12 Years of Selling Strangle

Last few weeks, I have been doing analysis on lots of option strategies on past 12 years data. This article aims to explain one such analysis on Short Strangle option strategy. Starting with basics of selling a Strangle, I aim to explain how has Strangle performed in the past 12 years, what are the risks involved and what market conditions are suitable for playing this strategy.

Strangle is an option selling strategy which involves selling an OTM call option and an OTM put option. It benefits the most if the underlying ends within a range by expiry. Maximum profit is the amount of premium collected by selling the options. The loss on this strategy is unlimited.

Let say Nifty is at ~9850. We can make a Strangle by selling 9500PE and 10200CE. Below is the payoff diagram for this strangle. If Nifty expires between 9500 and 10200, the trader will keep the entire premium. If Nifty moves outside this range, traders can suffer unlimited losses.

Payoff for Strangle

Strangle is one of the favorite strategies of option sellers particularly in index options like Nifty as the index does not give very large moves in a short frame of time. Thus, the trader ends up collecting all of the initial premium for most of the time. The data says ~85% of time , strangle writers make profit. The critical question here is, how good is the 85% win rate ? Is the risk worth it ?

To answer our question, I will present my analysis of selling strangles in the past 12 years i.e. from  1 Jan 2008 to 8 April 2020. This duration has seen a wide variety of markets including 2 major crashes (2008 & 2020). So the data should be good enough to give a solid idea of how strangle performs as a strategy.

Strangle setup for analysis

I have used the following setup to analyse strangles:

  • Nifty is used as the underlying.
  • I have used 1 lot on the call side & 1 lot on the put side. 1 lot is assumed to have 75 units throughout the period.
  • Options with monthly expiry are chosen to set up the strangle.
  • Strangle is entered 27 days before the expiry.
  • Strangle is taken till the expiry. So no stop loss or profit booking before expiry.
  • Strangle is formed by selling OTM options 5% away from the spot price on both Call & Put side. For example, if Nifty is at 10000, 5% of 10000 is 500, Strangle is formed by selling 9500PE & 10500CE
  • Analysis is done for monthly expiries lying in between 1 Jan 2008 and 8 April 2020

12 years PnL diagram

12 years PnL

Please zoom-in to the picture if it is not visible properly.

Key points to note:

  • X -axis represent the year from 2008 to 2020
  • Y-axis is the Pnl from -50,000 to 2,00,000
  • Strangle gave a net profit of ~60,000 in the past 12 years. Since the margin required to sell 2 lots of Nifty is ~1.5L, that is ~40% return in 12 years (not compounded). Does not feel like high enough return for unlimited risk taken with this strategy. Note, one can get ~6% per annum extra return, if they use liquid bees as collateral for margin money.
  • Strangle has been consistently giving profit from 2010 to 2019. This explains a lot why option sellers might be booming in this period. Strangle gave ~140% return till before the crash of 2020.
  • 1 bad month in March 2020 due to market crash took away ~8 years of profit. The PnL came down from ~2.1Lakh to ~60k. 
  • 2008, 2009 & 2020 have lots of ups and downs. These are the times when the market was highly volatile. Clearly strangle should not be played in high volatility.

Returns analysis

Net returns: Rs. 59576.25

Total trades taken: 147

Number of profits: 124

Number of loss: 23

Max drawdown: -155178.74999999997

Top 5 profits: [23385.0, 22860.0, 16203.749999999998, 15993.75, 12217.5])

Top 5 losses: [-155178.74999999997, -64811.25, -42761.25, -33225.0, -16586.25])

Average return per trade: 405.2806122448981

Sharpe ratio: 0.4055599174704976

Key things to note:

  • 124 wins out of 147 trades taken. That translates to ~85% win rate. 
  • If you see top 5 profits and top 5 losses, ~23k is the max profit. But the max loss is ~1.5L .This one loss is enough to take down years of returns. Thus you see the curse of unlimited risk strategy. You will win 85% of times, bit one unfortunate month and you have lost most of it.
  • Sharpe ratio is the measure of how good the strategy is. Any strategy with Sharpe ratio greater than 2 is considered good. Monthly strangle with OTM options 5% away from the spot price has a sharpe ratio of 0.4 , which is not good at all. I have tweaked around different configurations, but could not come up with a good enough sharpe ratio for this strategy. 

Volatility analysis

I have done analysis of returns in different market volatility. Volatility is tracked using INDIA VIX index. This analysis will help us understand that in what market conditions has strangle performed good and in what conditions we should completely avoid it.

Below table analyses the returns in different VIX buckets. VIX bucket tells what was the INDIA VIX at the time of entry of the strangle. For example, a VIX bucket of [10, 14] tells that when strangle was entered, the VIX was in range [10, 14]

VIX based analysis

Key things to note:

  • Strangle performs with high success rate and net positive PnL when VIX is < 20
  • At VIX >= 20 , the win rate has come down, or the PnL is negative for most of the cases.

Conclusion

Strangle has a high win rate but few losses can take away years of profits. If one wants to sell strangles, keep following things in mind:

  • Turn it into an iron condor. This will make it a limited risk strategy. Know more about risks of selling naked options here.
  • Use adjustments when the market is breaching the range of strangle. Learn more about adjustments here.
  • Avoid the high VIX markets to sell a strangle.

If you wish such analysis for more option strategies, please let me know in the comments section. Please subscribe to my blog and follow me on twitter to get all the latest updates.

Learn when to buy or sell a straddle in this blog.

9 thoughts on “12 Years of Selling Strangle”

  1. Ie trading strangles for sometime now… and agree with your VIX research above. I always keep some margin avaliable to make adjustment if limits (on either side) starts to breach . Either I roll up/down winning side or buy PE/CE to convert to IC (depends on cost).
    I really enjoy your writing style. V clear and precise . Keep up good work and keep sharing.

  2. Hi Sandesh, first of all wanted to say thank you and appreciate share valuable information. Couple of questions/doubts –
    1. what would be return when we sell strangle with no filter just exist when VIX >=20 ?
    2. also I did similar kind of analysis at very small level on bank nifty to sell short straddle instead of strangle and was giving good results as when market is at sideway why can’t we earn more. I did analysis for last 4 years bank nifty underline data as was not having option data that too in excel. hence wanted to check if possible and have option data, would you mind to calculate the returns on selling straddle for both Nifty and banknifty if possible.
    3. would it possible to share analysis shorting atm put when nifty is above 200 dma and short call when nifty is 200 dma on daily and also on monthly charts ?

    Thanks a lot again.

    1. Thanks Tushar.
      I will definitely write on (2) . (3) is a little tricky but will try to do that.
      I did not get (1) , can you explain a little

      1. first one is same as you explained in above article just to avoid large draw down wanted to try applying extra filter/SL i.e. simply exist all positions whenever VIX goes above 20/30 which could have avoided or reduced loss in march/april 2020 where the trend was clear directional

    1. Thanks.
      I am planning iron condor next. After that, I will definitely write for weekly and monthly. Yearly not sure as options are not liquid in such far month, so analysis could be wrong.

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