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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:568,134 / 5,727
Last Reply:December 2nd, 2016 (12:40 PM) Attachments:642

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Selling Options on Futures?

Old July 11th, 2013, 08:32 AM   #1791 (permalink)
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robby View Post
can you please explain what the kcv32250c is? what strike price

That's the October 2013 Coffee 225 call option

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Old July 11th, 2013, 08:50 AM   #1792 (permalink)
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Cogito ergo sum View Post
I am not really familiar with selling options on futures, as opposed to equities. Knowing that at ~60 days theta starts to really work in your favour, why sell options on futures +60 days till expiration? Are you essentially using the contango or backwardation in these futures to offset the slower decay in the longer dated options?

You'll probably get several responses to this and you are probably aware of most of this but:

During the last month or so options lose their value very quickly and the options/premiums that were in a good area to sell about 40 or 50 days ago may not be worth the risk with 30 days left. The way that I approach selling is with about 60, even 40 days sometimes, options that are still 30 or 40 % away from the underlying (ex: crude, natural gas) can still have a $ value of $30 or more. So, I ask myself what can move the market and what are the chances of a 30 or 40% move in 40 or 50 days? The answer is always "Anything can happen" but when you trade, especially with this method, you assume the risks. But, the probability is very low of that move. $30 per option may not seem like lot to bank but sell 10 of them, sell 50 of them and you will start to think differently about this. HOWEVER: UNDERSTANDING HOW MARGIN WORKS AND HOW IT CAN CHANGE DAY TO DAY DEPENDING ON THE MOVEMENT OF THE UNDERLYING IS CRITICAL. When selling options that are this cheap the goal, or at least mine is, is to let these expire worthless. I look for deltas around .02 +/- If i really like the market that I'm selling in I will go for deltas with .03 or +/- and the options might be priced at $50 or more but I do buy those back at $20 or $10 per. Those usually have more time premium (60 days or more) when I initially enter but if I have already banked 70 or 80% of the premium I will buy those back to free up that margin for the next opportunity. I don't like to lock up margin on a trade that is already 80% on the plus side to me but still have to wait 20 or 30 days for them to expire for another $10 or $20 per option.

There is chart reading, seasonal, fundamentals, Middle East, weather patterns, etc. to consider before entering the trade so it's not as easy as looking at an option chain and 'picking that one' Again, I am sure you are aware of all of this. This is how I approach this method.

Hope some of this helps.

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Old July 11th, 2013, 08:52 AM   #1793 (permalink)
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Updated the site. I'm up about 28% for the year. I've written a few credit spreads and those results will be added at the end of this month:

Vader Trader

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Old July 11th, 2013, 09:17 AM   #1794 (permalink)
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opts View Post
You'll probably get several responses to this and you are probably aware of most of this but:

During the last month or so options lose their value very quickly and the options/premiums that were in a good area to sell about 40 or 50 days ago may not be worth the risk with 30 days left. The way that I approach selling is with about 60, even 40 days sometimes, options that are still 30 or 40 % away from the underlying (ex: crude, natural gas) can still have a $ value of $30 or more. So, I ask myself what can move the market and what are the chances of a 30 or 40% move in 40 or 50 days? The answer is always "Anything can happen" but when you trade, especially with this method, you assume the risks. But, the probability is very low of that move. $30 per option may not seem like lot to bank but sell 10 of them, sell 50 of them and you will start to think differently about this. HOWEVER: UNDERSTANDING HOW MARGIN WORKS AND HOW IT CAN CHANGE DAY TO DAY DEPENDING ON THE MOVEMENT OF THE UNDERLYING IS CRITICAL. When selling options that are this cheap the goal, or at least mine is, is to let these expire worthless. I look for deltas around .02 +/- If i really like the market that I'm selling in I will go for deltas with .03 or +/- and the options might be priced at $50 or more but I do buy those back at $20 or $10 per. Those usually have more time premium (60 days or more) when I initially enter but if I have already banked 70 or 80% of the premium I will buy those back to free up that margin for the next opportunity. I don't like to lock up margin on a trade that is already 80% on the plus side to me but still have to wait 20 or 30 days for them to expire for another $10 or $20 per option.

There is chart reading, seasonal, fundamentals, Middle East, weather patterns, etc. to consider before entering the trade so it's not as easy as looking at an option chain and 'picking that one' Again, I am sure you are aware of all of this. This is how I approach this method.

Hope some of this helps.

Thank you for your explanation, I will check out the site when I have the chance. That makes sense, I probably stick to Index Futures till I finished a few books regarding options on futures. I like the strategy, and I know that some are doing this very successfully. What do you generally do when a position moves against you; keeping margin in mind. Do you spread into other structures such as Iron Condor's or do you simply close the trade? Or do you use a psychological stop loss?

On another note: this thread reminded me of the following segment that has also been posted here I believe:


Last edited by Cogito ergo sum; July 11th, 2013 at 09:22 AM. Reason: added youtube video
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Old July 11th, 2013, 10:41 AM   #1795 (permalink)
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Theta - Something to Bear in Mind!

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Cogito ergo sum View Post
I am not really familiar with selling options on futures, as opposed to equities. Knowing that at ~60 days theta starts to really work in your favour, why sell options on futures +60 days till expiration? Are you essentially using the contango or backwardation in these futures to offset the slower decay in the longer dated options?

Something to bear in mind when thinking about theta/time decay. The well known statement that time decay is at its greatest about 60 days from expiration is more applicable to at the money (ATM) options than for out of the money (OTM) options. In the equities world this isn't a big concern because you can generally only get options a few strikes out from ATM.

For Futures Options (FOPs) and for the traders in this thread in particular, you can trade extreme far OTM options. For OTM options, the rate of decay is almost linear throughout the life of the option. Even when at >60 days from expiry, the deviation from linear decay is very slight. So with these far OTM options, we get very little extra time decay benefit from being within 60 days.

The following image is a theoretical example illustrating this taken from a book.
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Old July 11th, 2013, 11:10 AM   #1796 (permalink)
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robby View Post
can you please explain what the kcv32250c is? what strike price

KC is commodity.
v3 is month and last digit of the year
2250 is the strike price. Some brokers call that 225. Some call it 2.25. For some reason OX added the 0 on the end recently.

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Old July 11th, 2013, 11:11 AM   #1797 (permalink)
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@Physicsman Thank you, that was a helpful and educational post. It makes perfect sense, I didn't consider this

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Old July 11th, 2013, 11:15 AM   #1798 (permalink)
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thanks for the post Ron, would you sell with a premium of $30.00 on these options?

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Old July 11th, 2013, 11:19 AM   #1799 (permalink)
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robby View Post
thanks for the post Ron, would you sell with a premium of $30.00 on these options?

I sell if the ROI% is decent. You have to calculate what your ROI is for your costs, excess cash and margin requirements.

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Old July 11th, 2013, 12:03 PM   #1800 (permalink)
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Cogito ergo sum View Post
Thank you for your explanation, I will check out the site when I have the chance. That makes sense, I probably stick to Index Futures till I finished a few books regarding options on futures. I like the strategy, and I know that some are doing this very successfully. What do you generally do when a position moves against you; keeping margin in mind. Do you spread into other structures such as Iron Condor's or do you simply close the trade? Or do you use a psychological stop loss?

On another note: this thread reminded me of the following segment that has also been posted here I believe:

This is why I prefer to sell options valued at $30, $40 or $50 per. If the market moves against me and that premium doubles I'm 'only' down half of that value since I collected on the sell side. On the other hand, for some traders that may sell those same options with more time premium at $300, $400, or $500 per and those premiums double that is a different scenario because the margin requirements are higher (percentage based) with the extra time premium. But of course, account size is critical vs.the value of the position and each trade based on a $10,000 or $100,000 account should have the same risk per account. Just because one account is larger than another the ratio of the risk or ROI as Ron pointed out should still be the same. It's all about ROI.

If I have an option double, say a call option from $30 to $60 in one day then there is a big event happening very fast. If it takes 10 or 20 days for this to happen there might be an obvious change in the current trend. I haven't had the first scenario happen to me but yes on the second. If the first instance happens then "Why?" if really bad news get out quick take that loss, let the market react, settle, then sell calls again later to make up for that previous loss to break even on the initial trade. Again, haven't had to do that yet but that is my plan. But, I will not chase a market. It might be weeks before I enter that same market to get to that break even on the second trade. If that trade gradually doubles then there is more time to determine "Why?" and what can be done. If there are 20 days or so left and the options are still 20% or so OTM then eventually the delta and the value of the option is going to fall because of the short time amount of time remaining. This has happened on the put side with crude with me and I let the up days give me confidence that my position is safe and that the market is just doing it's thing. Even these options were still $15 OTM and there was no reason for crude to go back down to $70 per barrel.

Soooooo, for me it is really the reason "Why?" then get out now, sell again same direction at some point later or wait it out and let the gradual decay of the premium and greeks do their thing.

This is a very unique method of trading and if someone hasn't done this before it can take a lot of patience to realize a profit. I've done a few quick trades with ES option but event those were about 10 days, that's quick when selling option. Most people here will tell you it takes 30 to 60 days or so to close a trade. And, I think very few people here sell options with $400 premiums according to some literature that is floating out there because you are simply locking up too much useable margin. The best thing to do if you have not done this before is simply watch the option premium along with a market, crude is a good one, for about 3 months and see how the options move. Take note of far OTM options in particular for a contract that is 30, 60, and 90 DTE. Watch the same few strikes of puts and calls on either side and see how they move. Very boring but the probabilities are higher.

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