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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:569,184 / 5,728
Last Reply:December 6th, 2016 (05:26 PM) Attachments:642

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Selling Options on Futures?

Old April 16th, 2013, 11:03 AM   #1351 (permalink)
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neko333 View Post
Ron,

Given how the implied volatility has gone up on both /CL and /GC why would you not consider selling deep OTM calls now then get out when things settle down?

Just asking for my ongoing education.

Thanks

V

I'd like to add a few thoughts and curious what you think.

Early yesterday was obviously a much better spot to to take a short call position in /GC but for the this discussion lets assume the position was put on sometime today or even tomorrow.

Why sell the 1820 calls when the 1600's have a 95%+ probability of expiring worthless.

With such a significant break on huge volume there is also new information that makes a push back above 1500 much less likely.

Margins went up but so did implied volatility and premiums. So if /GC does grind higher after the short call position is on volatility would likely contract from these extremes hedging the delta loss nicely and letting theta do its thing. A down day or two at some point and the position is very nicely profitable.

Just too much volatility not to sell and who really want to be short puts here?

Options with a .0500 delta are just too risky. Ask anybody who had puts with a delta far less than that before Friday.

Besides somebody is manipulating the GC market we have no clue what they will do next. Better to be safe than sorry. We were at 1600 15 days ago so saying we can't get back above 1500 is something I can't agree with. We already traded above 1400 today.

I agree with

Quoting 
Margins went up but so did implied volatility and premiums. So if /GC does grind higher after the short call position is on volatility would likely contract from these extremes hedging the delta loss nicely and letting theta do its thing.

But that is assuming volatility goes down. We don't know that. I'm thinking the next 1.5 months will be very volatile.

I am a low risk trader. Yesterday were the first short options that I had to bail at a loss in my IRA accounts since Sep 2011. I enjoy going 18 months without a loser. So what you are suggesting doesn't match what I do. But if you are OK with it then go ahead.

OT I'm curious. What Hawaii time do you get up and start trading?

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Old April 16th, 2013, 11:06 AM   #1352 (permalink)
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mackg867 View Post
Yep, IB is raising margin on the metals.

Mac

What is the overnight IB margin on GC futures today?

SPAN is 5940 today. It goes to 7040 tomorrow.

OX is 11880 today.

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Old April 16th, 2013, 11:08 AM   #1353 (permalink)
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britkid99 View Post
The coast is now clear for another push down, I would be expecting at least a 50-100 point move down from here to say 1480-1530.

So beware anyone thinking of selling ES puts now.

Well, we got the ES pushing down to1540 so far on a big delta bar. So from the high of 1593 that was over 50 ES points.
Now i'm looking to see if the 1534 area holds. If that breaks we could see a bout of covering from longs at 1480 low (100,000 holding longs) which would be over 100 point move .

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Last edited by britkid99; April 16th, 2013 at 03:14 PM.
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Old April 16th, 2013, 11:16 AM   #1354 (permalink)
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ron99 View Post
What is the overnight IB margin on GC futures today?

SPAN is 5940 today. It goes to 7040 tomorrow.

OX is 11880 today.

I am showing £4410 x 1.53 = $6747 for IM on IB for Apr GC futures

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Old April 16th, 2013, 01:16 PM   #1355 (permalink)
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Futures Edge on FIO
Goldís drop wiped out almost $1 billion of hedge-fund manager John Paulsonís wealth in the past two days.

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Old April 16th, 2013, 01:20 PM   #1356 (permalink)
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ron99 View Post
Goldís drop wiped out almost $1 billion of hedge-fund manager John Paulsonís wealth in the past two days.

That actually made me feel good, if it is true. But maybe he got out a few weeks ago?

Anytime I see a superstar hedge fund lose money, it makes me realize that EVERYONE loses from time to time, and EVERYONE can lose big. Yes, I make some terrible trades, but it is comforting knowing the best pros do, too.

If you have any questions please send me a Private Message or use the futures.io "Ask Me Anything" thread
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Old April 16th, 2013, 01:23 PM   #1357 (permalink)
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Selling Gold Puts


Note 1: All margin numbers are based on OptionsXpress

Note 2: A BIG thanks to Ron99, who gave me a lot of the historical numbers I use below, and for reviewing my initial draft. He is an excellent, selfless teacher of selling deep OTM options.



While this thread many examples of the upside of Option Selling, I think it is critical that people understand the downside and risk involved in selling options, even deep OTM options.

Take my friend Gilbert Goldoptionseller. Last Thursday at the close, he thought it would be a good idea to sell Gold puts. How did he decide this?


For the past year, Gold has been up and down, but seemed to respect so-called support around 1540...

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When he looked at the weekly chart, he saw we were still in a long term bull market...

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Finally, he looked at the seasonal chart, and found that from April to June, over the last 5 to 15 years Gold was flat to up...


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Putting that all together, Gilbert felt he had a pretty compelling argument to Sell Puts. So, he looked for deltas of .02-.04 for the June puts, which had 47 days to go to expiration. He was looking for a monthly ROI of 2-3%...

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Gilbert liked the 1300 Put. It had a 2.3% monthly ROI, and was 265 points away from being in the money (that is $26,500 per contract). Gold would have to drop 17% in 47 days for that to happen. Fat chance, thought Gilbert!


So, at the close Thursday, Gilbert sold 5 Puts at $50 each. After commissions, he pocketed $223.65, and using 3x margin as his allocated capital, he had $6,300 allocated to this trade. For each option, he had $840 in excess capital, which would go cover increases in margin and premium.


Of course, Friday the market crashed. Big time. (If you think there is no way Gilbert's timing could be so bad, let me tell you his timing could be that bad. I once Bought Live Cattle near the close on 12/23/2003, an hour or 2 before news report of Mad cow being found in US. Lock limit for days in a row. Not a very Merry Christmas that
year...)

At the close of Friday, Gilbert's Puts were now worth 1.7, with a delta of .033. The options had more than tripled in price in 1 day! Yikes!

Late Friday night, the updated margin requirements came out. Margin had jumped to $978 per option. His new excess looked like this:

Per Option Calculation
Original excess = 840
Increase in premium = -120
Increase in margin = -558

New excess as of Friday night = $162


His excess was almost gone. So over the weekend Gilbert fretted. He yelled at his kids (it was his weekend for visitation), and screamed at his ex-wife. He didn't sleep very well. He drank copious amount of lager, which made him forget about Gold (but also gave him a headache).

Sunday night came, and the Gold crash continued. His 1300 Puts opened at 3.2, almost double what they were on Friday close! Gilbert froze with indecision, although he knew his excess was gone at that point.

He started mumbling to himself, pacing his home office with his hands running thru what was left of the hair on his head.

During the day Monday, his broker raised margin requirements. Between that and the increase in premium on Monday, Gilbert's margin cushion was a distant memory.

But it happened so quick, Gilbert did not have time to think, or to exit. He stayed in on Monday.


Monday close with puts were now worth 30.4. Each. His delta had skyrocketed to .3105. His open loss was now $14,950. His margin requirements are around $6000 - close to the same as outright position margin requirements!


Tuesday, mid day, the 1300 Put price had fallen to 17.70.

***************************************************************

Now, put yourself in Gilbert's shoes. When would you have exited, if at all?

Friday, sometime during the day when option price doubled or tripled
Friday, right at the close, realizing you'd lose $720 total in one quick day. 3 times the amount you intended to make.
Sunday night, when 1300 Put options opened at 3.2, and your margin cushion was gone.
Monday during the day, when things got even crazier
Monday right at close, realizing you'd lose $14,950 total in two days. 67 times the amount you intended to make.


Although this is just an exercise, really try to put yourself in Gilbert's shoes. Please reply, and give your answers and your rationale. I'll give mine a little later.

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Old April 16th, 2013, 02:00 PM   #1358 (permalink)
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Reply to Gold Example

Hi,
Thanks a lot for quoting a detailed example. This is precisely why doubt that one can just use deep OTM selling for living? All it takes is one market whim and you are done.

My answer would be to sell 1 gold future on Sunday open to hedge somewhat and then close during Monday day session at huge loss.

On related note, that is why I am leaning more towards selling almost at the money options - so that loss to win ratio is like 2 to 1 or so instead of 30 to 1 or 50 to 1 (and with lot of sleepless nights). It has its drawbacks as well...

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Old April 16th, 2013, 02:34 PM   #1359 (permalink)
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seemasp View Post
Hi,
Thanks a lot for quoting a detailed example. This is precisely why doubt that one can just use deep OTM selling for living? All it takes is one market whim and you are done.

My answer would be to sell 1 gold future on Sunday open to hedge somewhat and then close during Monday day session at huge loss.

On related note, that is why I am leaning more towards selling almost at the money options - so that loss to win ratio is like 2 to 1 or so instead of 30 to 1 or 50 to 1 (and with lot of sleepless nights). It has its drawbacks as well...

If you sold GC future on Sunday open and closed Monday that would be a huge gain not loss on the future. Or am I not understanding your point.

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Old April 16th, 2013, 02:39 PM   #1360 (permalink)
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selling gc puts




***************************************************************

Now, put yourself in Gilbert's shoes. When would you have exited, if at all



What a textbook, classic case for the business school.
My answer
1. we get this because we looked at the low risk of selling an option based on a math number and forget that we are dealing with a bomb....100 oz of gold at $1500+- per oz...or $150,000. I decided a couple weeks ago that I could not afford to pull my pants down in the market for $80. in 3 weeks or so, maybe.
2. I would have given it up Friday..cough cough..if I was in the house,if....
3. I bought some cl put spreads earlier last week as a directional trade and they have made me money. Not as much as futures contracts but maybe I was allowed a little more time to be directionally correct. still learning.

Thanks to this forum for helping us Gilberts.

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