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1/27/20253 min read

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Short volatility strategies are trading approaches designed to profit from a decrease in implied volatility or range-bound market conditions. These strategies are commonly used during Nifty weekly expiries, as weekly options decay rapidly due to the proximity to expiry, making time decay (Theta) the primary driver of profits.

Here are some short volatility strategies with examples specific to Nifty weekly options:

1. Short Straddle

  • A neutral strategy where you sell both the ATM Call and Put options with the same strike price and expiry.

  • Objective: To profit from time decay (Theta) when Nifty remains near the strike price.

  • Risk: Unlimited if Nifty makes a big move in either direction.

  • Reward: Limited to the premiums received.

Example:

  • Nifty Spot: 18,000

  • Weekly Expiry: 2 days away

  • Sell:

    • 18,000 CE at ₹100

    • 18,000 PE at ₹120

  • Total Premium Collected: ₹220

  • Breakeven:

    • Upper: 18,000 + 220 = 18,220

    • Lower: 18,000 - 220 = 17,780

  • If Nifty stays between 17,780 and 18,220 until expiry, the strategy is profitable.

2. Short Strangle

  • A neutral to slightly directional strategy where you sell OTM Call and Put options.

  • Objective: Profit from time decay when Nifty remains within a predefined range.

  • Risk: Unlimited if Nifty makes a sharp move outside the range.

  • Reward: Limited to the premiums received.

Example:

  • Nifty Spot: 18,000

  • Weekly Expiry: 3 days away

  • Sell:

    • 18,100 CE at ₹60

    • 17,900 PE at ₹70

  • Total Premium Collected: ₹130

  • Breakeven:

    • Upper: 18,100 + 130 = 18,230

    • Lower: 17,900 - 130 = 17,770

  • If Nifty stays between 17,770 and 18,230 until expiry, the strategy is profitable.

3. Iron Condor

  • A limited-risk, limited-reward strategy where you combine a short strangle with long OTM options to cap the risk.

  • Objective: Profit from range-bound movement with defined risk.

  • Risk: Limited to the difference between the short and long strikes minus the net premium received.

  • Reward: Limited to the net premium received.

Example:

  • Nifty Spot: 18,000

  • Weekly Expiry: 4 days away

  • Sell:

    • 18,100 CE at ₹50

    • 17,900 PE at ₹60

  • Buy:

    • 18,150 CE at ₹20

    • 17,850 PE at ₹25

  • Net Premium Collected: (50 + 60) - (20 + 25) = ₹65

  • Breakeven:

    • Upper: 18,100 + 65 = 18,165

    • Lower: 17,900 - 65 = 17,835

  • Risk: Limited to the difference between strikes (50 points) minus premium received (65) = ₹35 loss per lot.

4. Short Butterfly

  • A neutral, low-risk strategy that profits from low volatility and sharp time decay near expiry.

  • Objective: Profit from limited movement around the ATM strike.

  • Risk: Limited to the net premium paid.

  • Reward: Limited but higher than a strangle or condor.

Example:

  • Nifty Spot: 18,000

  • Weekly Expiry: 2 days away

  • Sell:

    • 2x 18,000 CE at ₹100 each

  • Buy:

    • 18,050 CE at ₹70

    • 17,950 CE at ₹65

  • Net Credit: [(100 x 2) - (70 + 65)] = ₹65

  • Breakeven:

    • Upper: 18,000 + 65 = 18,065

    • Lower: 18,000 - 65 = 17,935

  • If Nifty stays near 18,000, you keep the premium.

5. Calendar Spread (Using Weekly Options)

  • A slightly bullish or bearish short-volatility strategy where you sell a near-term weekly option and buy the same strike of a later-dated option.

  • Objective: Benefit from faster time decay of the short position while hedging risk with the long position.

  • Risk: Limited.

  • Reward: Limited to the net premium difference.

Example:

  • Nifty Spot: 18,000

  • Weekly Expiry: Sell 18,000 CE expiring in 2 days at ₹90.

  • Next Week: Buy 18,000 CE expiring in 9 days at ₹130.

  • Net Debit: ₹40

  • If volatility decreases and Nifty stays near 18,000, the shorter-dated option decays faster, resulting in a profit.

Key Considerations for Nifty Weekly Short Volatility Strategies:

  1. Theta Decay: These strategies benefit from time decay, which accelerates as expiry nears.

  2. Implied Volatility (IV): Enter when IV is high and expected to drop. Avoid short volatility when IV is low.

  3. Risk Management:

    • Always hedge (e.g., use Iron Condors instead of naked Straddles).

    • Monitor positions closely, especially near expiry or during news/events.

  4. Adjustments: Roll over or hedge positions if Nifty breaches breakeven levels.

  5. Lot Size: Nifty options have a lot size of 50, so ensure proper position sizing.

By applying these strategies with discipline, traders can profit consistently in Nifty weekly options while managing risk effectively.