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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:568,987 / 5,728
Last Reply:20 Hours Ago (05:26 PM) Attachments:642

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Selling Options on Futures?

Old May 30th, 2012, 03:21 AM   #151 (permalink)
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ron99 View Post
I don't understand what you mean by 193/mth. Could you explain?

Hi Ron,

This is what I use to judge the reward aspect of the trade. I took the 65 strike Nov price of 0.65 and subrtacted the Aug price of 0.07 giving a 3 month potential erosion of 0.58 or $580. This equates to $193.33/mth erosion.

This assumes prices stay constant which they won't, of course, but i need to use something to judge whether prices are currently "cheap" or "expensive"

Regards
Brit

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Old May 30th, 2012, 03:46 AM   #152 (permalink)
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britkid99 View Post
Hi Ron,

This is what I use to judge the reward aspect of the trade. I took the 65 strike Nov price of 0.65 and subrtacted the Aug price of 0.07 giving a 3 month potential erosion of 0.58 or $580. This equates to $193.33/mth erosion.

This assumes prices stay constant which they won't, of course, but i need to use something to judge whether prices are currently "cheap" or "expensive"

Regards
Brit

'Erosion' is not linear in options. Do you use this for a rough estimate ?

Math. A gateway drug to reality.
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Old May 30th, 2012, 06:06 AM   #153 (permalink)
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traderwerks View Post
'Erosion' is not linear in options. Do you use this for a rough estimate ?

Yes, exactly that, a rough estimate at todays value.

Although not linear, in futures options especially CL, erosion seems to be more even from 3 to 5 months out and by 2 months out it is no longer worth holding to expiry. Unlike equitiy options where the greatest rate of decline is in the final month, with CL the final month has virtually nothing left in it.

For example CL 70 strike: Jul exp 0.02, Aug 0.14, Sept 0.50, Oct 0.85, Nov 1.20
so the difference from Nov to Oct is $350, Oct to Sep is $350, Sep to Aug is $360
BUT Aug to Jul is $120 and Jul to expiry only $20 dispite still having 3 weeks left.

Regards
Brit

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Old June 2nd, 2012, 07:01 PM   #154 (permalink)
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Coffee

Please, help me understand something that should be very simple but for me is beyond my simple mind.

I have the idea to sell call options of coffee. It has a cash price today June 2 of $193. I believe that prices may go down more, and the market also believes it because the July coffee is at $157 (take note that the July options expire in 6 days).

I see that the July 150 put is selling at $157, for only 6 days to go. Now, my question is, how is it possible that somebody is willing to pay $157 for an option more than 40 points away?

What am I missing?
Thanks guys,
Alfredo E.

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Old June 2nd, 2012, 08:58 PM   #155 (permalink)
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Cash coffee has nothing to do with options. The options settle to where the futures are priced. So the 157 put is at the money and at very high risk.

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Old June 2nd, 2012, 10:33 PM   #156 (permalink)
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Selling options on futures

I also learned from Cordier's book as well as some others back in the early 2000s. And, I happily sold ratio spreads on ES and 6E for 6-7 years. But, my account blew up with margin in 2007 when the first bank failed. They cleaned me out in 2 weeks while I was trying to manage my option positions. Evidently, you were luckier than I. Now, I don't have enough to sell options.

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Old June 4th, 2012, 10:42 AM   #157 (permalink)
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ron99 View Post
Cash coffee has nothing to do with options. The options settle to where the futures are priced. So the 157 put is at the money and at very high risk.

I donīt know why I had the idea that the day of the expiration of the options the cash price and the futures price becomes the same. So, actually the cash price of coffee will have to come down from $193 to 150 or lower to make the 150 put IN the money, to make me lose money.

Alfredo E.

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Old June 4th, 2012, 06:18 PM   #158 (permalink)
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Alfredoe,

You are basically correct that the cash and futures prices will converge at expiry.
The problem seems to be your cash price! The chart i have included shows cash price is 1.58 which is almost the same as July futures of 1.5750. Cash price has not been 1.90 for months

Regards
Brit

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Old June 4th, 2012, 08:11 PM   #159 (permalink)
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Hi Britt:

Thanks for your response.

I got the cash price from this page: Barchart.com - Futures Prices for Coffee

What could be the reason Barchart.com shows $193 today?

Where should I go to get the cash or spot price of any commodity?

Thanks.

Alfredo E.

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Old June 4th, 2012, 11:12 PM   #160 (permalink)
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alfredoe View Post
Hi Britt:

Thanks for your response.

I got the cash price from this page: Barchart.com - Futures Prices for Coffee

What could be the reason Barchart.com shows $193 today?

Where should I go to get the cash or spot price of any commodity?

Thanks.

Alfredo E.

Unless you are trading spot, it doesn't really matter. Options are based on futures, not spot, which settle financially ( At least the KT does, dunno about KC )

The prices will converge, but you don't know which way. Say the futures are in contango, you don't know if the spot will rise of the futures will fall. So I would just stick to the futures price and just look at backwardation & con tango for reference.

Math. A gateway drug to reality.
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