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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:568,616 / 5,727
Last Reply:December 2nd, 2016 (12:40 PM) Attachments:642

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Selling Options on Futures?

Old May 7th, 2013, 06:41 PM   #1551 (permalink)
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Quoting 
Analysts say the NG commodity's rally to above $4 was ultimately self-defeating,
as many electrical utilities cut back on their natural gas use and ramped up
their burn of cheaper coal. The Energy Information Administration underscored
that concern in a report Tuesday that said the share of power generated from
natural gas is set to decline 2.6 percentage points to 27.8%, while coal's
market share is seen rising 2.7 points to 40.1%.

.

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Old May 7th, 2013, 06:43 PM   #1552 (permalink)
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decarleytrading View Post
In the ES, the June 1635 calls.

Crude is a little more complicated...we've re-strangled and rolled puts up at least once to catch up with volatility and deltas. But at the moment we are in a July 86/97 strangle. The call is uncomfortably close, we are typically at least $7 to $10 out of the money on each side, but this has been a wild move so we are willing to give it a little more time. The back up plan will likely be to either roll into an August strangle, or buy back the July 97 and sell another put and 2 calls higher up.

Accounting for all adjustments and locked in profits on puts, the approximate draw down per lot is roughly $1.50 ($1,500). It's been painful, but in light of the $12 drop and subsequent $11 rally it could have been much worse. Ironically, playing it safe (rolling puts into bullish strangles) when the market was trading in the high 80's was our downfall.

*There is unlimited risk in naked option selling!

OK I think I am over he shock of how close to ITM you sell options.

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Old May 7th, 2013, 07:00 PM   #1553 (permalink)
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ron99 View Post
OK I think I am over he shock of how close to ITM you sell options.

As I said, we normally aren't this close to the fire...but market conditions have been extreme.

In the ES, we are comfortable selling calls relatively close to the money as long as we do it on large spikes in volatility and in overbought conditions. In general, once the ES has made a big run the upside is rather limited and ideally the options are overpriced...so even if the market creeps higher, the options shouldn't pick up a lot of value. I would never sell puts that close to the market. ES puts we try to stay 80 to 100 points out.

We sell options a little differently than most...we don't just sell and wait for time to erode. We are trying to sell into sharp volatility, with the goal (although it doesn't always work out as planned) of exiting the trade within a week or so.

This particular crude trade hasn't been our ideal scenario. When selling crude strangles we typically wait for a few big price swings to sell a strangle at what we think will be top dollar. The strategy is to sell a strangle with about 50 days to expiration for anywhere between $1,000 to $1500 and then buy it back within a week or two once 40 to 60% of the premium has eroded. We've managed to do it successfully multiple times, but this time around we've been working hard to correct our poor timing/insight/luck.

This type of "hit and run" approach to selling volatility doesn't work with options that are too deep out of the money. Also, most option sellers opt for deep out of the money options, but they sell them in larger quantities than would be the case if they simply sold a little closer to the market. I've found that when things get rocky it is sometimes the ridiculously distant strikes that see the largest percentage in premium explosion. So in some cases I like the idea of selling a low quantity at a closer strike.

**There is unlimited risk in naked option selling**

*There is substantial risk of loss in trading futures and options.

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Old May 7th, 2013, 07:23 PM   #1554 (permalink)
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My brain hurts....

Credit calendar option spreads with a twist...Not sure what the correct term is for this strategy but consider the following:

It is the month of May and a future (or stock) is at 50. Your directional bias is barely bullish to neutral. You want to enter on a put option credit spread such as the following:

Buy the June 45 put for 1.00 (call this $100).
Sell the July 40 put for 1.50 (call this $150; higher premium because of more time value).

Net credit is .50 = $50

The market goes up and you decide to exit the trade say at .10 for a net credit of .40 or $40.

The market goes sideways and you decide to exit the trade at .10 for a net credit of .40 or $40.

The market goes down = against you.

The June put you bought is gaining value as is the July put you sold. The June put you bought is closer to the underlying and 'should' (this is the main question) gain value faster than the further out July put you sold. You sell the June put for a profit. Your July put you sold is now uncovered and 'dangerous'. You immediately purchase the July 41 put and your are now is a bear put spread (buy the cheapest put to enter a bear put spread) that may cost you zero to enter, pennies to enter, or might even end up with a credit after you sold the June 45 put for a profit. The market continues down to 38 and you exit the bear put spread for a profit.

Tell me what is wrong with this scenario?

I have been thinking a lot the past few days....

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Old May 7th, 2013, 10:55 PM   #1555 (permalink)
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opts View Post
My brain hurts....

Credit calendar option spreads with a twist...Not sure what the correct term is for this strategy but consider the following:

This is a diagnol spread (different month and strike).


opts View Post
It is the month of May and a future (or stock) is at 50. Your directional bias is barely bullish to neutral. You want to enter on a put option credit spread such as the following:

Calendar spread is great for "barely bullish to neutral" market. You buy July and sell June, time decay is faster on the front contract (June) therefore it yields a positive return.


opts View Post
Buy the June 45 put for 1.00 (call this $100).
Sell the July 40 put for 1.50 (call this $150; higher premium because of more time value).

Net credit is .50 = $50

Here is the problem. Usually when two contracts are one month and one strike apart, their price are very close. For example, Ebay closed today $53.94. June 45 put is $0.14/0.15, July 40 put is $0.11/0.13. There is no room for collecting premium. If you go one strike higher, the June 50 put ($0.58/0.60) is more expensive than July 45 put ($0.36/0.37).

Let's suppose that you do find such price and entered positions as mentioned above:


opts View Post
The market goes up and you decide to exit the trade say at .10 for a net credit of .40 or $40.

The market goes sideways and you decide to exit the trade at .10 for a net credit of .40 or $40.

In both cases, the June contract would gradually approach to zero. However, the July contract should still retain some time value, say $0.40, making this spread unprofitable. Only when price increases quite a lot, then both contracts would not have much value left so you get to keep the premium.


opts View Post
The market goes down = against you.

The June put you bought is gaining value as is the July put you sold. The June put you bought is closer to the underlying and 'should' (this is the main question) gain value faster than the further out July put you sold. You sell the June put for a profit. Your July put you sold is now uncovered and 'dangerous'. You immediately purchase the July 41 put and your are now is a bear put spread (buy the cheapest put to enter a bear put spread) that may cost you zero to enter, pennies to enter, or might even end up with a credit after you sold the June 45 put for a profit. The market continues down to 38 and you exit the bear put spread for a profit.

Tell me what is wrong with this scenario?

I have been thinking a lot the past few days....

This is the best scenario if price drops quite a bit. You can have probably $400+ profit if price drops below $40. In my mind, this is actually a directional play.

I myself am still learning and observing option price behavior. Eager to see other's comments.


Last edited by walker; May 7th, 2013 at 11:21 PM.
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Old May 7th, 2013, 11:11 PM   #1556 (permalink)
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ES Options


decarleytrading View Post

In the ES, we are comfortable selling calls relatively close to the money as long as we do it on large spikes in volatility and in overbought conditions. In general, once the ES has made a big run the upside is rather limited and ideally the options are overpriced...so even if the market creeps higher, the options shouldn't pick up a lot of value. I would never sell puts that close to the market. ES puts we try to stay 80 to 100 points out.

We sell options a little differently than most...we don't just sell and wait for time to erode. We are trying to sell into sharp volatility, with the goal (although it doesn't always work out as planned) of exiting the trade within a week or so.

Sounds like we sell ES options in a similar fashion...wait for a large-ish move in one direction, wait for volatility to inflate and based on context, support or resistance (tough while ES is making all time highs) and stats, sell a strike that is not likely to be hit in the time it will take for the contracts to expire.

Only difference I see is I'm selling weeklies and my typical time from sale to expiration is about 8-10 days...sounds like the strikes you sell are a little longer out.

I know people who are short 1635 calls expiring this Friday. I missed my entry last Friday by .10 cents. Oh well...I had a price I wanted to sell the WK2 1635's for and it didn't get there, so I didn't chase. Will have to wait for another opportunity.

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Old May 8th, 2013, 08:28 AM   #1557 (permalink)
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walker View Post
This is a diagnol spread (different month and strike).



Calendar spread is great for "barely bullish to neutral" market. You buy July and sell June, time decay is faster on the front contract (June) therefore it yields a positive return.



Here is the problem. Usually when two contracts are one month and one strike apart, their price are very close. For example, Ebay closed today $53.94. June 45 put is $0.14/0.15, July 40 put is $0.11/0.13. There is no room for collecting premium. If you go one strike higher, the June 50 put ($0.58/0.60) is more expensive than July 45 put ($0.36/0.37).

Let's suppose that you do find such price and entered positions as mentioned above:



In both cases, the June contract would gradually approach to zero. However, the July contract should still retain some time value, say $0.40, making this spread unprofitable. Only when price increases quite a lot, then both contracts would not have much value left so you get to keep the premium.



This is the best scenario if price drops quite a bit. You can have probably $400+ profit if price drops below $40. In my mind, this is actually a directional play.

I myself am still learning and observing option price behavior. Eager to see other's comments.


Thanks Walker. The days until expiration and strikes apart example was a quick and dirty one. The real scenario would be something closer to buy a put with less than a month to go then sell a put with 3 months to go a few or several strikes lower than the front month. The decay should be a little 'better'.

And yes, your market directional bias still needs to be correct but not 'as correct' if you were trading cotnracts outright.

I'm just looking to minimize the margin requirement (and fluctuations during the trade) from selling options uncovered.

Thanks again...

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Old May 8th, 2013, 09:10 AM   #1558 (permalink)
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First Loss Today

Since starting Feb 1, I have been in 14 trades. All either expired worthless, or are currently profitable, except for one. 93% win rate.

I had to exit NGN33.2P today, since the margin requirement, coupled with premium loss, took away my excess margin.

Per the rules Ron laid out: "If the increase in premium plus the increase in margin become greater than that excess, that is when I get out. Otherwise I stay in.*"

The temptation to stay in the trade was HUGE, since there still has to be a move of .8 down before that option goes ITM.

But, in the end, I realized that survival is based on following the rules, not hoping for something to happen.

The loss on this trade (roughly $40 per option) drops my annual rate of return from 49% down to 40%.

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Old May 8th, 2013, 11:19 AM   #1559 (permalink)
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For those of you who missed selling KCu3 300c they are bid at 0.14. Looks like an iceberg order.

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Old May 8th, 2013, 02:29 PM   #1560 (permalink)
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ron99 View Post
For those of you who missed selling KCu3 300c they are bid at 0.14. Looks like an iceberg order.

Pardon my ignorance but how do you know or why do you suspect that this is an iceberg order?

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