Journal of Investment Strategies

Risk.net

Strangle to resuscitate: evidence from India

Peeyush Bangur

  • The short strangle option strategy is a more successful and profitable strategy than the long strangle option strategy in the Indian stock index
  • The Indian stock index has less bullish than bearish volatility behavior
  • The Indian stock index has range-bound properties
  • For any trader, these findings will be useful for trading on the Indian stock index
  • The payoff formulas of strangle strategies has never been reported in the literature

This study examines the performance of two strangle strategies at different legs to find the best strategy for consistent profit generation when trading on the Indian stock market index Nifty. These strategies have been analyzed on data ranging from 2007 to 2019 on a monthly basis. Both long and short strangle strategies have been used in this analysis. Using newly developed payoff formulas for both strangle strategies, the performance up to three different legs has been measured based on the monthly success rate, profitability (in terms of points earned or lost), risk and return. The results show that the success rate, profitability, risk and return of the short strangle is better than the long strangle at every leg. Further, the risk and return of the third leg of the short strangle have been compared with other legs of the short strangle, and the results show that the third leg of the short strangle has a lower risk and a higher return than the other two legs of the short strangle option strategy. The regression analysis verified these results. Due to its higher success rate and better profitability, the third leg of the short strangle should be preferred by any trader on the Nifty looking for maximum profit generation. The high success rate, better profitability and better return of the short strangle option strategy indicate that volatility in the Nifty is more bearish than bullish, and the Nifty has directionally range-bound characteristics, which increase as the leg increases.

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