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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:567,733 / 5,727
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Selling Options on Futures?

Old November 14th, 2013, 03:28 PM   #2361 (permalink)
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Old November 14th, 2013, 03:28 PM   #2362 (permalink)
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Why are Dec ES puts at 1280 to 1450 bid at yesterday's settlement price when ES futures are up 8.00 and they are only 36 DTE?

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Old November 14th, 2013, 03:30 PM   #2363 (permalink)
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kevinkdog View Post
Thanks for sharing. If I can ask, what kind of overall annual percentage return is that?

I don't know. I also buy options, and buy and sell futures in the same accounts.

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Old November 14th, 2013, 03:44 PM   #2364 (permalink)
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kevinkdog View Post
Thanks for sharing. If I can ask, what kind of overall annual percentage return is that?

In the interest of sharing: Right now, just for my option selling, I am looking at around +121% for the year, but the first half of the year was a very small account.

Next year, I'll be targeting +100% for the year, which more $$ on the line.

You guys are awesome and an inspiration. I am beginning to trade options more and more and have thoroughly enjoyed this thread.

I do have a question tho. I will be using portfolio margin and would like to know, if you could only pick one broker, who would you choose?

Also, which options "front-end" would you choose? Like OptionVue, Tradestation, LiveVol, etc. LiveVolX looks pretty good, but at $500/month (unless you open an account with them), I'll be looking elsewhere.

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Old November 14th, 2013, 03:54 PM   #2365 (permalink)
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You guys are awesome and an inspiration. I am beginning to trade options more and more and have thoroughly enjoyed this thread.

I do have a question tho. I will be using portfolio margin and would like to know, if you could only pick one broker, who would you choose?

Also, which options "front-end" would you choose? Like OptionVue, Tradestation, LiveVol, etc. LiveVolX looks pretty good, but at $500/month (unless you open an account with them), I'll be looking elsewhere.


Thanks. I've actually been able to do much better with regular futures, but the volatility of my equity curve was a lot more, and the drawdown a lot higher. This method is pretty nice, and usually boring (which is good).

I trade options at OptionsExpress, and will also be trading options starting next week at DeCarley Trading.

I love the Trade Calculator at OptionsExpress (except that P/L is a factor of 100 off right now).

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Old November 14th, 2013, 03:59 PM   #2366 (permalink)
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kevinkdog View Post
Thanks. I've actually been able to do much better with regular futures, but the volatility of my equity curve was a lot more, and the drawdown a lot higher. This method is pretty nice, and usually boring (which is good).

I trade options at OptionsExpress, and will also be trading options starting next week at DeCarley Trading.

I love the Trade Calculator at OptionsExpress (except that P/L is a factor of 100 off right now).

Being able to model trades is one of the functions I'm most interested in, especially the margin requirements. I have an unfunded account at OptionsXpress, but the Trade Calculator, as you noted, doesn't provide accurate IM and MM.

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Old November 14th, 2013, 04:02 PM   #2367 (permalink)
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mu2pilot View Post
Being able to model trades is one of the functions I'm most interested in, especially the margin requirements. I have an unfunded account at OptionsXpress, but the Trade Calculator, as you noted, doesn't provide accurate IM and MM.

IM amd MM are accurate, except for spread orders (multi-legs). Single leg calculations are correct. For multi-leg, just run it for 1 contract, then 2 contracts, and the difference will give you the correct amount (thanks to @ron99 for figuring this out).

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Old November 14th, 2013, 04:54 PM   #2368 (permalink)
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@PeterOhlson -

Thanks for sharing that ET link by Atticus. I am having trouble understanding the method proposed in that thread. How did you figure out how to implement what he described? Is there any source (forum thread, book, etc) that you recommend I look at for more background on his particular approach?

Or, if anyone can explain what he is doing in plain English (not optionese language), that would help too. I'm just a little slow...

THANKS

He is basically pricing skew premium. Skew is the differences in IV accross different strikes for one spesific expiration. Term structure is the differences in IV for the same strikes accross different expirations. The volatility surface gives you both term structure and skew in a 3D chart, as such:


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(Might be kind of hard to see the 3D effect but it's rotateable in the program. You can also search for volatility surface on GOOG pics and get some examples)

Your profits are dictated by the difference between the IV you sell at, and the final volatility the market realizes (HV). There is only one HV-figure per stock (but hundreds of different IV's, one for each option). As you can see the further away from ATM, the higher the IV and thus the higher the potential profit. But once you move past 10 deltas and below, things tend to break down a bit. So generally selling options lower than 10D is a bad idea, because vanna/vomma risk factors can destroy you (not getting into that here).

Anyways, if you buy an ATM straddle, whatever you pay for that is the markets expectation of future volatility. Meaning, if your straddle costs 3.00, and the stock price is currently 25, the market expects that the stock price will keep within the range of 28-22 within expiration. (Because 25 +/- 3 = 28 and 22 respectively). That is the expected volatility. Now, coming back to what atticus does, he essentially sells a "straddle" not at ATM, but outside ATM, and as said, outside ATM there is inflated IV, thus he makes more profit than what he would do selling the straight ATM straddle. He is in reality just selling delta-neutral volatility somewhere outside where the ATM straddle predicts volatility will go within expiration. So continuing on the above example, the ATM straddle predicts price will stay within 28 to 22. So what you do, is sell options at 22. You sell 3 puts and 1 calls. This essentially makes you delta neutral (Because usually the 3 puts have 25D and the 1 call has 75D. The 3-1 relationship is also why it's called a pitchfork). So, you sell a total of 4 options. That is essentially 2 "straddles" you sell at a price of 22. Because, if the stock price goes down to 22, to your 4 naked options, and you were to neutralize your deltas here, you are essentially short 2 straddles. Therefore, you can compare the price you get when you sell your two "straddles" at 22, with the price you would get for selling two straddles at 25. This difference is the "skew premium", and the skew premium represents whatever extra money you get for selling IV outside ATM. So you're essentially "pricing skew". This gives you actual monetary terms, not just a chart like the picture above. By keeping a database of skew premium you can figure out when it's expensive and when it's cheap, in monetary terms. If it's historically high then selling options becomes a very, very high probability game. Of course on some stocks you might have idiosyncratic risks so some fundamental research isn't a bad idea if you plan to do it there. Personally I sell only on indices (for now) and things are much more systemic there.

As for books....honestly there is no one book or webpage that can teach you options. What I've learnt so far is from probably hundreds of different articles on various webpages, long nights of reading forums etc. etc. It took me probably 1 year to accumulate whatever knowledge I have right now, and I work full-time as well. I'm nowhere near professional level but am now able to read most financial research papers and actually understand them, at least somewhat. I remember trying to read one of them when I was new to option trading and it was completely greek to me (pun intended)


Last edited by PeterOhlson; November 14th, 2013 at 05:28 PM.
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Old November 14th, 2013, 05:04 PM   #2369 (permalink)
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Thank you, Peter, for taking the time to explain that strategy.

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Old November 14th, 2013, 05:09 PM   #2370 (permalink)
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Thanks Peter - it is still a complicated topic (for me, at least), but your explanation has made the idea about 10 times easier to understand.

Is trading this particular technique a big part of how you trade overall? For me, options has been a relatively small percentage of what I am doing overall in trading, but I am giving it more prominence...

THANKS

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