What This Analysis Is About?
This study simulates a short strangle strategy in MCX Natural Gas options, where the strike prices are selected based on the prevailing Average True Range (ATR). ATR is a measure of realized volatility, indicating how much the price of Natural Gas typically fluctuates.
How It Works:
Strike Selection Based on ATR:
When volatility (ATR) is high, strike prices are selected further away from the underlying price to mitigate risk.
When volatility is low, strikes are placed closer to the underlying price to collect higher premiums.
Simulation:
The strategy was simulated for each ATR multiplier category, starting with 30 days to expiry and reducing incrementally to 1 day to expiry.
The goal was to find combinations of ATR multipliers and days to expiry that yield the best profitability and risk control.
Top Performers:
The table highlights the top 3 combinations from each ATR category based on a composite score that factors in:
Profitability (Average Profit, % Profitable Trades)
Risk (Worst Loss)
Key Recommendations
Based on the simulation results:
ATR Multiplier: 1.5 to 2.0
Days to Expiry: 25–30 days
This combination strikes a good balance between:
Profitability: High average profits and % profitable trades.
Risk Control: Manageable worst-case losses and fewer extreme price movements.
Risks to Consider
High Volatility:
Natural Gas options have Implied Volatilities (IVs) ranging from 60–120%, making them prone to sharp price swings.
Gamma Risk:
Near expiry, gamma sensitivity increases significantly, and small price movements can lead to large changes in option premiums, causing substantial losses.
Overnight Gaps:
As a globally traded commodity, Natural Gas is highly sensitive to:
Weather patterns, geopolitical events, and inventory reports.
This can cause massive price gaps overnight, leading to sudden losses for short option positions.
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