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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:569,198 / 5,728
Last Reply:December 6th, 2016 (05:26 PM) Attachments:642

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Selling Options on Futures?

Old November 4th, 2013, 05:08 AM   #2311 (permalink)
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kevinkdog View Post
I'm curious - does anyone else out there sell deep out of the money options on currencies? I'm talking in general, not just this particular trade.

I ask because I've thought about it, and the downside scares me. Any currency you sell relies on 2 governments not doing anything crazy - the currency government for whatever you are trading, and the US gov't, since everything is quoted in dollars. I just don't trust any government or central bank, especially the US gov't these days

Am I alone in this paranoia (which for me also extends into Gold and US Treasuries, although I do sell options in those)? Maybe I am missing a good thing by being irrationally scared...



edit: Of course, if the US dollar suddenly gets devalued or some FED action causes USD to skyrocket or plummet, most other futures will see impact, so maybe my concern is overblown.

I was look at Dec Euro calls, and they have over 3% ROI, so maybe selling a call, and buying a higher call, will limit the potential downside, and still provde a good ROI. I might just try it.

Hi Kevinkdog,

i do, mainly the aussie because it is easier for me to get a grip on my local currency, news etc. I have had a very successful year trading the aussie. I guess i am a bit naughty in my approach in that when the aussie was falling i was trading mostly Puts. I was able to sell options around 8-10 cents away with 45 DTE for a ROI of between 5-13%. I found Calls to be harder to get a decent ROI and chewed more of my excess margin.

At the moment i can't seem to find a trade on the aussie at a level that i feel comfortable with, with a close to respectable ROI. I have looked at trading other currencies and have dabbled here and there, but because i do not really understand their macro environment i have not been comfortable enough to place too many trades.

i have found the currency options to be fairly liquid. i generally sell puts on down days and have found on a number of times some strikes are better value than closer to the money strikes through demand i guess. i think you need to time your trades, a bit of volatility can have a big impact on individual strike prices for a day or so then they go back to normal. It is worth a look i think if the conditions are right.

bakes

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Old November 4th, 2013, 08:28 AM   #2312 (permalink)
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Bakes View Post
Hi Kevinkdog,

i do, mainly the aussie because it is easier for me to get a grip on my local currency, news etc. I have had a very successful year trading the aussie. I guess i am a bit naughty in my approach in that when the aussie was falling i was trading mostly Puts. I was able to sell options around 8-10 cents away with 45 DTE for a ROI of between 5-13%. I found Calls to be harder to get a decent ROI and chewed more of my excess margin.

At the moment i can't seem to find a trade on the aussie at a level that i feel comfortable with, with a close to respectable ROI. I have looked at trading other currencies and have dabbled here and there, but because i do not really understand their macro environment i have not been comfortable enough to place too many trades.

i have found the currency options to be fairly liquid. i generally sell puts on down days and have found on a number of times some strikes are better value than closer to the money strikes through demand i guess. i think you need to time your trades, a bit of volatility can have a big impact on individual strike prices for a day or so then they go back to normal. It is worth a look i think if the conditions are right.

bakes

Thanks bakes. What kind of delta levels are you selling to get 5-13% monthly ROI? I would guess those deltas are around .1 to .2.

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Old November 4th, 2013, 08:39 AM   #2313 (permalink)
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Took The Plunge


After looking at currency options over the weekend, I decided to take the plunge. sort of. Here is my thinking:

PROS
very liquid market, even for deep out of money
some have ROIs around 4% for deltas at .05 or less

CONS
I'm still scared of major price shocks due to Central Bank moves



So, I decided to look at selling an option, and then buying a lower delta option. Here's a specific example:

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Pretty good ROI, actually better than the naked 1.405 call by itself. That surprised me. Plus, knowing that my downside is limited - absolute worst case is a $1250 loss per option - makes this an attractive trade.


I've done only a handful of these one today, and am looking to do more. I'm not going crazy with it, but aiming for 10-15% of my overall portfolio.

Please feel free to poke holes in my thinking, if you see some!


edit: I should point out that I legged into this, rather than enter the order as a spread (simultaneous sell of 1.405 and buy of 1.415). There is risk here of a runaway market, and this takes a bit more effort. I figure this is worth it, considering there is 55% yearly return for doing this.

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Last edited by kevinkdog; November 4th, 2013 at 08:59 AM.
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Old November 4th, 2013, 02:23 PM   #2314 (permalink)
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Kevin:

I looked at your trade and pulled up the options. When I traded a few years ago I didn't follow the EC because of low premium. I mirrored your trade and while the prices were different slightly I could see the trade and was surprised that the premium was that high compared to what it used to be.

So i pulled up a chart and started playing with it. Here's my take. I like tech analysis. I put a trend line across the bottom and using 7/10 and 9/06 as bottom points it appears that EC touched the trend line and reversed today. Based on that I STO 1 jan 1.275 put for .0012 or $150.00. I plan to only keep it for 30 days.

I also pulled up the probability chart and it shows (if you can believe this) a less than 1% chance of expiring below this price point. ROI 23% if kept til exp.

The prob. of your 140.5 call reflects close to the same percentage (slightly over 1%).

The premium used to be low because of minimal moves in the contract. It appears to be making more pronounced moves now. So I question the validity of the 1% chance of expiry on either yours or my position. But it will give us something to watch. I hope we both succeed.

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Old November 5th, 2013, 07:50 PM   #2315 (permalink)
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Futures Edge on FIO

kevinkdog View Post
Thanks bakes. What kind of delta levels are you selling to get 5-13% monthly ROI? I would guess those deltas are around .1 to .2.

Kevin,

Looking back my Delta ranged from .03-.05. One thing that will skew my ROI is that i use margin * 2.8, not 3 like Ron does, so that will increase my ROI. the AUD trades is the only instrument where i will go above a delta of 0.03. I generally look at 0.03 as a starting point and then look at how far away that is from the current price then look at the macro environment.

Currently there i nothing offering remotely the ROI i have been getting with the AUD. A trade i would be comfortable placing right now would have an ROI of just under 3%.

bakes

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Old November 6th, 2013, 09:15 AM   #2316 (permalink)
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Ratio

When selling a naked put with a delta of .02 to .03 approximately what can I expect for the
ratio of (Initial Margin)/(premium sold) ?

thanks in advance.

HH.

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Old November 6th, 2013, 09:53 AM   #2317 (permalink)
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datahogg View Post
When selling a naked put with a delta of .02 to .03 approximately what can I expect for the ratio of (Initial Margin)/(premium sold) ?

thanks in advance.

HH.

Anywhere from 2 to 6:1.

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Old November 6th, 2013, 11:09 AM   #2318 (permalink)
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kevinkdog View Post
So, I decided to look at selling an option, and then buying a lower delta option. Here's a specific example:

Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).

Hi Kevin,

I've just started looking at currency futures options, so I was interested in your EC trade. I also like the look of muffin58's 1.275P, and wondered what would happen If you strangled the two of them.

I've adjusted the strikes a little to even up the premiums and the deltas, and it looks promising. I also did a calculation for an Iron Condor (at least I think that's what it's called).

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Now when I see monthly ROIs over 5% my first thought is that there's probably an error in the spreadsheet. Can somebody check this?

As you say the difficulty with the more complex combos is that you could be left exposed if you have to leg in. Maybe a combo order would get filled around a news spike. There may be one on the Euro for the bid rate announcement tomorrow.

All comments/criticisms welcomed


Chris

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Old November 6th, 2013, 11:14 AM   #2319 (permalink)
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MGBRoadster View Post
Hi Kevin,

I've just started looking at currency futures options, so I was interested in your EC trade. I also like the look of muffin58's 1.275P, and wondered what would happen If you strangled the two of them.

I've adjusted the strikes a little to even up the premiums and the deltas, and it looks promising. I also did a calculation for an Iron Condor (at least I think that's what it's called).

Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).


Now when I see monthly ROIs over 5% my first thought is that there's probably an error in the spreadsheet. Can somebody check this?

As you say the difficulty with the more complex combos is that you could be left exposed if you have to leg in. Maybe a combo order would get filled around a news spike. There may be one on the Euro for the bid rate announcement tomorrow.

All comments/criticisms welcomed


Chris


Are you counting all 4 commissions in your calcs?

If you have any questions please send me a Private Message or use the futures.io "Ask Me Anything" thread
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Old November 6th, 2013, 11:51 AM   #2320 (permalink)
World'sWorstTrader
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Risk



ron99 View Post
Anywhere from 2 to 6:1.


So if the ratio is much > 6 the risk reward is probably too great?

Or does this mean that the probability of success is higher than with a ratio of 2-6 and acceptable.

Thanks HH.

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