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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:568,022 / 5,727
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Selling Options on Futures?

Old November 20th, 2013, 01:03 AM   #2411 (permalink)
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BlueRoo View Post
This is for a standard NGG14 Strangle FOTM.

EMAIL FROM ONE OF MY AUSTRALIAN BROKERS
If you are looking at doing the NAT GAS CALL options best you do them with Options express, Both compliance and I too feel a little uncomfortable as a freak move like the ones in previous years will set you back 6 million dollars on a $10 move (x60 contracts as below)
While these events are few and far between they do happen and I would warn you to be very careful on the upside of this market.

THIS IS THE CHART THEY SENT ME WITH THE ABOVE EMAIL
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It is a legit fear, to a degree. Natty has gotten wild quickly in the past. So, for the sake of argument, let's say this COULD happen.

What could you do?

One alternative is to buy higher priced calls at the same time.

Here is an example: you sell the .024 delta calls, buy some calls at .008 delta. (Look at the 3rd line in the figure below, to see selling the 4.6 call, and buying the 5.1 call). Your risk is capped at $5K per contract. So if, as in your example, you sold 60 of these puppies, and NG skyrocketed, you'd be out $300K worst case. That's 5% of the loss your broker was worried about. And you've really have to be asleep at the wheel to lose that much. Chances are you'd exit long before that. You might even lift the sell leg, and keep the long call option, and cash in if price does go nuts.

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What is the cost to you? Well, instead of 3.7% ROI you get a 2.7% ROI, still good, but not as good. If you played around with combinations, you'd probably do better than my example (a few weeks ago I did this with the Euro, and I actually got better ROI by doing this - so I got paid to cap my risk!).

I will update this tomorrow AM with new margins, and we'll see how things changed.


FYI: I have done this with EC calls, ES puts and probably would/should with NG calls and CL calls. Gold might be a good candidate too, although I'm guessing the ROI would not be good enough. Capping your risk is always a great idea, if the cost to do so is not too high.


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Last edited by kevinkdog; November 20th, 2013 at 08:30 AM.
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Old November 20th, 2013, 11:43 AM   #2412 (permalink)
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BlueRoo View Post
This is for a standard NGG14 Strangle FOTM.

EMAIL FROM ONE OF MY AUSTRALIAN BROKERS
If you are looking at doing the NAT GAS CALL options best you do them with Options express, Both compliance and I too feel a little uncomfortable as a freak move like the ones in previous years will set you back 6 million dollars on a $10 move (x60 contracts as below)
While these events are few and far between they do happen and I would warn you to be very careful on the upside of this market.

THIS IS THE CHART THEY SENT ME WITH THE ABOVE EMAIL
Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).

I'm sure Ron can comment on this to a greater degree but there are two massive assumptions your broker is making:

1) That the pre-2008 market (where these large moves occurred) is fundamentally the same market as it is today. Even a small amount of knowledge about the supply chain would help you understand that this isn't the case.

2) Notice that those moves happen at a particular time of year? Yep, seasonals. Even during these pre-2008 years you wouldn't see a move like that during this time of year very often. How often? Going back 23 years in MRCI shows that during the 6 bullish years during that time period exactly 1 year (2006) had a "scary" up move. The total amount? $3. Obviously it wouldn't be great to be a move like that; however, that is a far cry from sitting in a $10 move. Also, you might ask yourself - are we in an extremely bullish year in NG? The answer to that question matters quite a great deal. Typically, in the next month we will actually see a precipitous decline in NG (due to seasonal fundamental conditions naturally).

Lastly, there is a thing called covering your position. Hopefully your broker has heard of it . And if they are worried about you trading a "thin OTM" position you can get delta neutral with an appropriate amount of outright contracts in the opposite direction.

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Old November 20th, 2013, 12:18 PM   #2413 (permalink)
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Hello,

is anyone of you option sellers using the company Globalfutures.com for selling (or buying) options on futures and if so, which of their platforms are you using, or would you recommend?

Thanks, Richard

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Old November 20th, 2013, 12:57 PM   #2414 (permalink)
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NG

From Futures Mag - 11/20:

Natural gas was weak on weather forecasts that are not as cold as some were predicting! Maddening! Big picture, though, the long-term demand picture improves. Reuters reports that Freeport LNG received government approval on Friday to export more liquefied natural gas from its proposed export plant in Texas to countries with which the United States does not have a free trade agreement. The approval is the fifth of its kind by the U.S. Department of Energy since 2011 and comes as U.S. natural gas output continues to hit record highs and prices remain below those in Asia and Europe.

Subject to final regulatory approval from the Federal Energy Regulatory Commission, the facility is authorized to export an additional 0.4 billion cubic feet per day (bcfd) for a total rate of up to 1.8 bcfd for 20 years. It follows similar approvals for Dominion Resource Inc's Cove Point Plant in Maryland in September, the Lake Charles terminal in Louisiana in August and Freeport's original approval in May. Cheniere Energy's LNG.A Sabine Pass project in Louisiana was the first to receive non-FTA approval in 2011 and is the only plant under construction with FERC approval.

Seems NG might trade range bound in tandem with sesonal trends. - My Comment

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Old November 20th, 2013, 01:24 PM   #2415 (permalink)
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Futures Edge on FIO

Are you a NinjaTrader user?

 
Hello again,

from reading in this thread, there are some who sell option on futures. I guess at least some are selling them as a vertical or credit spread. Which futures broker platform is the most suitable for that one?
Anyone familiar with RAN from globalfutures?

Thanks, Richard

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Old November 20th, 2013, 03:14 PM   #2416 (permalink)
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mu2pilot View Post
I post this here because it is important to this methodology that we use accurate option analytics to decide on what to trade.

I am demoing multiple trading platforms: OptionsXpress, Zaner360 (DeCarley), IB (I am long time user of TWS) and eSignal. All except eSignal are stand-alone trading platforms, including real time data. eSignal is primarily a data provider, but they do include a decent trading platform.

One of the important numbers we use in picking futures options is the delta. I want a trading platform that makes it easy to search through multiple markets, expirations and strikes to find candidates to trade. Ideally, I would like to do it with an excel spreadsheet. But that is not the point of this post.

Of all these platforms, eSignal is the easiest to link to excel. The IB/TWS excel link sucks big time.

I was setting up my spreadsheet and noticed that the deltas that eSignal was showing varied significantly from IB and OptionXpress. In one example, eSignal was showing the delta of the ESZ3 1655 Put as -1 (eSignal shows deltas in %, not decimal) whereas IB and OptionsXpress showed it as -.07 or -7%. That is WAY OFF. This is the difference between trading it and not.

Has anyone else noticed wide variances like this between different trading platforms?

Several platforms have different variables that you can change that affect the delta calculation. For example the QST platform 5 different models you can use.

Check the settings in ESignal to see if you can change how deltas are calculated.

I use the one that closely models what is on the Daily Bulletins from CME.

I used to have ESignal. It was pretty good. But I like QST better.

QST works well for linking to excel and for having correct deltas. Problem for most is that it is expensive.

I don't think CTS or OEC/Zaner has deltas. I haven't found them.

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Old November 20th, 2013, 03:22 PM   #2417 (permalink)
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BlueRoo View Post
This is for a standard NGG14 Strangle FOTM.

EMAIL FROM ONE OF MY AUSTRALIAN BROKERS
If you are looking at doing the NAT GAS CALL options best you do them with Options express, Both compliance and I too feel a little uncomfortable as a freak move like the ones in previous years will set you back 6 million dollars on a $10 move (x60 contracts as below)
While these events are few and far between they do happen and I would warn you to be very careful on the upside of this market.

THIS IS THE CHART THEY SENT ME WITH THE ABOVE EMAIL

Stupid comments like this from brokers just make my blood boil. The $10 move took 6 months to happen. And it was mainly because of trader manipulation.

I would run as fast as I can away from brokers like this. And unfortunately there are too many of them.

A commodity like NG with very little import export is the least likely to make a big move.

The chances of NG going up $10 in the next 5 years is when this happens.>


Last edited by ron99; November 20th, 2013 at 03:30 PM.
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Old November 20th, 2013, 03:24 PM   #2418 (permalink)
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eudamonia View Post
I'm sure Ron can comment on this to a greater degree but there are two massive assumptions your broker is making:

1) That the pre-2008 market (where these large moves occurred) is fundamentally the same market as it is today. Even a small amount of knowledge about the supply chain would help you understand that this isn't the case.

2) Notice that those moves happen at a particular time of year? Yep, seasonals. Even during these pre-2008 years you wouldn't see a move like that during this time of year very often. How often? Going back 23 years in MRCI shows that during the 6 bullish years during that time period exactly 1 year (2006) had a "scary" up move. The total amount? $3. Obviously it wouldn't be great to be a move like that; however, that is a far cry from sitting in a $10 move. Also, you might ask yourself - are we in an extremely bullish year in NG? The answer to that question matters quite a great deal. Typically, in the next month we will actually see a precipitous decline in NG (due to seasonal fundamental conditions naturally).

Lastly, there is a thing called covering your position. Hopefully your broker has heard of it . And if they are worried about you trading a "thin OTM" position you can get delta neutral with an appropriate amount of outright contracts in the opposite direction.

You answered very well. Nothing to add by me.

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Old November 20th, 2013, 03:27 PM   #2419 (permalink)
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Barrington View Post
From Futures Mag - 11/20:

Natural gas was weak on weather forecasts that are not as cold as some were predicting! Maddening! Big picture, though, the long-term demand picture improves. Reuters reports that Freeport LNG received government approval on Friday to export more liquefied natural gas from its proposed export plant in Texas to countries with which the United States does not have a free trade agreement. The approval is the fifth of its kind by the U.S. Department of Energy since 2011 and comes as U.S. natural gas output continues to hit record highs and prices remain below those in Asia and Europe.

Subject to final regulatory approval from the Federal Energy Regulatory Commission, the facility is authorized to export an additional 0.4 billion cubic feet per day (bcfd) for a total rate of up to 1.8 bcfd for 20 years. It follows similar approvals for Dominion Resource Inc's Cove Point Plant in Maryland in September, the Lake Charles terminal in Louisiana in August and Freeport's original approval in May. Cheniere Energy's LNG.A Sabine Pass project in Louisiana was the first to receive non-FTA approval in 2011 and is the only plant under construction with FERC approval.

Seems NG might trade range bound in tandem with sesonal trends. - My Comment

It will be years until the US is exporting any decent amount of LNG.

Be careful trusting what Phil Flynn says about NG. Or anything else. I talked to someone who used to work at a desk across from Phil. He didn't have anything good to say about Phil or Phil's knowledge of the markets.

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Old November 20th, 2013, 03:30 PM   #2420 (permalink)
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gismeu View Post
Hello again,

from reading in this thread, there are some who sell option on futures. I guess at least some are selling them as a vertical or credit spread. Which futures broker platform is the most suitable for that one?
Anyone familiar with RAN from globalfutures?

Thanks, Richard

For the far OTM options we are selling it is best to leg into them. The chances of getting good fills on spreads is very small.

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