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Bank Nifty Expiry Day Strategy with 71% Success Probability

Hello Traders, It has been a very long time since my last article. So, finally, I am back with some interesting stuff. This article is about the Bank Nifty Expiry Day Strategy. There are many traders who only trade on expiry day because of the high success probability. So, today I will discuss one of my expiry day strategies. This is not a new one, many in the market use this to take advantage of high theta decay on expiry day.

Strategy – THE SHORT STRADDLE

Many traders deploy short straddles but on the expiry day it gives more profit, let see how. But before, if you don’t know what is mean by short straddle I will say it in one line – ” SELLING CALL OPTION AND PUT OPTION OF SAME STRIKE PRICE”. The payoff graph looks like below.

Execution Process

According to this strategy – as soon as the market opens at 9.15 on the expiry day (usually Thursday) a trader should sell a call option and put the option of ATM (At the money) Strike Price at open prices.

Let me explain this with an example – Let us say Bank nifty opened at 10700 and Open Prices of Call Option(CE) and Put at 10700 are 170 and 165 respectively. So one has to sell this strike at Open Prices (i.e., 170,165) by placing a limit order and have to wait for the market to execute your trades

That is it. Now you can wait till 3 Pm and Theta Decay will take care of your trade. Since we are trading on the expiry day there will be no much movement in the bank nifty and there are high chances for bank nifty to expire near opening price itself.

I have backtested the data of 4 Years and let us see what the results are showing. In the below screenshot you can see the results.

In the above picture, there are two results first one showing the results of a plane short straddle without stop loss and the second one showing the result with stop loss. In both of their trades with stop loss are giving better results.

What will be the Stop Loss for this Strategy?

Stop loss will be twice the option price. In above case, stop loss for Call Option is 170*2 = Rs.340 and for Put Option 160*2=320. From the backtested results, you can observe that there is only a 2% increase in the success probability after placing the stop loss but that matters a lot.

Placing Stop Loss in this strategy saves you from facing huge drawdowns.

The above snip can show you what will be drawdowns if you don’t place the stop loss. These hug drawdowns of 500,1000 points can badly affect trader emotions. So, always place a stop loss and save your account from huge losses. The above snip also shows the difference in profit/loss of without stop loss trades and with stop loss trades. In fact, some of the loss-making turned into profit ones if one would have placed stop loss.

We are at the end of this article and before going I want to explain one more interesting result which I observed in the backtest. I analysed 172 trades from 2017 to now and in the end, the profit point for the trades without stop-loss is 6549 and for with stop loss is 10465. The difference is huge.

If you have placed only one short straddle order on every expiry your profit would something look like below

For Trades without Stop Loss, Profit = 6549*20 = Rs.1,30,980 ( Lot Size of Bank Nifty is 20)

For Trades with Stop Loss, Profit = 10465*20 = Rs. 2,09,300

 

 

7 Comments

  1. Thanks for the very simple yet powerful strategy. I have a query. If the SL is hit on either side, should i exit the trade on the other side as well or leave it to close. Why i ask is if market is moving in range, it could hit both the SL on the same day.
    Pls explain how to exit from the trade in different scenarios. Thanks Rajat.

    1. On the expiry day mainly on bank nifty, after 1 PM it gives violent moves with large wicks on both sides. In this case, it is better to exit on another side also. Because this kind of moves can bring loss by hitting both stop-losses. (If you exit then you will be at break-even or at a minimum loss position). But if the market becomes directional then there is no need to exit.

  2. Why not buy a straddle instead? Since expiry day experiences huge option price movements (due to high Gamma), isn’t there a good chance of making good (but predefined) profits?

    1. Hi Anubhav, I think it is not possible. Since we are trading on expiry day there is no much time left. Time decay will be very high. Even with huge movement also by the end of the day, there will be no much difference between the open and closing prices. On expiry days, selling is profitable than buying.

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