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Selling Options on Futures?
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Selling Options on Futures?

  #2031 (permalink)
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DEEP OTM and 60-90 DTE

I have been trying to come to terms with the idea of very deep OTM and 60-90DTE compared to the approach the I currently take (OTM and 30DTE) and have posted previously.

Ron and Kevin, would you be kind enough to comment on the following proposed CL Nov strangle, where the strikes are assigned, the premium, fees and the margin. My request to is try and further understand this approach. If possible would you answer the following questions from your experience.

1. It is my perception which (could be wrong and please correct me) that with such a large number of contracts and such a small premium that the value of the trade moves around significantly. Could you provide you view of how the value of a trade and margin over such a long DTE fluctuates?

2. Is the idea of such a Long DTE that it is more important to be deep OTM than to maximise time decay?


As you can see the posts in the group have sent me into a spin as I evaluate and question my adopted approach. This is a good opportunity for me to learn more about the key features of writing in terms of DTE and DOTM.

Thanks in advance.

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  #2032 (permalink)
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BlueRoo View Post
I have been trying to come to terms with the idea of very deep OTM and 60-90DTE compared to the approach the I currently take (OTM and 30DTE) and have posted previously.

Ron and Kevin, would you be kind enough to comment on the following proposed CL Nov strangle, where the strikes are assigned, the premium, fees and the margin. My request to is try and further understand this approach. If possible would you answer the following questions from your experience.

1. It is my perception which (could be wrong and please correct me) that with such a large number of contracts and such a small premium that the value of the trade moves around significantly. Could you provide you view of how the value of a trade and margin over such a long DTE fluctuates?

See attached image. Those are 150 calls. Aug Sep & Oct. Because the strike is so far OTM and the delta is so low, the premium does not move significantly unless futures move significantly.

2. Is the idea of such a Long DTE that it is more important to be deep OTM than to maximise time decay?

Time decay happens at a higher DTE the further OTM the option is. So we are still maximizing time decay but being less risky because we are so far OTM.

As you can see the posts in the group have sent me into a spin as I evaluate and question my adopted approach. This is a good opportunity for me to learn more about the key features of writing in terms of DTE and DOTM.

Thanks in advance.

The ROI is very good on that strangle. I get 8.5% monthly ROI if you ride it to expiration. (Note I'm using $198 each for margin. That is the correct OX number. 20% over SPAN. Their system does not calculate spread option margin correctly.)

Tip. Option premium erosion happens quicker on CL puts vs calls. So I usually leg into the strangle by putting the puts on 1st and then later the calls.
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  #2033 (permalink)
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ron99 View Post
The ROI is very good on that strangle. I get 8.5% monthly ROI if you ride it to expiration. (Note I'm using $198 each for margin. That is the correct OX number. 20% over SPAN. Their system does not calculate spread option margin correctly.)

Tip. Option premium erosion happens quicker on CL puts vs calls. So I usually leg into the strangle by putting the puts on 1st and then later the calls.
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What would happen if the futures moved violently? Wouldn't this drive premium up on both sides of the trade?

Also how would you handle margin buffer amounts on a strangle such as this?

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  #2034 (permalink)
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eudamonia View Post
What would happen if the futures moved violently? Wouldn't this drive premium up on both sides of the trade?

Also how would you handle margin buffer amounts on a strangle such as this?

Q1 It would take a severe violent move to do that. Those are pretty rare.

The strangle premium and margin would increase but not as much as if you just had on the one side that is being adversely affected.

Of course there is a point where the one side will stop offsetting the other side if things get too far out of hand.

Q2 I use 2x margin for cash excess just like naked option.

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  #2035 (permalink)
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ron99 View Post
The ROI is very good on that strangle. I get 8.5% monthly ROI if you ride it to expiration. (Note I'm using $198 each for margin. That is the correct OX number. 20% over SPAN. Their system does not calculate spread option margin correctly.)

Tip. Option premium erosion happens quicker on CL puts vs calls. So I usually leg into the strangle by putting the puts on 1st and then later the calls.
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Regarding legging in - if you were to leg in now on the puts how long would you wait to get the calls on? Would you wait for a price reaction or is it strictly based on time?

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  #2036 (permalink)
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If you want to be 25-30 OTM for CL puts then you need to put them on >60 DTE because less than that there isn't much premium left.

Nov 75-80 puts with 47 DTE are down to .02-.04. Dec 75s are .07.

For calls 30-35 OTM you can put them on <60 DTE because the premium is still there.

Nov 135-140 calls are still .15 to .10.

Because things are so volatile in CL now, I am staying at least 30 out on puts and 35 out on calls. Calmer times you can move closer.

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  #2037 (permalink)
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ron99 View Post
If you want to be 25-30 OTM for CL puts then you need to put them on >60 DTE because less than that there isn't much premium left.

Nov 75-80 puts with 47 DTE are down to .02-.04. Dec 75s are .07.

For calls 30-35 OTM you can put them on <60 DTE because the premium is still there.

Nov 135-140 calls are still .15 to .10.

Because things are so volatile in CL now, I am staying at least 30 out on puts and 35 out on calls. Calmer times you can move closer.

Thanks. I know you don't usually advocate doing covered trades but with the current situation in Syria could something like the following provide some extra protection at a reasonable cost:

Sell Dec 75 puts
Buy Dec 65 puts
Sell Dec 150 calls
Buy Dec 170 calls

I show about a 4% monthly Roi using the OX calc.

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  #2038 (permalink)
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eudamonia View Post
Thanks. I know you don't usually advocate doing covered trades but with the current situation in Syria could something like the following provide some extra protection at a reasonable cost:

Sell Dec 75 puts
Buy Dec 65 puts
Sell Dec 150 calls
Buy Dec 170 calls

I show about a 4% monthly Roi using the OX calc.

Somebody left OX on Friday and never updated OX margins. They still have the margins from Thursday.

Using OX Trade Calc and having to do the margin for one set and then quantity of two and subtracting the two I get 208.56. But that is from Thursday.

Using SPAN I get 127 margin and 100 net premium. OX adds 20% to CL so that would make the margin 152.40. Using 4.96 for fees for each contract I get 7.0% monthly ROI.

Yes I would definitely trade those.

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  #2039 (permalink)
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Step Two of Seasonality Study

This post follows a previous post. This chart compares XSP and USO 2013 to a 3 year seasonal average (2010 to 2012). I wanted to look at the index against USO following Ron's obserservation that the previously posted USO chart looked like the seasonality of the market. Well Ron was right. They look pretty much the same. I have also looked at the 15 and 30yr charts for CL from Moore which look quite different to the last 3 years. The purpose of this work is to try and better understand seasonality and how it might affect my approach to writing strangles on CL. All comments observations and or corrections are welcomed. (Please note that the chart is normalised so that the proptional moves of either the XSP or USO are based on a common datum.)

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  #2040 (permalink)
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Quoting 
Believe it or not, a Syria strike could send oil prices tumbling -- yes tumbling.

That may seem counter-intuitive, but that's exactly what Cramer is hearing from Carley Garner, the co-founder of DeCarley Trading and author of A Trader's First Book on Commodities.

She tells Cramer that historical patterns would suggest a strike should generate some watershed selling.

Looking back two years, when the US went into Libya, the price of oil domestically dropped by 10% almost immediately. And after America invaded Iraq a decade ago, oil futures tumbled 15%.

That's largely because oil prices tend to rally in anticipation of an attack, but after it happens it becomes a 'sell the news' event.

Garner says technical patterns in the charts of crude oil suggest that history is about to repeat itself, as the US threatens to strike Syria.

First, Garner says the stochastic oscillator has been in overbought territory since July, and every time the oscillator has reached overbought levels in the last couple of years and then pulled back, the declines have been significant.

Also, looking at the weekly chart, Garner points out that the price of crude is now consolidating in a violent but relatively narrow trading range. That too is bearish.

And she adds that the calendar is bearish for oil. Seasonally oil has a strong tendency to top out in early to mid-September.

And on top of all that, speculators currently hold record net long positions in oil. That too suggests selling is imminent.

Due to these and other patterns Garner suggests selling into strength.

Looking at how sharp the decline may be, Garner says there's every reason for crude to decline down to $96 and adds if that level doesn't hold, the next level of support should be $90.

Syria strike could send oil prices tumbling, (yes tumbling)

Jim Cramer in Mad Money video in link discusses Garner's opinion.

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