I have been looking at some of the chains for OTM options and notice that the Bid/Ask spread is very wide in alot of them.
I have a question - when you are entering an order (say, short put) and the Bid/Ask is showing 0.15 / 1.20, do you tend to enter (using LMT order) it:
a) at the Bid (0.15)
b) slightly inside the Bid (say 0.20 or 0.25)
c) at the midpoint of Bid/Ask
d) very close to the last traded price
I know there is no set answer and it will depend on alot of things - but how do you think I should approach entering orders in markets like this?
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As far as placing orders. That is one thing that takes a lot of experience because each market is different. For ES you can place a bid between the bid and ask and usually get filled if there is enough volume on that option. For most others you have to kinda know that market. And some days you just can't get anything done at a reasonable price. Never chase a bid to just get something on. Some commodities you have to offer less than settlement to get them on. Others you can sometimes get higher than settlement (assuming futures aren't too far from settlement).
Some days there are reasonable bids that you can sell. Some days you place an ask and get filled. Some days you can't get anything done.
Are you familiar with how Delta works to apply it to the changes in futures price? For example if you want to sell crude puts and futures are down 1.50 you take the delta, let's say .0200, and multiply it times the price change for the futures. So 1.50 times .0200 equals .03. So you take the prior day settlement for that option, lets say .06, and add the .03 to get .09. That would be a fair price for that option right then.
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I am glad this thread has been reactivated. I too have started selling futures options in my pension account this year, after reading the Cordier/Gross book and reading and watching everthing on Optionsellers.com.
I am in the UK and can really only use IB within my pension account. This gives me inferior margin requirements as mentioned before. I have been trading futures on and off for about 10 years with limited success. I only say that to show that I am well aware of the difficulties and risks involved with trading, having wiped out a couple of small accounts in that time.
So far I have successfully written Euro, Wheat, Coffee and Crude oil. I do find it difficult to find suitable ROI for the margins IB requires and I am going out two, three and four months to find decent premium.
I currently have a Crude strangle on the go if anyone is interested I can post details. I am looking at Gold after the latest email seminar from Optionsellers.
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Hi SPJ77, could you tell us what kind of premiums did you get from selling those puts and calls?
According to what I know, you got very small premiums because your options were only 30 -60 days away. In order to collect more premiums and to be more out of the money, less risk, you have to get farther away in time. Am I correct?
Thanks, for your information.
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I think he just picked out those contracts to check on the margin rates. I don't think he traded them.
Being more out of the money and further out in time is not necessarily less risky. It is harder to predict where future prices will go 4-5 months out than it is 2-3 months out. Look at the Delta numbers to determine the risk of an option.
Also don't get too greedy with premium. It just puts you too close to ITM and disaster in your account.
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First a quick explanation of why I chose this trade. My broker IB uses 1.5x margin within UK pension accounts. So for Crude I am looking at around $2000 margin per contract. Then I am looking for around 10% ROI, so $200 per contract per month.. At the time of the trade Oil was around $100 and I was looking to go 20% OTM. I am biased to the long side on oil.so sold the following using the layering technique suggested by the Liberty guys.
Date 9th April 2012
AUG12 80P for 0.52 $520
SEPT12 77.5P for 0.64 $640
SEPT12 80P for 0.87 $870
OCT12 77.5P for 0.94 $940
OCT12 80P for 1.22 $1220
Then to create a margin free strangle I sold the JUN12 120C for 0.23 or $230 on 11th April. As many as possible without pushing up margin. I chose the next month as it had only 6 weeks remaining and offered a reasonable premium. I was of course concerned about the geopolitical situation with Iran but talks were starting so I felt OK about it.
Over the 3 weeks duration of this trade so far, Crude has maintained a narrow range of $100-105. This has greatly aroded all positions and on Friday I closed out half of my AUG12 80P for 0.22 generating a profit of $300 per contract (minus commissions). This was a return of 15% in 3 weeks!
As of Friday the JUN 120C were 0.08 so up $150 per contract with 20 days to expiry. Depending on what Crude does today I may start to thin these out to reduce risk
The following 3 users say Thank You to britkid99 for this post:
Interesting. I would have done a few things different, but this has worked for you so far.
I would have sold lower strikes on the puts farther out in time. Maybe try to keep the premium the same as your Aug puts when you moved to Sep and Oct by moving to lower strikes. If the market goes against you the Oct would feel the most heat. Currently the delta on the Oct is twice as high as the Aug 80. 0.0348 Delta for Aug vs 0.0691 for Oct.
So if today crude dropped $3.00 then the Aug 80 would move at least 0.10 (3.00 times 0.0348) while Oct 80 would move 0.21 against you. The Oct 80s are twice as risky as the Aug 80. An Oct 72 put is the same risk as an Aug 80 today. On Apr 9th it settled at 0.58.
What percent of your account are you using for margin? Cordier mentions 50%. I have found that 66% works better. You are pushed out of positions less quickly with more excess. By being able to ride more positions out to expiration you are able to make up for the less contracts put on by having less losers. Of course if the market has a major fundamental reason for going against you, you need to get rid of the positions and not try to ride them out.
Just so everybody is clear, I'm guessing you are calculating the ROI by just using margin and not the excess you are carrying for the trade. Right?
If you are worried about the 120 calls, you could buy a call above the 120 to turn your possible unlimited loss into a limited loss. That will also reduce the margin required to put on the 120s. It also makes FCMs happier.
I sell further OTM options than you did. After a couple of blowups in 14 years of trading I learned that lesson the hard way.
Be aware that crude has crashed hard in early May the last 2 years. While what it did last year isn't always a good predictor of what it will do this year, keep that in the back of your mind and use that to determine whether to bail or not on positions.
I suspect that this Friday's monthly employment number will have a strong bearing on where crude will go later in May.
I need to get back to my own trading. Good luck.
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