Hello readers, today we will learn about a very interesting topic and that is Short straddle adjustments. Today most traders deploy Short straddles and earn good money but there is one drawback. Short straddles work smoothly in the RANGE BOUND market but it will create problems if the market is in Trend. So in this article, I will tell you how you can manage the losses in the Trending Market.
So let's get started.
In this blog, we will cover the following topics;-
What is a Straddle?
What is the best time to deploy Intraday Short straddle
When to make the first adjustment?
What is a Straddle:-
Straddle is an Options Strategy. In finance refer to two separate transactions which both involve the same underlying security, with the two corresponding transactions offsetting one another. Investors tend to employ a straddle when they anticipate a significant move in a stock's price but are unsure about whether the price will move up or down.
There are two types of Straddle :
Long Straddle -
Here you buy the ATM CALL and ATM PUT, basically you are paying the premium so it is used for a net debit. So these two options have the same underlying stock, same price, and expiration.
Traders deploy Long straddles when they believe there will be a big event such as Budget, RBI policy, FED policy, etc. so traders know there will be huge volatility.
In spite of being uncertain as to whether Banknifty will move up or down, the trader is confident that Banknifty will move 1000 points either way. He will therefore use a LONG straddle.
Let's say the Banknifty is trading at a level of 40000. He will therefore purchase a 39500 Put Option that would trade at 50 Rupees and a 40500 Call Option that would trade at roughly 52 Rupees. By using this LONG STRADDLE strategy, he can gain between 200 and 250 points if the Banknifty moves 1000 points UP. In this case, the 40500 Call option will trade at about 300 rupees and give him good profits, while the 39500 Put option will expire worthless.
The term for this is LONG STRADDLE. Only when there is high volatility it will work
Short Straddle -
Here you sell the ATM CALL and ATM PUT, basically you are getting the premium so it is used for a net credit. So these two options have the same underlying stock, same price, and expiration.
When traders anticipate no movement in the market, they use short straddles.
Let's use the Banknifty as an example, which is currently trading at a level of 40000.
Since both are at the money (ATM) options, he will short the 40000 CE and 40000 PE options.
They were both trading at 250 and 230, respectively.
If banknifty is only trading in this 200-point range, between 39800 and 40000. 40000 CE and PE will trade at 180 and 190, respectively, at day's end due to time decay. The trader in this instance gains 100 points from both options.
As I already said, I'll let you know the best adjustments for deploying short straddles in trendy markets as well.
What is the best time to deploy the Intraday Short straddle?
The best time to deploy the straddle is at 10 AM and the reason behind this is there is high volatility in the first half an hour. Traders book their BTST profits and make new positions which make markets very volatile.
At 10 AM markets get settled down and give one view of whether the market can go up or down or remain trendy.
We should deploy at 10 AM in any case whether it is sideways or trendy.
You should sell an ATM call and ATM put at 10 AM and both deltas will be at 50 or you see 0.5 in your terminal.
When to make the first adjustment?
Once you deploy your Short Straddle at 10 AM you sell the call and put at 50 delta or 0.5 delta
You should make an adjustment when any one side delta becomes 0.25 or 25 delta
You should sell that leg and again you should sell that leg with the same delta as another leg.
It might be complicated to understand but I will give you an example.
For example -
Let's say the Banknifty is trading at a level of 40000
40000 CE is trading at 260 rupees with 53 delta or 0.53 delta and 40000 PE is trading at 230 rupees with 51 delta or 0.51 delta.
So will short 40000 CE and 40000 PE at 10 AM
And after a few minutes, 40000 CE will become 302 rupees with 63 delta or 0.63 delta and 40000 PE becomes 185 rupees with 25 delta or 0.25 delta
So it's time for our first adjustment
We will EXIT 40000 PE at 185 rupees and we will short 63 delta or 0.63 delta Put option
Let's say 40300 PE trading at 300 rupees with 61 delta or .61 delta
So we will short that 40300 PE at 300 rupees
By this, we made our DELTA neutral.
After this, we should follow this till 3 PM or till then when you get 2000 profit in a day
To deploy Straddle you will require around 1 to 1.2 lacs.
So 2000 is around 2% of your capital
It is difficult to achieve a daily 2% but in a sideways market, you will get 2000 to 2400 rupees profit
And in the trending Market, by this adjustment, you can minimise the loss.
Remember traders, whenever one leg delta becomes 85 delta or 0.85 delta we should EXIT at leg and match another side leg delta.
And if Banknifty moves more than 1% in half an hour, we should try to know that today will be very trendy. On these days along with our normal adjustments, If the market gives a 1% up move we should buy one CALL Option of 25 delta or 0.5 delta
And If the market is given a 1% Down move we should buy one PUT Option of 25 delta or 0.5 delta
I wish you all would learn about intraday straddle adjustment. For the best outcomes, try this forward test and backtest. Keep in touch with us to learn about numerous other fascinating blogs.