Rolling Straddle Hedge

The Rolling Straddle Hedge strategy involves:

• Building multiple Straddles using deep In-the-Money (ITM) Call & Put options across different expiries & strike prices.
• Adding more contracts at different deep ITM strike prices to manage risk and lower the breakeven point.
• Rolling positions forward to later expiries to extend the hedge and mitigate time decay losses.
• If any position moves At-the-Money (ATM) or Out-of-the-Money (OTM), additional lots are averaged to recover the position or booked with minimal loss, while profits from the opposite hedge offset losses.

This strategy ensures continuous dynamic hedging, allowing traders to profit from market reversals while managing risk efficiently

Significance:

• Ideal for highly volatile markets, ensuring profitable exits by averaging deep ITM positions.
• Multi-expiry adjustments help reduce the impact of time decay (theta loss).
• Multiple deep ITM Calls & Puts are used to create a balanced hedge.
• If a position moves ATM or OTM, averaging additional lots allows a profitable or breakeven exit.
• Losses from one side (Call or Put) are offset by high profits from the opposite hedge. 

Example:

• BANKNIFTY at 42,000.
• Buy multiple Deep ITM Calls & Puts:
  • Buy 40,500 Call at ₹1,800 and Buy 43,500 Put at ₹1,750 (Lot size = 25).
  • Buy another set at different strikes (40,200 Call & 43,200 Put).
  • Buy additional deep ITM options at 40,000 Call & 43,000 Put.
    • If BANKNIFTY drops to 41,800, Buy additional Calls & Puts to average positions.
    • If BANKNIFTY drops further to 41,600, Buy additional ITM Calls & Puts to maintain hedge.
    • If any deep ITM position moves ATM or OTM, additional averaging is done or sold at breakeven/profit.
    • Roll some of the positions to next-month expiry to manage risk.
• Outcome:
  • If BANKNIFTY rebounds to 42,500 before expiry:
    • Deep ITM Call options gain value, increasing overall profits.
    • Deep ITM Put options lose value, but gains from Calls outweigh the loss.
    • Profit is booked when breakeven is surpassed.
  • If BANKNIFTY continues falling below 41,500:
    • Newly added Put options gain value, hedging previous losses.
    • Any Call options that moved ATM or OTM are either averaged or booked for breakeven.
    • Rolling positions to later expiries preserves time value, reducing immediate risk.