One of the most popular options trading strategies is the 920 short straddle. However, what many traders don’t realize is that over 75% of its profits come from trades where a one-sided stop loss gets hit. The reason behind this is that we short both call and put options with a minimal stop loss. Once one side gets hit, we exit with a minimal loss, and the other side tends to decay as long as the market moves in a one-sided direction. But, this strategy can be turned into a directional option selling strategy by placing trades on only one leg with a fixed stop loss. This can be done by analyzing option data and figuring out which leg has a higher probability of hitting stop loss in advance.

For example, if Bank Nifty trades at 35000, and we short 35000 CE and 35000 PE as per the 920 short straddle strategy, if the market becomes bullish and our 35000 CE stop loss gets hit, then our put leg will continue to decay and make profits. However, we can avoid placing trades that will hit SL if we can determine which option leg has a higher probability of hitting stop loss. Even though we can’t be 100% certain, a live analysis of 920 straddle results from November 2021 to April 2022 with a 25% fixed stop loss showed that this strategy made around 17500 profits for one lot.

The maximum loss in the same time was approximately Rs. 20,000 .

We conducted an analysis of option tick data over the past six months to determine the overall trend at the end of each day. By doing so, we were able to determine whether the trend was bullish or bearish. The following day, around 9:20 am, we used real-time option data to check the trend. If the trend remained bullish, we only shorted ATM put options. If the trend appeared bearish, we only shorted Call options. This approach allowed us to take a directional trade with a 25% stop loss instead of a short straddle trade.

When we tested this method and analyzed the results, the overall returns were three times higher than those of the normal 920 straddle strategy. By taking a more directional approach and analyzing the trend, we were able to maximize our profits and reduce our losses. This highlights the importance of analyzing option data and market trends when making trading decisions. With the right strategy, it is possible to achieve significant profits and minimize risks.

Despite being more profitable, the new strategy also had a lower overall drawdown compared to the 920 short straddle during the same time frame

We have implemented this as a new trading bot to all our Arthalab users. It has been running live since Feb 2020.