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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:570,021 / 5,734
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Selling Options on Futures?

Old December 17th, 2013, 01:21 PM   #2621 (permalink)
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Just FYI ICE just announced new margin rates effective Thursday 19th for many contracts.
The only real changes to Henry Hub are for long dated positions 2020+

https://www.theice.com/productguide/MarginRates.shtml?index=&specId=6590258

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Old December 17th, 2013, 03:20 PM   #2622 (permalink)
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Just saw the March/April $1 Spread Option Call trade 6.25c and the $2 calls trade 2.75c with March/April futures spread trading 14.5c!

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Old December 17th, 2013, 03:40 PM   #2623 (permalink)
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Interesting Day.
Jan Range 4194-4326 = 132
Feb Range 4210-4341 = 131
Mar Range 4196-4320 =124
Apr Range 4091-4160 =69

Jan/Feb Range (-18)-(-6) = 12
Feb/Mar Range (-15)-22 = 37
Mar/Apr Range 90-159 = 69

So the Mar/Apr spread had as large a range as Apr outright!

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Old December 17th, 2013, 04:36 PM   #2624 (permalink)
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Here is the Holiday Trading schedule in pdf

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Selling Options on Futures?-holiday2013.pdf  
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Old December 17th, 2013, 05:37 PM   #2625 (permalink)
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Futures Edge on FIO
I have been working on less risky ways to sell NG options. I took what the margin and premium were on 11/19/13 for March NG calls. The day before the NG prices started rising. I then compared what the margin was on 12/13/13 with 11/19. The increase column.

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500c is 5.00 calls.
500c525c is selling the 5.00 and buying the 5.25. Bear Call Spread.

The IM for a 5.00 call on 11/19 was 217. On 12/13 it was 836. An increase of $619.
The premium for a 5.00 call on 11/19 was $110. On 12/13 it was $1530! An increase of $1,420.

If you add the 619 + 1420 you get $2,039 that you had to have in your account per option to cover the increases in margin and premium. That is 9.4 times the 217 IM when you put on the contract.

Obviously nobody is going to keep 10 times IM in excess to cover major moves. And it was even worse for higher strikes. Up to 22 times for a 6.00.

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So then I looked at what happened if you had on Bear Call Spreads. I was expecting the ROI to be lower than the naked short options. It wasn't. That is surprising because in other commodities it is lower.

The 5.00 spreads were better ROI than 5.00 naked. The 5.25 spreads with at least a 0.50 spread were the same as the 5.25 naked. The 5.50 spreads were worse ROI than the 5.50 naked. So it doesn't work for all spreads. But there was a spot where it did work.

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I used $5 for costs per option. I used 2X IM for cash excess. So if IM was 217 then total IM + cash excess is 651.

I was expecting to have the spread move less against me. It did. By a lot.

For example, a 5.00 call took 217 IM on 11/19. A 5.00-5.50 spread took 118 IM. You could put on about 2 spreads for each naked 5.00 for about the same IM. The premium for the 5.00 was 110. For 2 spreads was 140. More premium.

Over the next 24 days the margin + premium for the naked 5.00 call went up by $2,039. For 2 spreads? Up by $1,292. Or 5.5 times IM on 11/19. Still painful but that is much better than the 9.4 of the naked 5.00.

I am kicking myself for not figuring this out before I put on a bunch of these.

Thoughts?

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Old December 17th, 2013, 08:20 PM   #2626 (permalink)
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ron99 View Post
I am kicking myself for not figuring this out before I put on a bunch of these.

Thoughts?

Actually, I did something similar after the big drop in GC back in April. I was looking to cap potential loss and help prevent a quick run from generating a margin call and forcing me to exit. In fact for a couple of months after that all I did was credit spreads. I didn't really have much of a plan for exiting other than what Cordier suggested in his book: exit when the short leg went in-the-money. Exiting in that manner, your loss was roughly 1/2 of the max if both options expired in-the-money.

I drifted back to selling naked options because where my exit did a good job of limited my loss, that loss was more painful. Well, that and I couldn't find a better exit to use with credit spreads. That obviously wouldn't be best exit strategy with the spread example you had, so what would you be looking at for an exit?

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Old December 17th, 2013, 10:09 PM   #2627 (permalink)
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Actually, I did something similar after the big drop in GC back in April. I was looking to cap potential loss and help prevent a quick run from generating a margin call and forcing me to exit. In fact for a couple of months after that all I did was credit spreads. I didn't really have much of a plan for exiting other than what Cordier suggested in his book: exit when the short leg went in-the-money. Exiting in that manner, your loss was roughly 1/2 of the max if both options expired in-the-money.

I drifted back to selling naked options because where my exit did a good job of limited my loss, that loss was more painful. Well, that and I couldn't find a better exit to use with credit spreads. That obviously wouldn't be best exit strategy with the spread example you had, so what would you be looking at for an exit?

I also researched a lot about spreads and ultimately came back to Naked options. Main reason was for any spread you almost end up holding till expiry to collect most of the sold premium while for naked options most of the time you can close the position in 50 to 70 % of time (provided you do not go for last tick or two). Another reason was for getting same dollar credit I had to sell 3 to 5 times spread or come very close to money. Both increases risk and it is very difficult to hedge/adjust spread (as it is kind of already hedged to begin with).

Better way that works for me is to limit the max no of contracts to somethings that can be covered by future margin and then never let total position delta get out of hand (put hedge by selling opposite options or buying options or futures). Like for 100 k account and cap of 10% margin for one position - when I put 600 March calls initial margin was about 44 and so technically I can put about 70 contracts but instead I will never go above 25 (1 contract per 4k - 2500 margin for 1 ng future plus some spare). So I might come bit closer to 5.5 and limit myself to 20 contracts. Then if initial delta was 0.03 or so and if I sold 20 contracts equal to 0.6 delta - I will start hedging as soon as it goes over 2.5 to 3 delta and bring the delta down.

I was also and is still short these calls but was able to hang through these crazy margin/price increase. One thing that I have discovered with naked option selling is that you have to have money power to hang through these kind of periods and at the same time never let position delta get out of hand. By hedging you may lose sometimes instead of making money (when price turns back right after hedging is done) but that prevents the very big loss which will put you out of business.

Just my 2 cents....

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Old December 17th, 2013, 11:19 PM   #2628 (permalink)
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ron99 View Post

Thoughts?

I think it is a good idea in general.

I've seen the same thing with currencies - the ROI for a spread is actually better than the outright.

The biggest problem I came across is in filling both orders.


In you particular case, Ron - if you had exited each by your rules, would the dollar losses have been comparable? Especially since you would have sold 2x the number of spreads as you did outrights.

If you have any questions please send me a Private Message or use the futures.io "Ask Me Anything" thread

Last edited by kevinkdog; December 17th, 2013 at 11:45 PM.
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Old December 18th, 2013, 03:00 AM   #2629 (permalink)
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I think you need match the strategy to the market, identifying markets and periods that may produce rapid and difficult to foresee price gains and corresponding volatility, NG and S come to mind, they may be more suited to spreads, but for most of the markets that should not be necessary.

I agree with Seemasp limiting the number of contracts per market to a manageable level is the strategy I would prefer, the other is to have the guts to switch sides if need be, in this NG market it really saved my bacon this time with the puts I sold less than half their sold value cushioning to some extend the calls I have on.

Limiting contracts to something manageable can sometimes be hard to put into practice when you are chasing a steady return and where a particular market has been giving easy returns for some time , CL springs to mind for me at the moment as it is just so easy to add contracts with a high degree of confidence and keep money working when other markets don't look appealing, until one day something bad happens and crash and , difficult to reign back when it looks easy and the RoR's are great.

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Old December 18th, 2013, 06:41 AM   #2630 (permalink)
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The problems is "which strategy that could make us profit in market" ??
These main factors must be solve first. If not, its same with killing our self in forex trade...

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