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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:569,610 / 5,734
Last Reply:8 Hours Ago (01:01 AM) Attachments:642

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Selling Options on Futures?

Old August 26th, 2013, 10:25 AM   #1991 (permalink)
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Rolling Out of Trouble...Or Into More Trouble?


With the recent surge in Soybeans, I thought I'd share with what I just did with some November Soybean Calls.


I sold some 1600 Calls last week, which with the 3x excess margin that Ron recommended, equated to about 18% of my equity (I like to target 15%, and I went a bit over on this one).

Friday the price of Beans soared 40 cents/bushel, and tonight (Sunday) it has risen another 45 cents or so.

My initial guess was that if on close of Monday, Beans stay up 45 cents, I'll still be OK with regards to the "Ron Loss Rule" (when increase in option price combined with increase in margin, takes away all your excess, it is time to exit). No need to exit yet.

BUT even so, I am not feeling good about the trade. My delta went from .04 to .12 or so - in less than 2 trading days. I'm feeling some heat.

So, I decided that instead of exiting the position completely, I would roll up to a higher strike price. My goal was to exit the 1600s with a loss, and sell enough 1800s to end up profit wise where I started (right after selling the 1600s).

I was able to do this, but at the expense of dedicating more margin to the trade (up to around 22%, from 18%). I guess there is no free lunch. I also am short more 1800s than I was 1600s.

Good news: my delta is around .03 now
Good News: if 1800s expire worthless, I'll still make money overall on the trade
Bad news: I now am short more 1800s than I was 1600s, so if things go really bad, losses will multiply more quickly.


Anyhow, I thought I'd share this with you, in case you find yourself in a similar position. Rolling to deeper Out of the Money options may be a solution, if you don't want to outright exit. I do suspect, however, that most times the outright exit is the best option.

I'm also short soybeans but didn't get in as early so I have on 1700s.

From the technical side we are currently in a band of resistance from approximately 1400-1500. I would anticipate that we will see some sort of pause in this area.

Near-term fundamentals remain bullish with high heat in the mid-west corn belt area likely to persist through the end of the week. Once we get into September we'll be in harvest season as there is a strong seasonal tendency to sell off during this period.

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Old August 26th, 2013, 10:32 AM   #1992 (permalink)
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eudamonia View Post
I'm also short soybeans but didn't get in as early so I have on 1700s.

From the technical side we are currently in a band of resistance from approximately 1400-1500. I would anticipate that we will see some sort of pause in this area.

Near-term fundamentals remain bullish with high heat in the mid-west corn belt area likely to persist through the end of the week. Once we get into September we'll be in harvest season as there is a strong seasonal tendency to sell off during this period.

Yes, prices historically seem to peak about the end of August. I feel the runup will stall soon, but then again a lot of people are thinking price will keep going up - 100 points in 2 days!

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Old August 26th, 2013, 11:33 AM   #1993 (permalink)
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This shows why I rarely trade grains during the growing season. Way too volatile and unpredictable.

CTZ3 this month. Up 8 down 9 in 3 weeks. SX3 up $2 in 3 weeks.

Now about that drop in Sep for S. Down 4 of last 6 years but up a $1 in 2007 & 2010. If the Midwest doesn't get some rain soon then this year could be up in Sep too.

But if you are far enough OTM a $1 rise in 4 weeks shouldn't be too much of a bother. The bigger worry might be more increases in margin rates.

Interesting that Nov S also had a $1.50+ rise in Aug in 2011 & 2012. So 3 years in a row. Matches seasonal chart. So selling S calls in August might not be the best thing to do.

August is when the soybean plant sets pods. So having moisture and not having extreme heat is very important during this time.

From a crop report.

Quoting 
The biggest surprise was that both, IL and IA’s average pod numbers were even lower than 2012 making rainfall over the next 2-4 weeks very influential to 2013’s U.S. yield.

Rain the last 14 days. Below normal.
http://water.weather.gov/precip/index.php?yday=1377475200&yday_analysis=0&layer%...uct=dep_normal&loc=conus

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Old August 26th, 2013, 11:55 AM   #1994 (permalink)
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I just looked at the St Louis 10 day forecast. Hot and dry.

If I had S calls on now I would get out and wait for rain to put them back on.

Specs have 49,000 or about 25% less longs than they did in June. Even with the 20,000 jump from 8/13 to 8/20. So more buying is possible.

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Old August 26th, 2013, 01:07 PM   #1995 (permalink)
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I just looked at the St Louis 10 day forecast. Hot and dry.

If I had S calls on now I would get out and wait for rain to put them back on.

Specs have 49,000 or about 25% less longs than they did in June. Even with the 20,000 jump from 8/13 to 8/20. So more buying is possible.

Thanks Ron. That seems like the smart plan. Rolling can be a good idea when the fundamentals favor you; however, the short-term pain may not be worth holding on.

I covered my 1700 calls this morning taking about an 8% hit on the account (largest loss for the year thus far). However, I freed up 35% of my usable margin.

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Old August 26th, 2013, 01:12 PM   #1996 (permalink)
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eudamonia View Post
Thanks Ron. That seems like the smart plan. Rolling can be a good idea when the fundamentals favor you; however, the short-term pain may not be worth holding on.

I covered my 1700 calls this morning taking about an 8% hit on the account (largest loss for the year thus far). However, I freed up 35% of my usable margin.


I guess I'll provide the "hold on for now" viewpoint. I will exit if/when the margin and premium grow too large. Hopefully never.

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Old August 26th, 2013, 01:24 PM   #1997 (permalink)
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I guess I'll provide the "hold on for now" viewpoint. I will exit if/when the margin and premium grow too large. Hopefully never.

I most likely exited too soon and I hope they expire worthless for you.

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Old August 26th, 2013, 01:34 PM   #1998 (permalink)
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eudamonia View Post
I most likely exited too soon and I hope they expire worthless for you.


It is always hard to know what to do in the heat of the moment. 6 months from now, it will be easy to look back and see what we should have done.

I'll just follow Ron's exit rules, and if it says "Get OUT!!!" I will do just that.

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Old August 26th, 2013, 01:40 PM   #1999 (permalink)
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eudamonia View Post
I most likely exited too soon and I hope they expire worthless for you.

You can still put on the calls when it starts raining. Might make good amount of money in short time frame.

I might be doing that for my first grain trade of the summer.

Sometimes when you roll it is best to just wait for the best time to put on the further OTM strikes after you get out of what you have. The roll doesn't need to happen right away. Of course sometimes that will be wrong, but usually it is right more than wrong.

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Old August 26th, 2013, 02:07 PM   #2000 (permalink)
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eudamonia View Post
... I hope they expire worthless for you.

If you didn't know or understand the context of this thread, eudamonia's sentence above might be interpreted very differently.

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