Banknifty being in the range of 25000 to 26000. It would vary if the Banknifty moves away from this range.

You can use this for Nifty monthly expiry as well. Execute this strategy on the Friday before the expiry week.

I will give an live example in next part of the series. Stay tuned.

BankNifty Short Strangle Strategy – Part 2

BankNifty Short Strangle Strategy – Part 3