Profitability of Initial Delta Neutral Strategies in the Option Market Under Different Market Conditions : Initial Delta-Neutral Strategy in Nifty 50

Abstract

This thesis explores the performance of long and short initial delta neutral straddles to find whether short straddles produce a risk premium over the risk-free rate, consistent with the past theory that traders should be paid for taking option selling risk. To measure the performance of these strategies, I used metrics such as the Sharpe ratio and the overall maximum drawdown of both strategies with statistical significance using paired t-tests, ANOVA tests, and Indian VIX regression analysis to find the overall result. These matrices also show descriptive analysis to check Nifty Fifty market liquidity, open interest, and volume.

Finally, the result shows that both straddles hold negative Sharpe ratios, which imply that these two strategies do not produce risk-free rates. Similarly, statistical tests also found these strategies are not statistically significant from each other with all market regimes, and simple regression shows that the Indian VIX has very small participation in the performance of these strategies, but the results show a weak positive and negative effect on long straddle and short straddle.

About these results, weekly short straddles make overtime a constant result, but in monthly, more volatile, On the other hand, a long straddle faces maximum drawdown, and constantly negative returns show theta decay in both time periods, weekly and monthly, but overall both strategies do not give a risk-free return, which supports the theory of the efficient market hypothesis that the Nifty Fifty is a semi-efficient market. Finally, this study has some limitations with a limited data sample, which may affect the results. Future research could analyze using a larger dataset and using alternative measures of volatility and market sentiments