Options trading strategy for union budget 2020 : Part 2

Budget 2020 is announced and Nifty fell 300 points. I explained my options strategy to trade this budget in Part 1. In Part 2, I will cover the results of this strategy, analysis of the trade and my learning for such future trades.

Results

P&L: +356.25

Capital employed: ~1.7L

ROI: ~0.2%

Strategy P&L

Market conditions at entry

I entered the position on 31 Jan at around 3:18PM

Nifty was trading at around 11970. I had to choose between 12000 or 111950 strike. I decided to go ahead with 12000 strike price because it made my position more delta neutral than 11950 strike price options. Monthly deltas of 12000 strike price call and put options were at exactly 0.5. More delta neutral position, the less directional it is. Another reason was that OI at 12000 strike was much higher than 11950 strike for monthly options. I felt this would raise less concerns of liquidity, although this is a very small reason. All strike price near ATM are liquid for Nifty weekly & monthly options.

Nifty was ~11970

IV of Feb 27 expiry 12000CE & 12000PE was ~17 (Short position)

IV of Feb 6 expiry 12000CE & 12000PE was ~25 (Long position)

Market conditions at exit

Nifty on budget day

I exited the position on 1 Feb at around ~1:30PM with profit of Rs. 356.25

My plan was to exit if the loss exceed 2% of capital. That never happened. On the contrary, my position was in small profits. My profit exit was as soon as the volatility dropped to normal level. This was a vague condition as normal levels are not defined. Adding to this, I had a feeling that volatility may not come down significantly due to fear of Corona virus affecting China market on Monday. At around 1:30 PM, VIX had already dropped by ~2.76% from market open. IV of both monthly and weekly options has also dropped. Nifty had already fallen to 11820 and was not moving much. Not being sure how long to keep the position, I decided to lock in whatever small profits my position was giving me.

Nifty was ~11820

IV of Feb 27 expiry 12000CE & 12000PE was 15.8 (Short position)

IV of Feb 6 expiry 12000CE & 12000PE was 22.7 (Long position)

P&L of weekly long position: -506.25

P&L of monthly short position: 862.5

Combined P&L: 356.25

What went good

  • I could exit at profit of ~0.2% ROI.
  • Position never went into loss of more than 0.5% of the capital. Thus risk potential of strategy was very less which potentially allows me to carry the position without much anxiety.

What went bad

  • IV did not fall as expected. Most of it because of impending fear of China market crash on Monday due to the corona virus. Thus theta decay took some of the profits.
  • I exited the position too soon. If I had carried it till near the market close, I could have gotten close to ~1.5 – 2% ROI. This happened because I did not have a clear rule on when to exit. I became anxious and tried to lock in whatever small profit the strategy gave.

Where did I get lucky

  • IV of weekly option did not fall much much more than the IV of monthly options.

Learning

  • I entered the position when Nifty was at 11970 and exited at 11820. This is a good 150 points (~1.4%) fall in Nifty. Even than the weekly long position was in loss of ~ Rs.500 and the monthly short position was in profit of ~ Rs. 800. This shows that Long straddle is never a good idea in high volatility environment, be it weekly or monthly expiry. It would have required a much greater fall in Nifty for Long straddle to be profitable, which did happen towards the market close. In high volatility environment, it is better to trade Short straddle with stop losses and tight profit targets. Short straddle in both weekly and monthly expiry gave profit even after a fall of 150 points. Monthly expiry gave more profits than the weekly expiry due to less gamma. 
  • Towards market close, Long straddle started giving huge profits and Short straddle profits turned into huge loses. This happened because the market kept falling and gamma effect started showing its compounded effect. If trading Short straddle, keep very tight profit exit. Do not get greedy because gamma takes time to show its colors, but when it does, it wipes out all the profits due to theta decay or IV crush.
  • Only way to control emotions while trading is having pre-defined rules for all the scenarios. I did not set a rule for profit exit and ended up exiting too soon out of anxiety. 

Will I trade this strategy again ?

I will definitely trade this strategy once again in similar big events scenario. I still want to test what happens to the position when IV actually falls after the event is over. This time Corona virus did not let IV fall much. Next time, I will be better prepared with all my learnings and more. Let the next budget come!

I am starting a new series on Strangle adjustment through my live trades. I will post my trade logs with detailed explanations of the pre defined rules that I use to execute & adjust the Strangle. You can learn each day as I trade. Please subscribe to my blog and follow me on twitter to get the latest updates.

Read about how to sell options by properly hedging all your risks.

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