Will doing long straddle on Banknifty everyday work? If yes, please give guidelines on stoploss and target.
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Unfortunately, you canāt consistently win by going long straddles on a daily basis. You need to trade straddles opportunistically. When you trade directionally (long call, long put, long call spread, etc.), you are making a ābetā that the underlying will move in your selected direction. A straddle is a volatility strategy. While you can win with this strategy if the underlying moves significantly up or down, volatility strategies work best when 2 conditions happen: the underlying moves (either up or down) AND volatility goes up. If volatility goes up, then the price of the option will gain in value leading to potential profit. If volatility (look to the āIVā or implied volatility metric in the option chain) is already high, then you need to consider that the chance for volatility to continue to rise may be slim. You can also think about IV as āhow good of a deal am I getting for this option contractā.
Here is something else to consider: the price of a straddle is what the market is implying in terms of movement. For example, the Nifty closed at 18065 on Friday. The 18050-straddle has a price of 137.35 (76.00 for the call and 61.35 for the put). This means that the market is implying the Nifty will move +/- 0.76% from 18050 by the next expiration on 4 May. This is calculated by taking dividing the straddle price of 137.35 by the strike price of the straddle. If you believe, based on technical analysis or other insight that you derive, that the Nifty in this example will move more than this, then you could enter the trade.
Straddles are sensitive to time decay so there is a chance of losing 100% of what you paid to enter the position. There are a few ways to manage the trade. One is to set a fixed percentage of loss (perhaps -20% or -30%) which would come into play if the underlying stays flat. If the underlying begins to trend in one direction, and you are confident that the move will sustain, you can consider closing the opposite leg at a small loss. This would convert the straddle into a directional trade.
Hope this helps!
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Thanks Mike for your elaborate reply.
I was considering Banknifty Intraday Straddles ā Banknifty is more directional and has higher volatility. Nevertheless, what you said may still stand. I will be careful ā will try on 1 lot for a month to see what happens.
Warm Regards,
Mahesh Shah
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Exactly. While some underlying securities like the Bank Nifty may generally be more volatile, that is already ābaked intoā the price of the option. So, it really is about the relative volatility: is it more or less volatile than it has been AND are you expecting that to change.
Good idea on starting smallā¦itās always prudent to go slow anytime you are trying out a new strategy.
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Banknifty historically has wider price movements than Nifty; i suppose I should do statistical analysis to establish the variance etc. Donāt know how to
Regards
Mahesh
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First of all I would say why you are doing this, are you gambling or donāt want to learn something new or donāt have time bro, donāt gamble l, donāt waste your time and money or things you canāt pay attention
mind your language please
Hi Mahesh
Did you completed the statistics about using of long straddle on banknifty ?
If yes requesting you to share what is the success rate and analysis details
No sorry, I abandoned the idea.
Warm Regards
Mahesh