Angled Short Straddle: A New Dimension of Trading

Abstract

In this article, we propose a novel option strategy that is better (in terms of success rate, profitability, risk, and return) than the short straddle option strategy on the Indian Stock market index, Nifty. By using the trigonometric ratio tan θ, an angle has formed between the monthly points earned/lost by the short straddle option strategy and the monthly change in the price of the Nifty index. Further, the angle for next month has been forecast by using the technique of 14-months moving average. After calculating the forecasted angle by the 14-month moving average technique, the related angle (of forecasted angle) in different quadrants has been calculated. The angles of quadrants one and two have been considered because short straddle is profitable in quadrants one and two and hence the angles of quadrants three and four have been ignored. By using the total straddle premium of the forecasting month, the upside and downside levels of Nifty of that month has calculated where this forecast angle will form. After finding the upper level and lower level of Nifty, we propose a strategy (angled short straddle strategy) that involves the selling of call and put option. We compared the proposed strategy against the short straddle option strategies based on the success rate, overall profitability, risk, and return in the Indian stock market. The result indicates that the proposed strategy has an 18.06% higher success rate than the short straddle strategy. In terms of overall profitability, the proposed option strategy is more profitable by 57.22% than the short straddle strategy. Further we have compared the risk and return of both strategies and our results shows that the proposed strategy has lower risk and higher return than the short straddle option strategy; these results were verified by the regression analysis. In the end, the results of the success rate have been verified by the time series plot of India VIX and realized volatility. Due to the higher success rate and better profitability, the proposed option strategy can be consistently applied by any trader on the Nifty for profit generation.

TOPICS: Options, emerging markets, performance measurement

Key Findings

• ▪ Angled short straddle option Strategy is more successful and profitable strategy than the short straddle option strategy in the Indian Stock Index (Nifty).

• ▪ Nifty index has less bullish than bearish volatility behavior.

• ▪ Nifty index has range-bound properties.

• ▪ This is the first article where trading results are based on angle tan θ.