Is 9 : 20 straddle dead already?
The 9:20 straddle is losing its potency, and it is not turning effective anymore. How true is that? Well, let me share with you my experience.
Back in 2018, When I was introduced to 9:20 straddle, it seemed like a promising strategy, but I didn't have enough capital to explore it at that time. However, I had contacts who were deploying this strategy. I kept hearing from my fellow algo traders that the 9:20 straddle has been gaining a spotlight in the market. Intrigued yet sceptical, I decided to try and test it out myself.
For those who don't know,
9:20 straddle refers to selling at-the-money ATM ( at-the-money) options at 9:20 AM and closing the trade after 3.15 PM. This strategy involves selling naked ATM call and put options. The loss in this strategy is unlimited loss and limited profit. Usually, the cost of deploying this strategy is approx 2 Lakh, and if you want to reduce its margin, you can hedge this strategy by buying OTM call and put options.
The idea behind deploying this strategy is to pocket premium regardless of market direction. The Indian market stays sideways 70% of the time and the rest it is sideways.
When the market is sideways, the premium of options does not move much, and gradually the premium depletes, which leads to profit for an option seller.
It is such a common strategy that funds of 1000s crores are run on this strategy.
But you might be wondering Why 9:20 AM and why not other times?
Well, We picked this time because of the way the market usually behaves at that hour. The market is often the most volatile and unpredictable first thing in the morning. Buyers are unsure about the market's trajectory for the day. Accordingly, options prices tend to rise in the first 5 minutes and then settles at this time. And this is what we traders want, right?
Back to our story: Regarding the index options, many traders use a Stop Loss of 30% of the margin earned.
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The different volatile trends of the market left me wondering whether I should be patient, make a tweak or try another strategy. However, I decided to stick to it and trust the process.
And the maximum profit I could generate was 2,88,670 in 4 years.
I tried every way possible to maximise it, but it didn't exceed that amount.
What could have been the reason?
Increased popularity: Initially, when the strategy was developed, it was performing quite well, but gradually when more and more people started to deploy this strategy for investment, especially after the rise of no-code-platform, 9:20 didn't remain at 9:20 anymore.
Algorithmic trading platforms: The growth of processing algorithm platforms has made it easier for multiple users to put in similar trades at the same time. This could lead to humongous traffic and returns like peanuts.
Higher volatility: In recent times, the markets have become more volatile. The volatility that goes up can make things harder to predict and make it even harder for the strategy to work constantly.
Lack of direction: The plan depends on the market moving in a one-sided direction to make money. During times when the market isn't sure what to do or is showing low directional movement, the approach may have trouble getting good results.
Non-linear returns: The approach's success is not linear, and most of the gains come from a small number of trades. This implies that certain months or periods may bring losses or small gains while others may bring in a lot of earnings.
With this information, savvy investors pass on the 9:20 straddle in favour of either 9.17 or 9.25, depending on their research. Because of this the drawdown has also reduced.
If you are an algo trader, let me know what strategy you use and what annual return you have generated.
