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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:569,332 / 5,728
Last Reply:December 6th, 2016 (05:26 PM) Attachments:642

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Selling Options on Futures?

Old April 16th, 2013, 02:48 PM   #1361 (permalink)
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@kevinkdog,

Thank you very much for providing this analysis. And thanks to Ron for helping fill in the data.

My thought is that these types of massive moves in the market happen infrequently but trade long enough and you will have to survive a few of them. For those saying that you can't just trade OTM naked options and be successful go back to page 118 of the thread and re-watch Karen's videos. If she can successfully take a $750k account to $90+ million in one of the most volatile market periods in history (2009-now), there is no doubt that it can be done. Also Ron's successes (and others in this thread) speak for themselves.

What would I do? Knowing that once we broke the "unbreakable" 1540s area the next level of support is going to be the 1320s, by Friday afternoon I will be doing one of two things: 1) Either take the hit for $720 (these things don't happen that often so really not a big deal) or 2) roll the position. If I roll I will take some loss (probably a couple hundred bucks), so I may add some calls to make up the difference. With a move this big I know the margin is going to jump and the break from these levels is massive (multiple monthly bar support). Smart thing is to take the $720 loss and move on to the next position.


Last edited by eudamonia; April 16th, 2013 at 02:55 PM.
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Old April 16th, 2013, 02:49 PM   #1362 (permalink)
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Over Friday and Monday the commodities that lost OI on futures (the ones I checked) were, SB, KC, RB, HO, C, S, W, SI & ES.

The only ones to gain OI were NG & Gold. Interesting.

Normally with a price crash OI declines. But it didn't for GC.

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Old April 16th, 2013, 03:18 PM   #1363 (permalink)
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@eudemonia

ok, some make 2% a month, most of the time and that's very good, and I'm happy for them. So show me the math on this return over 4 years please. I saw the Karen video and would like to make millions. When I try, I get margin clerks phoning me, seems to me to take more than 30% a year to turn 1 mill to 10 mill let alone 100.

I'm just throwing out the other side of the argument. Ron and others have done great. Some kids started Facebook and did good. just saying I was happy with nearly a double on some put spreads


Last edited by chartminder; April 16th, 2013 at 03:26 PM.
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Old April 16th, 2013, 03:30 PM   #1364 (permalink)
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chartminder View Post
@eudemonia

ok, some make 2% a month, most of the time and that's very good, and I'm happy for them. So show me the math on this return over 4 years please. I saw the Karen video and would like to make millions. When I try, I get margin clerks phoning me, seems to me to take more than 30% a year to turn 1 mill to 10 mill

I'm just throwing out the other side of the argument. Ron and others have done great. Some kids started Facebook and did good. just saying I was happy with nearly a double on some put spreads

You have the wrong ROR for her.

From the You Tube page
OPTION TRADER makes XXX PROFIT in the NDX, SPX & RUT - Her STORY Uncovered - YouTube

Quoting 
2002 Karen takes an options trading course. Karen then starts trading with $100k of capital. Now Karen is managing around $190,000,000 which $110,000,000 being profits.

She has 190m of which 80m is deposits and 110m profits.

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Old April 16th, 2013, 03:34 PM   #1365 (permalink)
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chartminder View Post
@eudemonia

ok, some make 2% a month, most of the time and that's very good, and I'm happy for them. So show me the math on this return over 4 years please. I saw the Karen video and would like to make millions. When I try, I get margin clerks phoning me, seems to me to take more than 30% a year to turn 1 mill to 10 mill

I'm just throwing out the other side of the argument. Ron and others have done great. Some kids started Facebook and did good. just saying I was happy with nearly a double on some put spreads

Return and risk are correlated. Karen goes into pretty great detail about how she achieves her returns - she commits a larger percentage of her capital than most (keep in mind stock margins work differently) and she churns the account very actively.

To be fair though most of us are doing better than 2% a month in here. But even at 2% a month that is 24% a year. Most investors would be thrilled to do that amount annually and there are plenty of people who would invest in someone who had a track record of being able to do that consistently.

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Old April 16th, 2013, 03:45 PM   #1366 (permalink)
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I had a real life GC put shock a couple of weeks back with a 1450 put. If you are at your trading desk then throw on a futures short if the price is really gunning. It at least gives you cover and time to think about what to do. My put went from less than 50% to double the premium in no time, my short future covered most of the rise and I was able to work an exit for the net cost of the original premium for a break even.

I don't like to have more positions on in any one commodity than I could cover with futures.
In Gilberts case his 5 contracts even at a delta of 0.30 could be covered by 2 futures (5 x 0.3 = 1.5)

EDIT: I was typing this while Ron was typing his reply. LOL

I would just add - You know when the market is really tanking. A future with a trailing stop to break even can solve Rons bounce problem and buy you time to THINK.


Last edited by britkid99; April 16th, 2013 at 03:55 PM. Reason: Rons fault
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Old April 16th, 2013, 03:48 PM   #1367 (permalink)
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kevinkdog View Post
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.

Question. In hindsight if you sold one GC futures on Sunday open and kept it through Monday 3pm you would have broke even.

But what happens if you sell a future and the market bounces up and down from the price you sold the future at? If it bounces up and you are losing money on the future you wouldn't want to lose too much on it before dumping it. But you then run the risk of the market reversing and going lower and you wish you had the short future still on.

I doubt you can keep selling and buying a future all day to keep cover but to not lose too much on it.

So is covering with a future a realistic option?

EDIT I was typing this while Brit was typing his related response.

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Old April 16th, 2013, 05:10 PM   #1368 (permalink)
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Hi,
To clarify my post, by selling 1 future at Sunday evening, I reduce my delta somewhat and do not have to deal with illiquid market to cover my options at exorbitant prices. I will make some money on my hedge but loss big on options and overall still loss a lot (less compared to taking no action).


About making a living by selling deep OTM options, it is obviously doable but I can not think of using 100% of assets for doing it, way too much stress and your broker has to be 100% behind you in the sense that he won't liquidate you (auto or manual) without giving you a chance....

I would rather shoot for 2% like other posters said and also with 1/3 of assets...Just my 2 cents...

Regards

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Old April 16th, 2013, 08:09 PM   #1369 (permalink)
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kevinkdog View Post

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. ...

I found this thread recently I have read through it carefully to understand the pros and cons of OTM options writing. But I want to post for the first time and thank kevinkdog for his illuminating post on what could happen. Obviously /GC does not move the way it has for the last few days often. But it's always good to understand all the risks to any strategy, especially the "black swan" type risks.

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Old April 16th, 2013, 08:21 PM   #1370 (permalink)
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Well if we are talking about Gilbert, then i must be Dilbert, with a massive emphasis on the Dil.

I read this thread all the time but rarely post.

Let me relay my story of the gold plunge, which i think Ron/Kev have basically told.

To those who have taken the textbook approach of “I would of have got out at X point in time” life sometimes doesn’t work out that way as i can attest to (my stupid fault entirely though and i accept that, so don’t even bother lambasting me for it, because i am kicking myself harder than you ever could).

I sold 1300puts for 0.40 based on all the factors described by Kev and was comfortable with the trade with GC at 1560 prior to the plunge. We get Friday’s drop and i check the margins etc.. on sat afternoon (australian time). Of course it is against me, but not at the puke out point yet. The weekend rolls on and my brother arrives from another part of Australia, having not seen him for a year, we have a few drinks on Sunday and a big bonfire Sun night with a few more beverages. I have a ‘sicky’ off work on Monday and we go surfing for the day (meaning i miss the opening of the markets for the week, US Sunday night equivalent). I do not check the markets until late Monday afternoon (aust time – so that is early early morning US time and about the time the London markets open) – by this time gold has fallen HUGE and now these 1300 puts are trading at astronomical rates, i am talking bid 15, ask 50. I am staring at the screen in disbelief thinking WTF then kick myself into gear, ok i have to make a descision, I cannot afford to sit and “hope” for a bounce, i have to get out now and accept my medicine, my duty has to be to protect what i have left, not risk i what i have left in 'hoping' for a bounce. I need to get out now and live to fight another day. With GC at approx 1410 i get out of the 1300 puts at 17.50 each – a whopping loss of 1710 per contract. GC bounces a bit and then continues to fall to 1330, with those 1300 puts going on the trade up at $54 each!

If i would have waited in 'hope' for a bounce i would have been completed wiped out. This action of getting out and not sitting on my hands in hope for a bounce is the only thing i did right during the event, but it saved my bacon. I got as early as i could but it still wasn’t fast enough obviously. Moral of the story for me, when i have risk on i need to be closer to the market, especially if there is some turbulence. Big expensive mistake on my part and the most expensive surfing trip i have ever taken, so like i said earlier don’t even go there, i know it full well.

I post only to hopefully make people aware of just how far and fast these things can move. I never would have believed these things could have moved so far and fast in my life unless i had seen it with my own eyes, and up until this point I always had the mindset of “i will have plenty of time to get out at 2x or 3x the premium sold if i need to”. Thank fully for me, GC options made up less than 20% of my total account as i was well diversified, and my account was not over-margined, that is my only saving grace, but still it is a bitter bill to swallow.

Please please please do not think like a textbook that you will have plenty of time to get out, because sometimes it doesn’t happen that way. Stay safe everyone.

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