Is Short strangle of deep OTM a good strategy for regular returns?

I have started the following strategy since 3 weeks and profitable

Strategy for Weekly expiry:
-> Short strangle of deep OTM ~8 to 10% from strike price on weekly expiry of Banknifty
-> Premium of CE and PE is ~Rs.20 respectively. Margin requirement ~1lac
-> When the premium increase on one side upto Rs.40, I made adjustments to new positions from the strike price
-> With adjustments, I didn’t bear loss at the end of the week, but earned little less premium

Strategy on expiry day (Intraday):
-> Out of 3 weeks, in the recent week, I traded Intraday by short selling deep OTM (900 points away from Strike price) at Rs.6 premium of 4 lots
-> I kept SL of Rs.10 premium, but it didn’t cross Rs. 7 also. So I bagged the entire premium
-> Margin for 4 lots is ~ 1lac

Returns:
-> If I follow both positional with short strangling deep OTM and intraday of shorting deep OTM, I am able to generate Rs. 1100 with investment of ~ 1.1lac. Which means, return of 1% per week
-> This turns into 48% per annum
-> Even if assume 0.5% per week due to adjustments 50% of the time per year, return will be 36% per annum
-> Where as banks offer meagre 5% on FD and even MFs might offer a max of 10% subject to market variations

Probability of strategy
-> My observations and timely adjustments ensures I am profitable 100% of the time. As explained above, adjustment offer cushion of not going into loss

Question:
-> I am planning to increase capital gradually to 2lac and 3lac to generate higher absolute returns
-> Is this sustainable in the longer run? I understand volatility like during Mar to May 2020 impacts this strategy very badly

Note: I am office goer (currently WFH) and wanted make use of my money efficiently to generate better returns. Intraday using price action and option buying is not suitable for me during to work and other mental pressures due to intraday. Hence I feel this is safe strategy

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Overconfidence

Even if u adjust, the pennies that u are collecting would be gone in one single consistent move against your position, and trust me this happens frequently. because simply put, you haven’t calculated what will happen after you do the adjustment and the underlying moves against your position, calculate this max loss, and you would realize the worth of your pennies u want to collect.

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I have done this well. Initially think it’s very easy , gradually know nothing is easy in stock market. Market surprised me and take all the profit made in a week . Go through some try and error method and doing now with some confident. Today sold nifty 10800pe 5 Nov at 8+ and it moved unexpectedly to 25+. The key to success of this strategy is
1.keep safe distance from spot price at least 600 to 800 points. From Tuesday I sold next week option because current week option premium become very low for 600 points otm pe/ce.
2. Collect premium not more than 15
3. Keep stop loss
4. Avoid volatility day.
5. Focus on maximum loss not profit.

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@trader_dude Do share your experience here.

Well, its pretty simple actually.

Retail should not be selling options , instead they should only stick to buying options.

Use options as leverage to catch directional moves with limited risk. That’s what its for.

Regarding selling options. Market makers offer options to buyers. They are incentivized to make the market. The market markers are hedged when selling options so their risk is limited. They make money on the spread of options. They are also very good at managing risk.

Retail on the other hand is unhedged when he is selling options , so when there is an adverse move he loses a lot more than he made in all those premiums. It only takes one or two trades to go wrong to wipe out all those profits from premiums.

The other segment that used FNO is again for hedging purpose. i.e institutions.

The only way retail should trade options is analyzing the direction and capture the move using leverage while limiting your risk. unlike futures where the risk is unlimited.

Many options sellers may not agree with what i said above and that’s fine. If you want to still sell options , you sure can its your money that you will give to someone.

Bottom line : Trade options like you would trade cash or futures.

Only institutional hedgers and markets markets can afford to sell options because they are hedged either way.

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Its penny wise pound foolish strategy. you have to adapt as per the market all these calcs washed away with single black swan event. Stay vigilant and adapt based on market.

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I agree with what most of what you have said, but when u say institutional players sell options because they are hedged, I think if one has a backtested strategy on 4-5 years of data, and sells spreads (for example if Nifty is at 10700, selling weekly 10900CE and buying 11100CE immediately as a hedge), these type of spreads offer limited profit, limited risk, and on top of it margins for overnight hedged positions have gone way lower recently. So if one has a strategy that is tested, or trades on price action, I don’t see retail traders not able to do spreads both sides with proper stop losses, risk management and position sizing ?

This conversation has been repeated numerous times over various forums, SM sites etc. And debate is endless.
Actually you can take just the opposite statement of whatever here anybody is saying and you may still prove correct.

if someone says “buying options is good and selling is bad” well then “selling options is good and buying is bad” is also equally true.

Its all mind game. One of the star option seller in India Mr. jegan is prime example. He never made losses and I don’t think he ever will! Reason? Stable mind and strict Money management.

If you are strict enough to follow your rules and take least risk possible then you will be getting regular returns with any strategy. Period.

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There are basically two categories of institutional who trade FNO.

  1. Market markers - as the name implies they are incentivized to make the market. Their objective is to be delta hedged and make the market and earn on spreads.
  2. Institutions - They use FNO to hedge their portfolios. They could be hedge funds or companies or some big players.

Note that these two are categorized as institutions because they have huge capital. Unlike your typical retail who has a small account.

With a small account , he can only trade directionally to make money. To do this you can use cash/futures/options depending on your account size and risk appetite.

Also if a retail hedges, his returns can reduce ( i say can). Hedging is not necessarily always beneficial to returns.

I m not saying retail cannot make money by selling options, i m saying in general retail should stick to buying rather than selling. Since selling is mostly inclined and beneficial to institutions.

You can however make money by selling options , if you think you have an edge. Nothing is written in stone when it comes to trading.

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I personally think it is way too risky to have short strangles / straddles even with a SL. Any gap up/down would kill. whatever PnL you are looking to make.

Why not try short Iron Condors or short Iron butterflies? Speaking from experience, I started off with Deep OTM Calls and puts on individual scrips and in the 2nd month that I started I lost about 80k or so.

Since then, I’ve moved into OTM Short Iron condors, its not at all flashy - you make money really slow and a consistent downward/upward trend in prices can sneak up on. you without realising but it is much less risky than naked option selling.

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Hi Abhijeta, it’s wonderful that u are maintaining sustainable performance thru your short strangle strategy. Just few queries, do u also look at delta while selecting strike prices, and how much margin do u maintain to avoid getting negative balance in your ledger.

Thanks, its always inspiring to see positive stories like yours.

Choosing strike price
I look at open interest in option chain, key support and resistance levels in choosing the strike prices. Being a very safe play, I chose options whose premium is not more than 25/-

Margin
I maintain 1.15lac (for 2 lots, one on pe and one on ce). Even when vix reached 23 last week, I didn’t face margin issue

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Cool! Should b worth giving it a try. And for adjusting positions I believe you roll down your positions from the farther side, and don’t exit your loss making positions.

My plan is to enter the trade on Monday and the time decay works best.
I made adjustments for the trade I entered on Thu/Fri when market was moving in one direction.
I squared of loss making positions and took new strike prices at slightly higher premium (from other end, eg: market moving up, then take pe side strike price a closer). My overall profit dips a bit due to adjustment but no loss

This Mon, planning to enter at 25500 CE and 21300 PE. Up side big resistance and market looking downside, hence farther stike price.

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I’ve been trying Iron Condor in Nifty in the last few expiries at 0.3 Delta, most of the times I ended up in red even after adjusting positions actively. This also shot up my brokerage costs considerably. So quite not understood, whats the logic when they say 30% Probability of ITM, when it is ending up ITM so frequently. Definitely, a change in strategy required.

Previously, I’ve also tried credit spread strategies in stocks based on technical analysis, where I earned profits in many trades consecutively till my last two trades went against me and caused me big losses. Seems like strategies in stock options is only for ppl who have sufficient capital to adjust, and even take assignments of stocks when ITM

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Positional Stock options are risky and prices can quickly move when compared to index
Iron condor is complex to adjust as there are both buy and sell option at two ends of the strikes. Short strangle is relatively easy to adjust with predefined sl

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@Abhiteja_Pachipulusu You square off loss making positions when they are in the money or just as they shoot up beyond a certain price point. If you are doing the latter one, u might not be giving probabilities enough time to play out.

I never take ITM, requires huge capital.
I take deep OTM where options premium is around 20.
Say If CE premium is going beyond 40, I squared off loss (note PE premium would come down to ~10) , so net loss would be ~ 10 premium only.
Then I take new positions on both call and put sides with similar premium (20/- ce and 20/- pe)
At the end I take 30/- premium (-10 loss + 40 adjusted one)

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Thats pretty cool @Abhiteja. For adjustments, how often u have to monitor your positions.

I keep two alerts ,one at sl and one near sl. Eg: one at 35/- premium and another 40/-.
Also, As I wfh, I have laptop open. I casually check positions in free time

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