Raunak Sir, yesterday you taught about short straddle on Nifty. Just one doubt remains - what should be the expiry - weekly or monthly for selling ATM CE and PE?
When you enter a short straddle, you are ‘short theta’. This means that time is your friend and each day that passes, the more time value that an option will lose (which is what you want with a short option strategy). There is a bit of a caveat with option time value: it doesn’t lose value linearly. On the last few days of an option’s life, it will lose large percentages of time value. An option that is further out from expiration, the percent of time value lost is really small.
When you select an expiration, probably the first thing that you will notice is that the further out the expiration, the more that an option will cost. When you short straddles that are one-month out vs. one-week out, you will collect more premium for the one-month expiry. The challenge is that with one-month out short straddles, there is more of a chance for the underlying to move which would impact your profitability. In addition, time decay will work a lot faster for the one-week expiry. Ultimately, the decision is your trade-off to make: collect more premium but with higher risk for the one-month out expiry or collect less premium but take more advantage of faster time decay for the one-week expiry.