Straddle strategy – Option Trading in volatile Market

Are you confused about the market direction? Then you may apply straddle strategy. This strategy is for a situation when a stock moves in a big way either on the bullish side or on the bearish side. Therefore, if you know that market will be volatile but you are not sure which side it will go then this is the right option strategy for you for the time. Straddles are a popular and effective way to potentially capitalize on large price movements in stocks, indices, commodities or currencies with limited risk and capital outlay. It involves buying both a call and put option of the same strike price at the same time as a bet that prices will break out of their current range. Through this article, we will discuss the basics of straddle trading and how it can help you generate extra income in a sideways market.  Keep reading to find out more!

 

Overview of the Market

On 27th March, Nifty closed at 16985, and the Index had been consistently hitting a support level. This presented an opportunity for traders to take advantage of a potentially large price movement in either direction, which is why many traders were preparing strategies in anticipation of some volatility in the market. With Nifty near its support level, it was unclear whether it would break out or remain stagnant within this range. As such, straddle option trading provided an attractive option for those looking to make extra money in this situation. ​By buying both a call and put option of the same strike price simultaneously, investors could bet on large market movements with limited risk and capital outlay.

Experiment- 27^th March: The Option Trading strategy

To capitalize on the potential volatility of this sideways market, I decided to test out a straddle option trading strategy. This involved buying both a 17000 Call Option (CE) and Put Option (PE) at the same time with two days left before expiry. By doing so, I hoped that the Nifty would either break above or below 17000 by EOD on 29th March for me to make a profit. If it remained within 16844 and 17156 maximum loss will be 7803/-. Thus, even if it breaks Nifty needs to move past either of these levels.

At this point 3 important questions to be answered were:

1. Is it too short for the strategy to play out?
2. Will the market do nothing and keep on testing the support for these 2 days?
3. Will the market break now or will it break after the option has expired?

Observation

The experiment turned out to be successful as Nifty did break out of its range and exceeded 17000. However, my strategy didn’t make a profit as the Index closed only 80.70 points above the strike price at 17080.70. The 17000 CE still retained its value but the 17000 PE contract lost all its value, leading to a total loss of 3727 on expiry day. This highlighted that for traders to make profits with straddle option trading strategies, prices had to break beyond either their upper or lower break-even levels (16844 or 17156 respectively).

Inference

Through this experiment, it is now clear that straddle option trading strategies can be a great way to make profit in sideways markets. However, traders need to be aware of the upper and lower break-even levels before placing their trades to ensure that they can capitalize on large market movements and generate profits. Moreover, traders need to understand the basics of option trading and have proper risk management protocols in place as losses can quickly add up if prices don’t move beyond your set boundaries.  With these considerations kept in mind, straddle options can provide an attractive way to potentially make extra money from volatile markets with limited investment and risk.

Moral: Trading in sideways markets can yield profits, but careful risk management is essential for minimizing losses.

Also Read: Most Effective Strategies to Invest in Stocks using Stochastic Chart

Useful Websites and Apps for Options Trading – Zerodha kite

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