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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:567,835 / 5,727
Last Reply:9 Hours Ago (12:40 PM) Attachments:642

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Selling Options on Futures?

Old April 17th, 2012, 10:09 AM   #91 (permalink)
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Interactive Brokers

Hi Ron,

I have just opened an account at IB - do you use or have had any experience them??

Regards
Scott

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Old April 17th, 2012, 10:22 AM   #92 (permalink)
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I am not sure you want to be trading at IB. I checked them out a couple of years ago and they were not friendly to option sellers.

Number one, when I called and asked about margin required, it was far higher than exchange minimum. They were the highest of any that I checked out. By far. Some FCMs do that. Some charge a little extra. Some don't charge any extra. That will severely cut ROI.

Since you already have an account there can you check on that? Pick a couple of options and find out the margin required. I have the PC-SPAN program that all exchanges use to calculate the minimum. We can then compare.

Number two, and this is a big one. I believe that if you get to the dreaded margin call that IB will automatically trade you out of the position (auto-liquidation) with a market order. You do not want that to happen. Huge unnecessary losses could result.

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Old April 17th, 2012, 10:37 AM   #93 (permalink)
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Hi Ron,

I just checked IB margins on the following contracts:

July Corn 5.00 put 1323
July Crude 75 put 1338
June ES 1000 put 1464
July KC 250 CALL 919
June GC 1300 put 3535

Are you able to check them against your broker?

Also, I just confirmed with IB by phone that you are 100% correct with the auto liquidation of your position instead of issuing a margin call....that's not good at all.

Regards
Scott


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Old April 17th, 2012, 10:44 AM   #94 (permalink)
Market Wizard
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Initial Margin for Apr 16, 2012.
............................PC_SPAN..OX........IB
July Corn 5.00 put 343.00 411.48 1323
July Crude 75 put 323.00 354.92 1338
June ES 1000 put 341.25 341.25 1464
July KC 250 CALL 228.00 228.00 919
June GC 1300 put 564.00 564.30 3535

I see that IB is a lot higher than PC-SPAN (the minimum) and OX. Almost 7 times higher in gold!

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Old April 18th, 2012, 12:52 AM   #95 (permalink)
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Futures Edge on FIO

Are you a NinjaTrader user?

 
Ron,

Thank you for answering my recent questions in the private message section and as you requested, I will now continue our previous conversation in the open forum for all to enjoy and hopefully learn from.

I previously mentioned that I bought my first option in the silver market. You asked what lead me to that purchase.....it is one of the financial astrologers that I am currently testing out right now that has predicted $42.00 silver by the end of May....so we shall see! I agree with your comment otherwise, the margin requirements in that market are relatively high that I, too, avoid selling there as it seems to bring down the returns.

I mentioned that I have my account with PFG Best. You are correct, they do not charge a fee for options expiring. With my comission structure of $15 each way per contract, I prefer to sell the options and try to let them expire as it takes a much smaller chuck out of my profits....its like turning the commission structure in to $7.50 each way.

Here is one question and response I am having a little trouble understanding from our private message post:

"You mentioned you try to make 3% ROI on a 30 day basis.
How do you calculate this with selling options?
Are you looking at the amount of premium you will receive in relation to the amount of margin you need to put up for that option?

I take premium of the option minus fees divided by (margin required plus the excess cash I keep on hand for that position). But that ROI is low because as the margin decreases I am reinvesting that unneeded margin and selling new positions. The 3% assumes that I am keeping the same margin and excess until expiration, which isn't true. But I don't know any other way to calculate it. But it does give me a way to compare options and pick the ones to sell."

I understand the "premium of the option minus fees divided by margin" part, but how do you determine what exactly is the amount of excess cash that you will keep on hand for that position?

Do you revert back to the 66% cash reserve? Could you give me a simple example...using some arbitrary numbers? Maybe $115 in premium with $15 in fees and comminssion and $1,000 in margin to keep things simple.....

When you continue to add postions in this example, do you generally add at the same strike price or do you start you evaluation all over again?

Thanks again for your input!!!!

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Old April 18th, 2012, 02:38 AM   #96 (permalink)
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Annualised Rate

Hi,

I was also thinking about a hurdle for ROI and the way i was planning on approaching it is with using a minimum 40% annualised rate:


Margin1200.00Cash Buffer2400.00 (Marginx2)3600.00Premium Recd132.00Fees-15.00Net Received117.00Days to expiry30Annualised Return40% (hurdle of 40%)

This way, whether the position is held for 90days, 43 days or any other timeframe, it still roughly meets the 3% ROI per month compounded rate:

Margin1200.00Cash Buffer2400.00 (Marginx2)3600.00Premium Recd380.00Fees-15.00Net Received365.00Days to expiry90Annualised Return41% (hurdle of 40%)

Example for 17 days (eg, if then using excess margin closer to expiry):


Margin1200.00Cash Buffer2400.00 (Marginx2)3600.00Premium Recd82.00Fees-15.00Net Received67.00Days to expiry17Annualised Return40% (hurdle of 40%)

The annualised formula, for the last case, is: (67/3600)/17days x 365 days



What do you think??? Am keen to hear your thoughts.


Regards
Scott

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Old April 18th, 2012, 02:44 AM   #97 (permalink)
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Annualised Return

That didn't come out too well - have a look at the file instead!

Attached Files
Register to download File Type: xls Annualised Return.xls (21.5 KB, 116 views)
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Old April 18th, 2012, 01:47 PM   #98 (permalink)
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Its Magic View Post
"You mentioned you try to make 3% ROI on a 30 day basis.
How do you calculate this with selling options?
Are you looking at the amount of premium you will receive in relation to the amount of margin you need to put up for that option?

I take premium of the option minus fees divided by (margin required plus the excess cash I keep on hand for that position). But that ROI is low because as the margin decreases I am reinvesting that unneeded margin and selling new positions. The 3% assumes that I am keeping the same margin and excess until expiration, which isn't true. But I don't know any other way to calculate it. But it does give me a way to compare options and pick the ones to sell."

I understand the "premium of the option minus fees divided by margin" part, but how do you determine what exactly is the amount of excess cash that you will keep on hand for that position?

Do you revert back to the 66% cash reserve? Could you give me a simple example...using some arbitrary numbers? Maybe $115 in premium with $15 in fees and comminssion and $1,000 in margin to keep things simple.....
Yes 66% cash reserve or 2X the margin required for cash. For some more volatile contracts, I may use 3 or 4 times for cash.

For example, the margin required for a June NG 3.00 call is $332 (Apr 18 trading). I put $664 for cash excess. So $996 to cover the trade. $40 premium minus $15 for fees leaves $25 possible profit. $25 divided by $996 equals 2.5% ROI in 38 days. Converted to a 30 day basis that is 2.0% ROI.

A 2% monthly ROI is 26.8% yearly when compounded monthly. I bet a lot of people will take that.

But in reality the returns are even higher. When the option gets closer to expiration and if the market isn't going severely against you, or if the exchange doesn't raise margin rates, then you will have some of that $996 to reinvest in another option. The 2% ROI would be if you kept $996 to cover it until it expired. Which rarely happens.


When you continue to add postions in this example, do you generally add at the same strike price or do you start you evaluation all over again?

Most times a new strike. But if bids are there and the return is good I will add more contracts at the same strike.

Thanks again for your input!!!!

You're welcome.
Ron

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Old April 18th, 2012, 02:26 PM   #99 (permalink)
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Yes Scott, that is exactly how I calculate it. I have been using a spreadsheet with those calculations for years.

One thing I would caution is that you can't set a minimum or hurdle and strictly stick to it. You have to go with what the market gives you.

Sometimes the market will only give you 1-2% monthly ROI. Other times 5-6%. You just never know when. Don't try force to trades. Don't make trades to just have something on. Sitting on your hands is sometimes the best thing to do. And revenge trading (trying to force trades to get back money you lost) is always bad.

I have made all of these mistakes. Hopefully you won't have to learn the hard way too.

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Old April 19th, 2012, 12:53 PM   #100 (permalink)
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Question



ron99 View Post
I have been selling options on futures for years. But it is rare to find others doing it. I was wondering if there are others here doing it.

I have been doing it for 5 years. Learned it from James Cordier's book.

I have sold energy, grain, softs and metal options. Far out of the money. Usually less than 90 days from expiration.

Hi Ron, I am new here and wanted to know where can I see your trades? Do you show them any where in this forum?

Thanks,
Alfredo E.

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