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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:567,857 / 5,727
Last Reply:11 Hours Ago (12:40 PM) Attachments:642

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Selling Options on Futures?

Old April 6th, 2013, 12:08 AM   #1261 (permalink)
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vmaiya73 View Post
What would you guys do with Natural Gas? Selling deep OTM calls or deep OTM puts?

One thing i need to get over is being scared when a position goes against me. I was thinking about getting into OTM calls on /NG which expire in 21 days but chickened out and maybe did the right thing as today its up almost 5 %

my fear is going to get the best of me.

V

I'll make one suggestion. You do need to stay with deltas <.0300 or even better for new traders <.0200.

There weren't any May NG calls with a delta that low that were trading for more than $10 before today. So you should be scared if you are selling options with higher deltas because they will jump up and wipe you out. What strike were you looking at?

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Old April 6th, 2013, 12:37 AM   #1262 (permalink)
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eudamonia View Post
@vmaiya73

I think Ron has made it pretty clear what he is doing with Nat Gas and you know what my position is. I don't think there is anything wrong with following some trades (that is certainly what I am doing in this thread), but you will need to understand why the trade is being taken and as Kevin mentioned, you need to determine when you will get out.

Most importantly you need to define and accept the risk. This is true with any type of trading. Before I got into this trade (or any trade) I determine the risk.

So to put it all out on the table here is my NGM35C trade:

I started looking at this trade based on Ron's recommendation. I looked at the fundamentals (like supply and the weather) that Ron pointed out by doing various Google searches. Essentially the supply side is weak (which has driven up demand recently), but demand side is largely driven by weather which has been warm and is going to get warmer. Additionally, a few pages ago Ron mentioned that supply side shifts will likely occur if prices move higher. Overall fundamentals are neutral short-term more bearish long-term IMO.

I went and looked at the seasonal tendencies (and even asked Ron about those a few pages ago because they break down into two types of seasonal variances) - Natural Gas Futures (NYMEX) NG - Seasonal Charts. I noticed that prices tend to either rise from recent lows or fall from recent highs. We aren't at recent lows so it would make sense that we more likely fall or consolidate around recent highs.

Next I went and looked to sell calls (since I'm neutral to bearish) in the intermediate term and I looked for delta at 0.02 and all the good things that Ron has mentioned in this thread regarding getting a decent return on our margin.

This morning I entered NGM35C at 0.005, 3 contracts, delta at 0.04 (things moved up pretty aggressively this morning), for $135 in net premium, $733 margin, $1465 buffer and DTE of 53 for an ROI of 3.07% per month.

Most importantly before I got into this trade I determined the risk I was willing to accept. Per Ron's rules (which I am attempting to follow verbatium to learn on a small account) I will exit should the price moves against me plus the increase in margin exceed my buffer. Going through the current options prices gives me an idea of where that is. If the price moves up to 4.8 I would be forced to bail. When I calculated this trade 4.8 was trading at a premium of $440 for 3 contracts. This is my anticipated max loss.

This gives me plenty of buffer regarding the current events to see whether my hypothesis is correct. As Ron points out, if I find that my hypothesis is wrong - say weather gets colder in the next few months then I will get out before or at my max loss.

Very good post.

One thing I will mention is that I highly doubt you will be able to ride this option until 4.8 futures. The margin increased about 76% for this option on Friday ($360 SPAN), the premium increased by $50 and the futures are only at 4.160.

I do think that the NG price rise on Friday was more due to the markets reacting to the employment report than fundamentals. I have seen many times in the past when CL, RB & HO are down NG is up. I suspect there are a lot of specs that get long CL, RB & HO and short NG.

OI for NG has been growing at a huge rate lately. So probably the NG shorts were bailing to help cover their losses in CL, RB & HO. We'll see next week.


Last edited by ron99; April 6th, 2013 at 12:43 AM.
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Old April 6th, 2013, 01:12 PM   #1263 (permalink)
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ron99 View Post
OI for NG has been growing at a huge rate lately. So probably the NG shorts were bailing to help cover their losses in CL, RB & HO. We'll see next week.

My understanding is that short covering leads to a drop in open interest; an increase in open interest can only come from new positions being initiated.

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Old April 6th, 2013, 08:14 PM   #1264 (permalink)
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Karen the great!

Hi ron
I'm wanting to purchase James Cordiers' book can you tell me if Karen's method (of the tastytrade videos) is using the same methods in the book, and is Karen's method the same as yours?

TIA cheers

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Old April 7th, 2013, 07:34 PM   #1265 (permalink)
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Futures Edge on FIO
I don't believe Karen's method has any similarities to Cordier's book. Cordier is looking at optiops with about 100 days away with premiums of no less than $300 in various commodities. Karen specifically trades index options (mostly puts) about 56 DTE, 100 points away then 12% further out. Cordier's book is a good primer for selling options but there are a considerable amount of different approaches to selling premium. Karen introduces another one of those methods.....

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Old April 7th, 2013, 10:39 PM   #1266 (permalink)
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Bookworm View Post
My understanding is that short covering leads to a drop in open interest; an increase in open interest can only come from new positions being initiated.

Short covering doesn't always lead to a drop in OI. If new shorts replaced the contracts that are short covering then OI will stay the same.


Last edited by ron99; April 7th, 2013 at 10:45 PM.
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Old April 8th, 2013, 01:06 AM   #1267 (permalink)
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ron99 View Post
I don't know why she picked 100 points and 12% more away. Maybe because SP rarely if ever moves that much in 56 DTE?

I looked at a recent worst case scenario. May 2010. ES was ~1200 5/3/10. It dropped to 1014 7/2/10. Using her formula, (1200-100)-12%=968. So her formula covered that big drop.

Now it wouldn't have covered the 2008 drop. But that is where you overrule your criteria based on current conditions.

For the 56 DTE, I'm guessing that for options with the delta she trades, about .0500, that is the sweet spot where time erosion on the premium hits harder.

If you are selling lower delta then the sweet spot for DTE would be higher.

I was wrong on that delta. Tonight I went back and looked at the May ES puts. On Thursday March 21st, day before the 56th DTE, ES settled at 1539. If you subtract 100 then remove 12% you get 1266. Delta for the 1265 ES May put on Mar 21 was .0170 not the .0500 I mentioned above.

She was using the TOS calculation of % chance ITM. That number was 5% for puts. 10% for calls.

So Karen is selling the same delta I have suggested in this thread.

I also like her idea and have done it myself of selling right before the weekend to quickly get weekend time erosion of the premium and margin.

I wish there was an easy way to calculate the different commodities over time and see if selling options in some commodities with a delta < .0300 go in the money or move far enough to force you out more often than other commodities. I suspect some do it more often than others.

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Old April 8th, 2013, 04:56 AM   #1268 (permalink)
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Ratzzz i just ordered his book


opts View Post
I don't believe Karen's method has any similarities to Cordier's book. Cordier is looking at optiops with about 100 days away with premiums of no less than $300 in various commodities. Karen specifically trades index options (mostly puts) about 56 DTE, 100 points away then 12% further out. Cordier's book is a good primer for selling options but there are a considerable amount of different approaches to selling premium. Karen introduces another one of those methods.....

thanks for the reply Opts
and clarifying Karen's method

Ok putting the book aside, i haven't completed reading this thread and given there is little documented about Karen's method can you/ron discuss what the main differences are between Ron & Karen's method please so i can update the summary page

i wanted to try a non directional method on Ozzie stocks but as Karen states it too hard dealing with all the incidentals so i gave it a miss and went onto learning daytrading & TA, I've found that doesn't really suit my overall objective but I've become fascinated with the challenge, (got my arse handed to me)
point being i wanted to continue trading options and only recently discovered you can sell futures options (i've been under a rock)

so pleased i found this thread many thanks to all the contributors & owner

Cheers Angelo

the more i browsed the web the less impressed i was about the purchase, maybe i'll use the book as an end,,

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Old April 8th, 2013, 09:43 AM   #1269 (permalink)
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ron99 View Post
I was wrong on that delta. Tonight I went back and looked at the May ES puts. On Thursday March 21st, day before the 56th DTE, ES settled at 1539. If you subtract 100 then remove 12% you get 1266. Delta for the 1265 ES May put on Mar 21 was .0170 not the .0500 I mentioned above.

She was using the TOS calculation of % chance ITM. That number was 5% for puts. 10% for calls.

So Karen is selling the same delta I have suggested in this thread.

I also like her idea and have done it myself of selling right before the weekend to quickly get weekend time erosion of the premium and margin.

I wish there was an easy way to calculate the different commodities over time and see if selling options in some commodities with a delta < .0300 go in the money or move far enough to force you out more often than other commodities. I suspect some do it more often than others.

Ron: What software/data are you using to look back in time for the historical options info? I wrote OX and suggested the possibility of listing the options for a given contract and the probabilities of them expiring ITM along with various user inputs and there response was "this is an excellent idea" so I am hoping they will expand on their current format.

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Old April 8th, 2013, 09:49 AM   #1270 (permalink)
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Angelo1 View Post
thanks for the reply Opts
and clarifying Karen's method

Ok putting the book aside, i haven't completed reading this thread and given there is little documented about Karen's method can you/ron discuss what the main differences are between Ron & Karen's method please so i can update the summary page

i wanted to try a non directional method on Ozzie stocks but as Karen states it too hard dealing with all the incidentals so i gave it a miss and went onto learning daytrading & TA, I've found that doesn't really suit my overall objective but I've become fascinated with the challenge, (got my arse handed to me)
point being i wanted to continue trading options and only recently discovered you can sell futures options (i've been under a rock)

so pleased i found this thread many thanks to all the contributors & owner

Cheers Angelo

the more i browsed the web the less impressed i was about the purchase, maybe i'll use the book as an end,,

Angelo: I'd be happy to but I am typing from my droid phone rtight now and it is not the easiest thing to do. If Ron or someone else does not respond to this by this evening I will...

watching n korea...I think everyone needs to before entering an index or index influenced futures options trade...be safe

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