I have been doing intraday option selling (straddles and strangles) for around a year now and I manage my risk by placing stop loss limit orders. I also buy hedges (around 2000 points away for BankNifty since they are fairly cheap on Expiry day) but that is primarily for getting margin benefit. I risk around 2% of my capital per trade.
In case of a black swan event however, if the market quickly hits upper/lower circuit and my stop loss orders remain in ‘OPEN’ state, I risk losing 50% of my capital which is a huge risk.
How do intraday option sellers manage risk considering the worst case scenario? Moving the hedges closer reduces the worst case risk but also eats away the profits. Is this the only available option or are there other alternatives?
Clarifying: Your trade is completely hedged, right? So you are saying if a 5% move happens, you hit a max loss. And in that case the hedges are active. And in this scenario do you lose 50% of the capital?
That is correct.
To add more details, it takes around Rs. 60,000 to initiate a strangle with 1 lot for BankNifty (with 2000 pts away hedges). In case of a 5% move the loss would be Rs, 30,000 (= 2000 * 15) [minus the premiums received].