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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:567,733 / 5,727
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Selling Options on Futures?

Old March 18th, 2013, 02:53 PM   #1051 (permalink)
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Ron,

From my analysis I did over the weekend (back on page 103) it looks like we are at the lowest volatility for many of the commodities markets in the last 5-6 years. Based on how low the ROI from current premiums are, is that information in line with your experience? Are you becoming more choosy knowing that current returns aren't that great (and the risks are the same)?

Also, one thought on your Crude examples above - when you are selling somewhat OTM 0.10-.20 options and the market has been low volatility this can mean you have some additional iceberg risk. Specifically the negative gammas (big negative gammas are hazardous) in this range of OTM puts can put you ITM very quickly should both price go against you and volatility spike. So one more good reason to go with deltas below 0.03.

Edward

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Old March 18th, 2013, 03:15 PM   #1052 (permalink)
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Edward, yes low volatility equals lower ROI. I used to sell a ton of GC options with 3+% monthly ROI. Now they are <2% and I have quit doing them.

A GCM3 1350p (.0198 delta) is a 1.8% monthly ROI for me. Too low except for maybe my IRA accounts. I like to stay above 2% if possible.

When ROI is low you just have to live with it. I used to be tempted to move to a closer strike to ITM but I don't do that at all anymore. Too many painful real life lessons. I'm enjoying the almost 100% winners and low stress.

Back in the middle 2000s I had acid reflux and was on Nexium and other similar drugs. Probably from the stress of trading. After switching to selling far OTM options and doing well trading, I have dropped the drugs and don't have acid reflux anymore. I am back to eating the things that would set my stomach on fire. I don't ever want to go back to that again.

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Old March 18th, 2013, 03:25 PM   #1053 (permalink)
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I see that CL has completely reversed it's earlier losses and is now trading higher. So did anyone sell CL puts early this morning when CL was down over $1.50?

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Old March 18th, 2013, 03:34 PM   #1054 (permalink)
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MJ888 View Post
I see that CL has completely reversed it's earlier losses and is now trading higher. So did anyone sell CL puts early this morning when CL was down over $1.50?

Yes, I have sold again the same strike as last week but half the size, only five contract and will add if CL go lower in a couple of weeks or just have close @ .01
3/18/13 06:15:20 TRD 517182408 SOLD -5 /CLK3 1/1000 MAY 13 /LOK3 80 PUT @.08 -15.00 400.00
3/18/13 06:16:18 TRD 517183835 SOLD -5 /CLM3 1/1000 JUN 13 /LOM3 75 PUT @.10 -15.00 500.00

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Old March 18th, 2013, 06:17 PM   #1055 (permalink)
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MJ888 View Post
You mentioned that you traded strangles. If you sold both a call and a put with the delta at 0.08 for each, you should have on a decent trade. You mentioned that you would bail when the delta reaches 0.20. Wouldn't the other end of the strangle be showing a nice profit with a very low delta? When you bail, do you just cover the side that is losing money or do you get out of the entire strangle? For me, I consider a strangle position as ONE POSITION, so if I were to exit for a loss on one end, I would also exit the opposite end for a profit, thus cushioning the overall loss. By doing this, I was able to be at break-even to slightly profitable even if I was wrong 3 out of every 4 strangle positions. This is assuming that your position sizes, premium collected and stop loss points were the same for every trade. I wrote about this in more details a few pages back.

First of all great comments all around MJ888. But, it looks like we have some miscommunication. I do not currently sell strangles. I was inquiring because your post about them intrigued me. After I read your post I put on some strangles in my simulated account per your guidelines. I really enjoy how one side offsets losses on the other just as you described.

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Old March 18th, 2013, 06:21 PM   #1056 (permalink)
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ron99 View Post
SPAN margin is $700 each. It looks like TOS is adding more to that.

I add 2X the margin for cash excess. So in your case if I use 475/(7500+15000)/32*30 I get 1.979% monthly without fees.

I should state that this formula assumes that margin and excess stays the same to expiration. Which it doesn't. So your actual returns will be higher than this.

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Old March 18th, 2013, 06:52 PM   #1057 (permalink)
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Harlequin View Post
superb. looking forward to it

What has been happening in the data for the DCOT report is that since Feb 5th, the specs have been reducing their net long or going short on several commodities by a large amount. Unusual for this time of the year.

For CL the specs have gone from having 90% of their futures position being long to 78% longs.

CL 90 to 78 84 last year
HO 73 to 56 85 last year
C 79 to 67 86 last year
W 43 to 39 39 last year
GC 77 to 62 92 last year
SI 91 to 58 89 last year
HG 67 to 37 62 last year
LH 76 to 45 64 last year

They have done this by having 5.8% less longs in the 20 major commodities and having 49% more shorts! By far the highest ever total for shorts for the DCOT report (since June 2006).

The other thing that has happened in the same time frame is that the dollar index (DX) has moved from 79.5 to 82.5.

The commodities RB, NG, S, SM, all ICE Softs, and LC were flat to higher on net longs in the same time frame.

Any ideas why specs are adding so many shorts in commodities when the stock market is running higher?

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Old March 18th, 2013, 07:25 PM   #1058 (permalink)
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I must admit I have never quite understood how to interpret COT data

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Old March 18th, 2013, 07:44 PM   #1059 (permalink)
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mackg867 View Post
First of all great comments all around MJ888. But, it looks like we have some miscommunication. I do not currently sell strangles. I was inquiring because your post about them intrigued me. After I read your post I put on some strangles in my simulated account per your guidelines. I really enjoy how one side offsets losses on the other just as you described.

No worries about the misunderstanding. Glad you put on some simulated trades to get a better feel of how a strangle works.

Please take note that the hedge benefits on a strangle is limited. When the premium on one side erodes almost to zero, it no longer provides a hedge against further losses on the opposite end. That is why I will not stay in any strangle trade should one side of the premium doubles from where I sold.

Another point that I should mention about my stop loss on strangles is I do not exit during the day should the premium double, it needs to CLOSE at double or more and then I will make arrangements to exit during the next regular trading session should it still be trading at double or more of what I sold at. You may say that I will be taking on additional risk if the market continues to trade against me by waiting until the following day to exit. And my response to that is you are absolutely correct, it is a risk I am willing to take because there have been too many instances where I have seen the premium of an option spike higher briefly during the course of the day only to close below double of where I sold. There is NOTHING more frustrating then exiting at the high premium of the session only to see the premium trade back down at the end of the session. This morning may be an excellent example of that with CL and ES. With the Cyprus news causing an overnight sell off, premiums on ES and CL puts spiked higher but as the day went on, both ES and CL traded back to break even, CL even turning positive. I am sure some traders exited their short CL and ES puts this morning at an inflated premium only to see that same premium go back down by session's end. I need to stress that this is a decision I made based on my experience selling strangles. It is not for everyone and I admit that this has cause me some sleepless nights. And yes there have been times where I did indeed lose more than double the premium. But there have also been many more times where the premium traded at my stop loss double point during the day only to close the session way below that point. And there have been many times where the premium closed at double my entry point only to open the following day below it thus allowing me to stay in the trade.


Last edited by MJ888; March 18th, 2013 at 07:51 PM.
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Old March 19th, 2013, 11:47 AM   #1060 (permalink)
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MJ888 View Post
There is NOTHING more frustrating then exiting at the high premium of the session only to see the premium trade back down at the end of the session.

Well MJ888, yes, there is something more frustrating...seeing your premium continue to escalate the next day, like what happened with natural gas last march 15. I waited until next day and the premium went up another 100% in a few hours. I lost what I had done in the 2 previous months....Never again will I let premium go over 100% of what I received, It has happened twice to me. It is called accepting your loses.

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