BankNifty Straddle on weekly options

Straddle is one of the popular option strategies which benefits from underlying not moving much and time decay. It is a 2 leg unlimited risk strategy with high chances of winning. Data shows that ~60% of times, straddle ends up in profit.. In this blog, I will analyse the performance of BankNifty straddle on weekly options.

Weekly options on BankNifty were introduced in 2016. Liquidity in weekly BankNifty options is high which makes it very attractive to deploy option trades without much slippage. I have data of about 200 expiries since 2016, which gives us enough to analyse how straddle performs in general. I will start with the basics of straddle option strategy and then show how it has performed on various timeframes and different market volatility.

Straddle is a 2 leg option strategy which is deployed by selling 1 lot of ATM Call option and 1 lot of ATM Put option. Assume that BankNifty is at 18800. Straddle will be set up by selling 18800CE and 18800PE, 1 lot each. Assume that initial premium collected is Rs. 1050. This gives a breakeven of 17750 on the downside and 19850 on the upside. So if BankNifty expires above 17750 and below 18850, the trader will make a profit. Outside this range, the trader can make unlimited losses. The trader will make a maximum profit if BankNifty expires at 18800, which will be equal to Rs. 21k , assuming a lot size of 20 units. Below is how the payoff diagram of straddle looks.

Straddle payoff

Straddle setup for analysis

I have used the following setup to analyse Straddle:

  • BankNifty is used as the underlying.
  • I sold 1 lot of ATM call and put option each. 1 lot is assumed to have 20 units throughout the period.
  • Options with weekly expiry are chosen to set up the Straddle.
  • 3 time frames are used for analysis. Straddle entered 6  days before expiry, entered 1 day before expiry, and entered on the day of expiry.
  • Straddle is taken till the expiry. So no stop loss or profit booking before expiry.
  • Analysis is done for monthly expiries lying in between June 2016 and April 2020

Straddle entered 6 days before expiry

I will analyse how Straddle has performed if entered at market open 6 days before expiry.

PnL for Straddle 6dte

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

Returns excluding brokerage/taxes: 121146.0

Total trades: 201

Number of profits: 124

Number of loss: 77

Max drawdown loss: -91068.0

Top 5 profits: [41645.99999999999, 34145.0, 14583.0, 11592.000000000004, 11542.0]

Top 5 losses: [-50282.00000000001, -49345.0, -22386.0, -17596.0, -15533.000000000002]

Average return per trade: 602.7164179104478

Sharpe ratio: 1.0826237289579541

Key things to note:

  • X -axis represent ~200 trades taken from 2016 to 2020
  • Y-axis is the Pnl from -50,000 to 1,25,000
  • 124 wins out of 201 trades taken. That translates to ~61% win rate. 
  • If you see top 5 profits and top 5 losses, ~41k is the max profit. But the max loss is ~50k. The win rate is very high, but reward to risk is less than 1. 
  • Straddle gave a net profit of ~1.21L in the past 4 years. Since the margin required to sell 1 lot straddle on BankNifty is ~1L, that is ~120% return in 4 years (not compounded). Note, one can get ~6% per annum extra return, if they use liquid bees as collateral for margin money. Note these returns do not include brokerage and taxes. 
  • For simplicity, while calculating ROI I have not taken drawdown into account. Adjust the ROI as per your bet sizing.
  • Max drawdown is -91k. This shows that unlimited risk strategy can wipe out months or even years of gains due to one bad week. 
  • Sharpe ratio is the measure of how good the strategy is. Any strategy with Sharpe ratio greater than 2 is considered good. Straddle entered 6 days before expiry have a sharpe ratio of ~1.08 .

Straddle entered 1 day before expiry

I will analyse how Straddle has performed if entered at market open 1 day before expiry.

Pnl fr Straddle 1dte

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

Returns excluding brokerage/taxes: 111373.0

Total trades: 201

Number of profits: 127

Number of loss: 74

Max drawdown loss: -66335.0

Top 5 profits: [23976.0, 9954.0, 9681.0, 8537.0, 8219.0]

Top 5 losses: [-23177.000000000007, -22226.000000000004, -20932.0, -18661.0, -15464.0]

Average return per trade: 554.0945273631838

Sharpe ratio: 1.6710580842158902

Key things to note:

  • X -axis represent ~200 trades taken from 2016 to 2020
  • Y-axis is the Pnl from -25,000 to 1,75,000
  • 127 wins out of 201 trades taken. That translates to ~63% win rate. 
  • If you see top 5 profits and top 5 losses, ~23k is the max profit. The max loss is also ~23k .The win rate is very high. Reward to risk is  ~1. 
  • Straddle gave a net profit of ~1.11L in the past 4 years. Since the margin required to sell 1 lot straddle on BankNifty is ~1L, that is ~111% return in 4 years (not compounded). Note, one can get ~6% per annum extra return, if they use liquid bees as collateral for margin money. Note these returns do not include brokerage and taxes. 
  • For simplicity, while calculating ROI I have not taken drawdown into account. Adjust the ROI as per your bet sizing.
  • You can see huge drawdowns in the PnL chart in the 2020 crash. This shows that unlimited risk strategy can wipe out months or even years of gains due to one bad week. 
  • Sharpe ratio is the measure of how good the strategy is. Any strategy with Sharpe ratio greater than 2 is considered good. Straddle entered 1 day before expiry have a sharpe ratio of ~1.67 . 

Straddle entered on the day of expiry

I will analyse how Straddle has performed if entered at market open on the day of expiry.

Pnl for straddle 0dte

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

Returns excluding brokerage/taxes: 113703.0

Total trades: 201

Number of profits: 128

Number of loss: 73

Max drawdown loss: -17520.0

Top 5 profits: [11318.000000000002, 8769.999999999998, 7121.999999999998, 6376.0, 5634.000000000001]

Top 5 losses: [-14698.999999999996, -9918.0, -8571.0, -8506.0, -7153.0]

Average return per trade: 565.686567164179

Sharpe ratio: 2.8351402993828434

Key things to note:

  • X -axis represent ~200 trades taken from 2016 to 2020
  • Y-axis is the Pnl from -20,000 to 1,20,000
  • 128 wins out of 201 trades taken. That translates to ~63% win rate. 
  • If you see top 5 profits and top 5 losses, ~11k is the max profit. The max loss is also ~14k .The win rate is very high. Reward to risk is less than  1. 
  • Straddle gave a net profit of ~1.13L in the past 4 years. Since the margin required to sell 1 lot straddle on BankNifty is ~1L, that is ~113% return in 4 years (not compounded). Note, one can get ~6% per annum extra return, if they use liquid bees as collateral for margin money. Note these returns do not include brokerage and taxes. 
  • For simplicity, while calculating ROI I have not taken drawdown into account. Adjust the ROI as per your bet sizing.
  • The max drawdown is ~17k which is much lesser than straddles entered 1 or 6 day before expiry. One possible explanation is that this strategy is immune to overnight gap open. Since this strategy is entered and exited on the same day, the trader can further limit their risk by putting a stop loss.
  • Sharpe ratio is the measure of how good the strategy is. Any strategy with Sharpe ratio greater than 2 is considered good. Straddle entered on the day of expiry has a sharpe ratio of ~2.83 , which is very good. Note that bringing brokerage and taxes into analysis will reduce the sharpe ratio.

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 Straddle performed good and in what conditions we should completely avoid it. 

Straddle entered on the day of expiry has returns comparable to other straddles, it has much better sharpe ratio and it has the potential of turning into a limited risk strategy by using stop loss. Thus, I will do volatility analysis only for the straddle entered on the day of expiry.

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

Key things to note:

  • Straddle has given net positive PnL per trade in VIX less than 25
  • The data above VIX 25 is not sufficient to say anything with high confidence. So take that data with your personal subjective judgement.

Conclusion

Straddle is an unlimited risk option strategy with high chances of winning. The best performance of straddle comes when it is entered on the day of expiry and taken till expiry. This type of Straddle  is also immune from overnight risks and gap openings. It can further be turned into a limited risk strategy using Stop loss orders. For Straddle taken a few days before expiry, do note that it has the potential of huge drawdown hidden behind unlimited risk potential. Learn more about risks of selling naked options here. To avoid these risks, convert it to an Iron Fly by buying OTM options on both call and put side. 

See similar analysis on selling Strangles here.

See similar analysis on Iron Condor here.

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.

8 thoughts on “BankNifty Straddle on weekly options”

  1. Hi,
    Thank you for sharing this, i was looking for this and i got it.
    Can you give one more analysis that i have been thinking for mamy days.
    If i short a weekly straddle 1 lot and at any point if it gives a profit of 2K at any point of time i am ready to book the profit and exit. If it runs in a loss of 4K i will exit the tarde and book loss
    Can you tell me what is the win rate for this.

  2. Good one Sandesh.
    Can you do similar analysis for iron fly for nifty. Entry condition is before 45DTE n 35DTE.? SL cirteria would 25% of the collected premium. Thank you

  3. I like the anlaysis you performed with numbers and statistics.
    It would require a lot of effort. Thanks Sandesh.

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