Selling a weekly NIFTY OTM strangle: steady profits, uncapped risk

The idea

Most weekly NIFTY options expire worthless. A short strangle sells one call well above the index and one put well below it, collects both premiums, and profits if NIFTY stays between the two strikes until the options are closed or expire. The further away the strikes, the less premium you collect, but the less often the index reaches them.

This version sits about 600 points away on each side, re-centres the strikes when NIFTY moves 200 points, and carries positions overnight. It has no protective options bought further out, so a big enough move has no ceiling on the loss.

The rules

• Sell one weekly NIFTY call at the index +600 and one put at −600 (strikes rounded to the nearest 100).
• Re-centre: when NIFTY moves 200 points from where the position was opened, close both legs and sell a fresh pair at the new level ±600 (in this test, at most once a day).
• Roll to the next weekly expiry when less than a day remains.
• Carry positions overnight; an average position lasts about 2½ days.
• Cost: 0.4 points per strangle round trip, calibrated to real fills (see Wrong costs, in either direction).
• No stop-loss: the re-centre is the only adjustment.

The backtest

Data: 1-minute NIFTY weekly option prices, 1 June 2023 to 23 June 2026 (about 3 years). Open positions are valued at every day’s close.

(t measures whether the average trade is distinguishable from zero; around 2 or more is needed before we call a result more than luck. ret/DD is the average profit per year divided by the worst drawdown.)

Year by year, per lot of 65 units:

*2023 from 1 June; 2026 up to 23 June.

What it takes in capital. A short strangle needs about ₹2.25 lakh of margin per lot. Because losses on sold options arrive during the day, we size the buffer on the worst intraday loss in the test: 932 points × 65 ≈ ₹0.61 lakh. That makes the capital about ₹2.9 lakh, on which the average profit of about ₹44,000 a year is a return of about 15% a year. The worst intraday loss took about 21% of the capital.

The days that hurt

Every one of the worst days began with a large overnight gap in NIFTY, in either direction:

On election-results day, NIFTY fell about 1,300 points; the put sold at 22,200 went from ₹164 to ₹1,156 by midday. The position recovered most of that by the close, but anyone without enough margin could have been closed out at the worst point.

Robustness tests

• Profitable in all 13 quarters, the steadiness you expect from selling far-out options.
• Not dependent on a few trades: the five best produced 29% of the profit, and the best quarter 17%.
• Costs barely matter at these levels; doubling them takes about 9% off the profit.
• Not fragile to its settings. Dropping the re-centre altogether (the row above) was still profitable. Earlier exit-only runs of the same idea at 400 and 500 points were also profitable, though not directly comparable.
• Re-centring trades profit for safety. Holding each strangle until the expiry roll, without re-centring, made about 50% more (+1,016 points a year against +672), but its worst drawdown was almost 2½ times deeper (−1,038 points), only 10 of 13 quarters were profitable, and one quarter produced a third of the profit. For strikes this far out, re-centring gives up premium but buys a much smoother ride.

Risks

• Uncapped losses. There is nothing bought further out to limit a move. A crash or a gap of a few thousand points, larger than anything in this sample, could cost many months, or years, of profit in one day.
• Overnight and weekend gaps. Positions are carried, so a shock outside market hours is met at the next open with no chance to react.
• Margin calls. Losses and margin requirements both jump on big days; without spare capital you can be forced out at the worst moment.
• A benign sample. About three years, and the biggest event in it (the 2024 election) recovered within the day.
• Rule changes. Weekly expiries, lot sizes and margins have all changed in recent years and may change again.

An idea we could not test. Staying out of the market around scheduled big events, such as election results or the budget, might lower the risk. We can’t test it honestly: deciding after the fact which events counted would be hindsight.

Pros & cons

Pros

• Steady: profitable in every quarter tested, winning about 7 trades in 10.
• About 15% a year on capital, well above a deposit, with low trading costs.
• Simple, mechanical rules.

Cons

• Losses are uncapped; the risk is in the tail, not in the averages.
• Needs margin plus a real buffer, and nerves, on gap days.
• Only three years of data, without a true crash.

Our verdict

It passed all eight of our checks: profitable, steady, robust to costs and to its settings, and consistent across both halves of the test. On numbers alone it is one of the most reliable strategies we have tested. We still rate its risk Extreme, because the losses have no ceiling and its record contains no real crash. The key question is whether you can follow the rules consistently, and whether your capital can survive a day far worse than 4 June 2024.