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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:567,999 / 5,727
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Selling Options on Futures?

Old September 24th, 2012, 04:09 AM   #241 (permalink)
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justtradeit84 View Post
Hi guys,
I am new to selling options ,particularly options on futures.Can we do credit spread with 1 or 2 month out and still be able to collect decent credit instead of selling naked options? Coz the idea of unlimited loss should the position goes again you is pretty scary to me.


You can do credit spreads but you will find that to get a reasonable net premium you will have to go closer to the ATM price which then increases the chances of taking a loss. The generally accepted risk management technique is to sell well OTM naked options where there is still a decent premium and to use a financial stop, ie exit if the premium doubles or the price reaches a level where you decide you were wrong.

The unlimited loss scenario that exists with selling naked stocks which can go bankrupt overnight or get bought out is not really the same when selling commodity options which you would not expect to go to zero.
With stock options the spread sets a maximum loss but more importantly dramatically reduces the margin required from the cost of the whole position (cash covered put) down to the cost of the spread (max loss). Whereas with futures options the margin is much smaller to start with even if selling naked.


Hope this helps
Brit

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Old September 24th, 2012, 06:06 AM   #242 (permalink)
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Hi,

Other than OTM credit spreads to collect premiums, you may also short calendar for futures like GC. I recently shorted GC Dec/Nov -1780/+1780. This trade needs patience for GC to move far away from 1780 (upside/downside).

In fact the margin required is quite low (with IB).

joejoe

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Old September 24th, 2012, 08:42 AM   #243 (permalink)
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joejoe View Post
Hi,

Other than OTM credit spreads to collect premiums, you may also short calendar for futures like GC. I recently shorted GC Dec/Nov -1780/+1780. This trade needs patience for GC to move far away from 1780 (upside/downside).

In fact the margin required is quite low (with IB).

joejoe

Very interesting joejoe,

What was the IB margin on this and what would your expected gain be (one months time value?)

Brit

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Old September 24th, 2012, 09:03 AM   #244 (permalink)
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The margin is about 790 for 1 spread, expect underlying price +/- 80 to be away from strike i.e. 1700/1860 in 1 week's time. So the gain will be around 450-550 which is about >50% gain already !

joejoe

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Old September 24th, 2012, 10:20 AM   #245 (permalink)
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joejoe View Post
The margin is about 790 for 1 spread, expect underlying price +/- 80 to be away from strike i.e. 1700/1860 in 1 week's time. So the gain will be around 450-550 which is about >50% gain already !

joejoe

Interesting. Does the price going up or down have the same effect on this spread? I used to think that only one scenario will favor your spread. Am I wrong? Would appreciate any more elaboration.

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Old September 24th, 2012, 10:26 AM   #246 (permalink)
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I just checked the option chain from day to day that the effect should be the same (looking at 80 away from my strike).

Note that commodities prices in the last week of quarter end will be very crazy that may create big swings which is favourable to this trade (look at 28-30 June 2012 !!!)

joejoe

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Old September 24th, 2012, 01:51 PM   #247 (permalink)
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rosho01 View Post
thanks, as expected.

Are all the commodity futures you trade cash settled? I guess its not that big an issue as they are either closed out before expiry or left to expire well OTM?

It doesn't matter if they are cash settled as long as the option is OTM.

I rarely close out before expiry. Normally I let them expire OTM.

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Old September 24th, 2012, 02:10 PM   #248 (permalink)
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britkid99 View Post
Hi rosho01,

Take a look at the chart attached which shows my recent CL Nov 80 Put, and some of my analysis and thoughts behind it.

I have a SIPP with Stadia as the trustees. They are the only one I could find that gave me good access to US markets through IB. So you get low SIPP costs about 250/yr i think, plus low cost access to US. The only downside is the 150% margins they impose on top of their full exchange requirements. You can trade freely with Futures and Options on Futures but not allowed to short stocks and it is a cash account so no stock marginning allowed either. Stock options ie covered call etc can be requested.

Brit

The MRCI chart shows a dip in prices for Nov CL mid to late Sep. Looks like we are getting it again this year. But the bottom should be this week and CL is up 1st 2 weeks of Oct most years.

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Old September 24th, 2012, 02:16 PM   #249 (permalink)
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justtradeit84 View Post
Hi guys,
I am new to selling options ,particularly options on futures.Can we do credit spread with 1 or 2 month out and still be able to collect decent credit instead of selling naked options? Coz the idea of unlimited loss should the position goes again you is pretty scary to me.

This is directed at brokers and traders, justtradeit84, don't take it personally.

I never understand why people are so scared of naked options and their unlimited loss potential when futures have a much worse unlimited loss potential. You just have to manage the position.

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Old September 24th, 2012, 02:30 PM   #250 (permalink)
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justtradeit84 View Post
Hi guys,
I am new to selling options ,particularly options on futures.Can we do credit spread with 1 or 2 month out and still be able to collect decent credit instead of selling naked options? Coz the idea of unlimited loss should the position goes again you is pretty scary to me.

The SPAN minimum margin for being short a Dec CL 70 put is $436 (Sep 24th). Premium is $150. With double excess your possible ROI is 11.3%.
The margin for a short Dec CL 70 put and long a 65 put is $235. Premium is $90. With double excess your possible ROI is 12.0%.

The margin for a short Dec CL 70 put and long a 60 put is $340. Premium is $120. With double excess your possible ROI is 10.7%.

The margin for a short Dec CL 65 put and long a 60 put is $105. Premium is $30. With double excess your possible ROI is 6.2%.

These numbers need to be adjusted for your commissions and fees. I used 5.21 per option. Also the margin you will be charged may be higher at your FCM.

OX just jacked up their margin on CL to 30% (was 20%) over SPAN. So the ROI for these trades at OX are 8.5% and 8.7%. That's still a great ROI for 51 days.


Last edited by ron99; September 24th, 2012 at 02:41 PM.
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