Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

How the 9.20a.m Intraday Straddlers are Being Gamed?

3 min read

9.20 Straddle is a popular trading strategy in Nifty and Bank Nifty Options. The strategy involves a very simple execution process and can be easily automated and doesn’t involve much of the complexity and it comes with only one vulnerability. Yeh, it can be gamed with stop hunting.

What is 9.20 a.m Intraday Straddle?

Sell the Nifty Straddle (ATM CE and ATM PE options) exactly at 9.20 a.m in the morning with a fixed stop loss on both the legs say 40% or any other fixed stop of your comfort from the entry price with SLM orders.

Exit the Straddle at 3.10 p.m in the evening.

If the stop hits one of the legs then continue the other leg with the stop loss.

Trading ActivityOrders to be Placed
Time-Based EntryEnter Straddle/Strangle at 9.20a.m (Two legged Order)
Calculate the Short Call Average PriceCalculate the Short call Stoploss
Calculate the Short Put Average PriceCalculate the Short Put Stoploss
Place Stoploss Orders (SL-Market)Place the Stoploss for both Short call and Short Put if the entry order status is completed
Check Open PositionsCheck the Open Positions for the Qty traded
Time-Based ExitSquare of Short Call and Short Put legs for the qty present in the open positions around 3.10p.m.

Backtesting Results

Used the Backtesting tool Quantman to implement intraday short straddle strategy

Here are the backtest results for Nifty Monthly Options Since 1st Jan 2017 to date

Intraday Monthly Straddle Backtesting Results Since 1st Jan 2017

Intraday Weekly Straddle Backtesting Results Since 1st Apr 2019

How the Strategy makes money?

Short straddles make money from intraday time decay. It is a well-known fact that weekly options erode more in time compared to monthly options and so the strategy is quite successful on the backtest results. However, on the real-life scenario, there are a couple of challenges with execution.

What are the Challenges in Execution?

When you are designing any strategy three things need to be ensured for running smoother operating.

1)Transaction Cost & Slippages
2)Liquidity
3)Strategy Adaptability

1)Transaction Cost and slippages

Transaction cost and slippage play a vital role in any rule-based trading system and in many cases 80% of the profitable system post the transaction and slippage will not yield smooth returns and in some cases strategy could get into losses because of high frequency of trades or higher transaction + slippage charges.

In the case of punching MKT orders at entry the slippage+transaction cost in a highly liquid environment could be anywhere between 1-2.5% of the total premium turnover.

When Exit is designed to be SL-Market Orders and hence liquidity and market volatility plays a major rule in slippage when the exit is likely to be an SL-Market order. Traders Generally go for SL-Market order as it guarantees execution however it doesn’t guarantee the price of execution. Stop order execution based on the available liquidity and market volatility.

2)Liquidity in Nifty Options

Nifty Options is considered as one of the highly liquid trading instruments. However, that is partially true as Nifty with strike price with round numbers of 100 for example 16400,16500,16600 are highly liquid and more business happens and that results in more trading volume and better open interest built-up

However the strikes with 50 multiples for example 16350,16450, 16550 lack liquidity, and less business happens, and one of the reasons why fewer market makers are interested in supplying liquidity around those levels. Mostly such strike price trade with thin liquidity zones and at times it is vulnerable to manipulation of SL-M orders once in a while and though it cannot be manipulated on a day-to-day basis as the underlying is Nifty Index which is very tough to manipulate on a daily basis.

How to Find Liquidity in Options?

I have already written a brief article on how to determine liquidity in options using orderflow tool Orderflow helps traders indirectly to measure the availability of liquidity.

Liquidity in Nifty 16450 options – 1min Orderflow charts (Executed Market Orders in Lot Size)

Liquidity in Nifty 16500 options – 1min Orderflow charts (Executed Market Orders in Lot Size)

with the above comparison of 16450CE and 16500CE – Aug 2021 Monthly expiry it is evident that 16500CE is more liquid and at least 3-10 times denser compared to the liquidity at 16450CE. And this is true across the strikes ending with 50s. Hence 50s are vulnerable to run straddles with SL-Market Order as it could result in higher slippage if ultra-thin liquidity zones are available.

3)Strategy Adaptability

How many traders are using the strategy is what adaptability is all about. Any strategy easy to learn and easy to implement involves faster adaptability and the learning skill and time involved to learn and implement is very less. Strategies like 9.20 straddle went viral across social media and many young/experienced traders who have no idea about liquidity ended up trading the system without knowing the vulnerability.

When the masses are adopting a particular trading system with fixed Stoploss Market Order and that too in a thinly traded counters like 50s strike price in Nifty Options by the masses it is vulnerable once in a while when situation favors the manipulators.

How Vulnerable a Mass Strategy Adaptability could bring pain to the traders?

Extraordinary Slippages – that’s the vulnerability that SL-M orders could bring when the SL-M orders are getting triggered in a less liquid but highly volatile trading environment.

A better example is 20th August 2021 one of the options strikes 16450PE (26th Aug 2021 Expiry) just went from 122.70 to 803.50 in the very next second triggering SL-M orders in an avalanche manner (one SL-M Order triggered another SL-M Order as there is a lack of liquidity and ended up selling at higher liquidity levels)

And moreover out of the 6287 lots it is unclear what are the levels of execution happened as the exchange itself transmits only consolidated ticks at every one-second interval. The Slippage cost for most of the intraday 9.20 straddlers and any other traders shorted in 16450CEs with SL-Market orders could be anywhere between 100 points to 680 points per lot (i.e Rs5000 – Rs34000 per lot)

16450CE SL-M order Triggered – 6287 lots

Is that a manipulation?

A Very high possibility looking into the sudden short covering of massive quantity of position within a single second and later it gets cooled off immediately as the price is back to the liquidity zone.

What’s the Key takeaway?

  1. Consider using Stop-Limit Orders or Market Protection Orders.
  2. Be aware of Liquidity conditions before involving in any trades (Systematic/Discretionary) setups.
  3. Avoid trading strategies that are already adopted by the masses.
  4. Be aware of transactions costs and slippage and understand the basic mechanics of market microstructure works.
  5. Mid of the day liqudity is dried up and during those phases SL-M Orders are vulnerable for stop hunting even if it is ATM strikes (Nifty, Bank Nifty)
Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

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