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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:568,362 / 5,727
Last Reply:December 2nd, 2016 (12:40 PM) Attachments:642

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Selling Options on Futures?

Old April 16th, 2013, 08:27 PM   #1371 (permalink)
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spj77 View Post
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.


Thanks for sharing. You have provided some good lessons in your recount of events. I'm sure it will help multiple people in the future.

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Old April 16th, 2013, 08:52 PM   #1372 (permalink)
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I actually experienced a real life example of what Gilbert went through, except with CL and not so extreme. I made my first live trade on Sunday evening with CL. I sold the 70P with May expiry for 0.04 on that evening. I thought the market had a nice down move the day before and it looked like the treadline and support were providing good support for the prices.

Before I knew it though, the price broke through both supports and the price of the option went up to 0.09. Then yesterday evening prices continued to go down and the option went up to 0.22. At that point per the 2x excess rule, it was time to get out but I didn't want to hastily make a trade just to get out. So I put in a bid for 0.15 which seemed reasonable at the time and started watching the prices closely. I was thinking at best I can roll the trade using the same expiry but by increasing the number of options I sell. Also to counteract the losses I sold the 110 Calls for 0.05.

Soon the prices started to rebound and when prices went up over 87, I removed my order to buy back the options as I wanted to see if the rebound would continue. My rationale was that fundamentally oil did not have a reason to drop significantly like gold considering that China was the reason behind their prices dropping and the data from China, all things considering, was not nearly as bad as the effect it had. Also I wanted things to settle down to reassess the situation. Since then prices have continued to go up and the options have now settled down to 0.08. I am still not comfortable with the position and will continue to monitor it closely but I feel a whole lot better about it now that yesterday.

All in all this has been a good learning experience for me. It seems that Sundays are not the best days to sell options as it is a good idea to wait till Monday to let the market digest the information from the weekend and to see how it reacts before placing a trade. Also I need to work on getting better prices for the options I sell do a better job of analyzing the major news events/fundamentals before placing a trade. Lots of learning for me to do but its always exciting figuring out the puzzle pieces to this game.

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Old April 17th, 2013, 12:28 PM   #1373 (permalink)
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I'm looking at July Coffee puts. Looks like we may have made a technical bottom and we are near multi-year support on the monthly charts near 130. Seasonally, it looks like Coffee tends to move higher to sideways through mid-June (which would be near expiry). Fundamentally prices have been very weak for the last several months due to a bumper crop expected from Brazil. With most of production complete and moving into harvest in the next few months prices will likely improve.

Currently trying to work a good price for KCN31125P (the 112.5 level which is well supported). Last price is 0.08 which doesn't quite meet my requirements. Trying to work a price closer to the ask at .19. Will most likely need prices to come down a bit to get filled. Delta is 0.01, net premium $67, margin $324, buffer $648. Monthly ROI 3.5%.

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Old April 17th, 2013, 12:35 PM   #1374 (permalink)
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Hey everyone, even though I have not posted in several weeks, I check for new posts everyday. This really is an awesome thread to learn about option selling. Once again, thank you Ron for starting this thread and thanks to everyone who has contributed to it.

Back in mid-March I took a job at a nearby international hotel. And no, I was not forced to go back to a "day" job because I blew-out my trading account! In fact, I took this job for the opposite reason, I wanted to reinvest my option selling profits to grow my account. The cliche "it takes money to make money" is corny but absolutely true in every way! For the past five years, I have lived off of my trading profits but my account size has remained somewhat stagnant. With the continued increases in margin, I realized that if I do not grow my account, I will not be able to put on as many positions as I use to. So when I saw a job opening that had flexible hours with relatively low stress and was very close to where I live, I decided to go for it.

With this job providing a steady monthly income, I have removed the pressure of needing my trades to be profitable. It also allows me to establish a more disciplined and patient approach to option selling. I can be more like Ron and sell very far OTM strikes that has very low delta's containing only time premium. With a steady paycheck I can now "afford" to wait 60 or more days for a set of options to expire worthless.

I too took a loss this past week on some short CL puts but the loss was somewhat cushioned from the short CL calls that I had on.

As for spj77, the only comment or question from me is don't you have some sort of pda device so you can quickly check what the markets are doing at all times? I have OX and IB apps on my iPad and cell phone so I can always quickly check how the markets are doing 24/7

Live and learn!

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Old April 17th, 2013, 12:39 PM   #1375 (permalink)
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eudamonia View Post
I'm looking at July Coffee puts. Looks like we may have made a technical bottom and we are near multi-year support on the monthly charts near 130. Seasonally, it looks like Coffee tends to move higher to sideways through mid-June (which would be near expiry). Fundamentally prices have been very weak for the last several months due to a bumper crop expected from Brazil. With most of production complete and moving into harvest in the next few months prices will likely improve.

Currently trying to work a good price for KCN31125P (the 112.5 level which is well supported). Last price is 0.08 which doesn't quite meet my requirements. Trying to work a price closer to the ask at .19. Will most likely need prices to come down a bit to get filled. Delta is 0.01, net premium $67, margin $324, buffer $648. Monthly ROI 3.5%.

I had looked at that, too. I got scared off by 2 things:

1. Long term trend is down, since mid 2011. I personally hate selling against the lt trend.

2. The seasonal chart shows mid April to mid June as flat for last 5 years, and down for 15 and 30 years. But the drop in June for 15 and 30 years scares me (although I know your options would expire mid month).


I don;t want to talk you out of it, but I just want to throw another opinion out there.

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Old April 17th, 2013, 12:58 PM   #1376 (permalink)
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@kevinkdog,

Thanks for that perspective. I may be looking out too far ahead from the technical side on that trade.

Any other trades that you are eyeing at the moment?

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Old April 17th, 2013, 01:03 PM   #1377 (permalink)
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eudamonia View Post
@kevinkdog,

Thanks for that perspective. I may be looking out too far ahead from the technical side on that trade.

Any other trades that you are eyeing at the moment?


Here's what I have open right now:

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I have some more selling to do, since I am running out of inventory...

After replying to your Coffee Put post, I actually decided to sell a couple of July 200 calls. Still an open order.

Nothing else at the moment. Normally, I look at option selling possibilities on Wednesday nights.

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Last edited by kevinkdog; April 17th, 2013 at 01:04 PM. Reason: 200 calls, not 120 calls
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Old April 17th, 2013, 05:11 PM   #1378 (permalink)
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eudamonia View Post
I'm looking at July Coffee puts. Looks like we may have made a technical bottom and we are near multi-year support on the monthly charts near 130. Seasonally, it looks like Coffee tends to move higher to sideways through mid-June (which would be near expiry). Fundamentally prices have been very weak for the last several months due to a bumper crop expected from Brazil. With most of production complete and moving into harvest in the next few months prices will likely improve.

Currently trying to work a good price for KCN31125P (the 112.5 level which is well supported). Last price is 0.08 which doesn't quite meet my requirements. Trying to work a price closer to the ask at .19. Will most likely need prices to come down a bit to get filled. Delta is 0.01, net premium $67, margin $324, buffer $648. Monthly ROI 3.5%.

I'll add that while the delta is low the distance between 112.50 and current futures is only 24.35. That isn't much for 56 days.

Last year KCn2 dropped 30 from mid May to mid Jun, in 30 days. But that was from 180 to 150. A higher price and part of a longer down trend.

Now I kinda agree that I doubt KC gets below 125. In May people are worried about a frost in Brazil before the beans are harvested even though most coffee groves have been moved further away from frost prone areas. But when we get past that early May worry about frost the prices come off. And with only a 24 cushion it wouldn't take much of a futures drop to force you out.

So this has been a long way to state that you can't always use low deltas to say you are safe in an option.

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Old April 17th, 2013, 05:33 PM   #1379 (permalink)
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kevinkdog View Post
I had looked at that, too. I got scared off by 2 things:

1. Long term trend is down, since mid 2011. I personally hate selling against the lt trend.

2. The seasonal chart shows mid April to mid June as flat for last 5 years, and down for 15 and 30 years. But the drop in June for 15 and 30 years scares me (although I know your options would expire mid month).


I don;t want to talk you out of it, but I just want to throw another opinion out there.

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I would be careful about looking at 5 year averages now. For most commodities they include the abnormal movements of 2008. KC includes 2011 when prices hit 300.

That's why I use my own seasonal charts that show each year. You can then see if a trend happens every year or if the 5 year average is being influenced by one abnormal year. Or if there is no consensus.
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Old April 17th, 2013, 10:50 PM   #1380 (permalink)
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I have the largest gain and drop table for CL. Obviously the months that are still trading are not complete.

If you ignore 2008 & 2009, you have max drops of about 30 and max gains of 27-29.

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