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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:570,189 / 5,734
Last Reply:December 9th, 2016 (01:01 AM) Attachments:642

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Selling Options on Futures?

Old December 18th, 2013, 08:17 AM   #2631 (permalink)
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Harvard16 View Post
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.

Yes limiting the number of contracts reduces the return and is hard to do when market is offering 'easy' money but one has to train mind for looking for more of a positive steady return rather than any fixed goal in terms of return. After all there is not much benefit in getting very high return if there is a high possibility of getting blown out completely.

Also another thing to consider is limiting yourself to markets that you know. How well you know the market in terms of price behavior affects ones ability to hedge/stay put when things do not go per plan. I am very hesitant to trade markets that I do not know well but offers high return like Live Cattle or Cocca as I just do not know what exactly I will do (with at least some confidence) if it does not proceed per plan.

Many times I initiate new positions which would only give 1.5% to 2 % return and bypass 5% return because of diversification and familiarity with markets and limiting the no of contracts for one market. I would rather take 2% probable return rather than 5% 'easy' return as in past I had been burned by these 'easy' returns. After going through one such painful event when I had to take loss at the worst time (right before market turned in my favor) I came up with these guideline of limiting contracts and not letting delta getting out of hand which have saved me many times after that.

Just sharing what works for me...

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Old December 18th, 2013, 09:30 AM   #2632 (permalink)
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Harvard16 View Post
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.

Exactly. Doing spreads in some commodities is just not feasible because you either have to get too close to ITM to make worthwhile profit and/or the ROI is just too low.

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Old December 18th, 2013, 10:50 AM   #2633 (permalink)
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kevinkdog View Post
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.

It looks like you would have exited both the naked 5.00 and the 5.00-5.50 spread the same day on 12/5 when futures popped up that day.

The loss, using that day's settlement price, would have been $280 on the naked 5.00 and $180 times 2=$360 on two 5.00-5.50 spreads.

It is interesting how the margin changed for both of these. The naked 5.00 the IM was 217 on 11/19. It was 498 on 12/5. It was 836 on 12/13. Straight up.

But for the 5.00-5.50 spread the IM went from 118 on 11/19 to 261 on 12/5 but then only went to 264 on 12/13. Almost no increase from 12/5 to 12/13. But the premium kept increasing. From 70 to 250 to 570.

I hung on to almost all of my NG calls because I feel fundamentally there is a range that NG will have to stay in. Prices approaching 5.00 will reduce demand. I just happened to have a lot of cash excess before this happened.

NG can and will get replaced by coal for electric generation. But in other commodities there is no to no substitute. Oil has to be used. Grains are needed. People need their sugar.

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Old December 18th, 2013, 11:12 AM   #2634 (permalink)
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Just a comment, I think the best way to make a highest possible risk-adjusted return w/ options is isolating whatever risk you're trying to make profit off. Options have several risks, and when you sell a OTM spread and don't delta hedge it, you essentially are betting on market direction rather than on making theta. If your goal is to make theta, you isolate your theta and eliminate all other risks, that means actively delta-hedging and keeping your vega neutral. The higher the theta/gamma ratio and theta/vega ratio you have, the better structured your theta-portfolio is.

You will actually notice that if you look at the theta/gamma ratio of a credit spread, it's worse than that of a straddle. And if you look at a naked OTM put, it has the best theta/gamma ratio of the three. So the naked OTM put is the superior trade for theta. Obviously there are margin considerations, the consideration of how your risks will change with spot and volatility (need a flexible risk graph software, I personally use thinkorswim), and a good understanding of the idiosyncratic risks of whatever instrument you trade is neccessary. If you trade horizontally a good understanding of term structure is also neccessary.

But to be blunt, I've found that purely for theta, verticals are just terrible. Straddles aren't good either. Naked puts have too high margin requirements, otherwise they would be awesome. To be honest, you really need to start moving horizontally and look at the term structure as a whole. One of my favorite trades is to sell OTM puts and calls on the front-month, then hedge it with ATM vol further out. The theta/gamma ratio is awesome, the margins are VERY low, it's pretty much the best thing besides the front-month naked put. Obviously you will be delta hedging actively til expiration. Your only real problem then is managing the vega-risk of the ATM vol, which is rather high. But it's not really a "problem", because if vol comes down on the ATM, it will COME DOWN on your short OTM options as well. They have lower vega, but more vol-of-vol so it works out just fine. This is where understanding of the term structure and limits to black-scholes comes in. Anyways it's one of my favorite trades, I use it on the SPX where skew is high.

For an example I've attached a trade I currently have on the ES Futures Options. I put it on Dec'9 (Consisting of Jan03 1805 straddle and Dec20 1780p / 1820c) As you can see the performance vs the bull put spread (Dec20 1770-1750) is very good. Obviously the deltahedges aren't visible, but for the vertical you would be about 0.1 down, vs around 2 up for the other trade. (whatever it can be called)

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Last edited by PeterOhlson; December 18th, 2013 at 11:32 AM.
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Old December 18th, 2013, 11:29 AM   #2635 (permalink)
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PeterOhlson View Post
Just a comment, I think the best way to make a highest possible risk-adjusted return w/ options is isolating whatever risk you're trying to make profit off. Options have several risks, and when you sell a OTM spread and don't delta hedge it, you essentially are betting on market direction rather than on making theta. If your goal is to make theta, you isolate your theta and eliminate all other risks, that means actively delta-hedging and keeping your vega neutral. The higher the theta/gamma ratio and theta/vega ratio you have, the better structured your theta-portfolio is.

You will actually notice that if you look at the theta/gamma ratio of a credit spread, it's worse than that of a straddle. And if you look at a naked OTM put, it has the best theta/gamma ratio of the three. So the naked OTM put is the superior trade for theta. Obviously there are margin considerations, the consideration of how your risks will change with spot and volatility (need a flexible risk graph software, I personally use thinkorswim), and a good understanding of the idiosyncratic risks of whatever instrument you trade is neccessary. If you trade horizontally a good understanding of term structure is also neccessary.

But to be blunt, I've found that purely for theta, verticals are just terrible. Straddles aren't good either. Naked puts have too high margin requirements, otherwise they would be awesome. To be honest, you really need to start moving horizontally and look at the term structure as a whole. One of my favorite trades is to sell OTM puts and calls on the front-month, then hedge it with ATM vol further out. The theta/gamma ratio is awesome, the margins are VERY low, it's pretty much the best thing besides the front-month naked put. Obviously you will be delta hedging actively til expiration. Your only real problem then is managing the vega-risk of the ATM vol, which is rather high. But it's not really a "problem", because if vol comes down on the ATM, it will COME DOWN on your short OTM options as well. They have lower vega, but more vol-of-vol so it works out just fine. This is where understanding of the term structure and limits to black-scholes comes in. Anyways it's one of my favorite trades, I use it on the SPX where skew is high.

Because we sell options very far OTM and for low premium, we can't be delta hedging. There isn't enough volume on many of the commodities we trade. And a few delta hedges and the profit will be gone. Your trading is very different than what we have been discussing.

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Old December 18th, 2013, 12:06 PM   #2636 (permalink)
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The OI on KC options has gone from 300k last year to 100k now. Huge drop.

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The KC option vol is down too.

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Too bad because that was one of my favorite options.

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Old December 18th, 2013, 12:15 PM   #2637 (permalink)
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Recent trades

A trader new to options selling asked me via PM what are some good current trades.

It might be interesting if people chime in with a current good trade...


I'll go first.


Today I sold some Live Cattle Jan 2014 126 Puts. ROI was about 10%. Only 2 weeks to expiration.

The downside to short term trades like this is that you have to sell pretty close to current price, even though the delta is around 0.05. I got burned last week doing this with Coffee. It seems like I haven't fully learned my lesson yet, but the ROI here was so good, I felt it was worth the risk.

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 December 18th, 2013, 02:42 PM   #2638 (permalink)
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CL option OI is dropping too.

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Old December 18th, 2013, 02:44 PM   #2639 (permalink)
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But ES put option OI is growing a lot.

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Old December 18th, 2013, 05:38 PM   #2640 (permalink)
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ron99 View Post
CL option OI is dropping too.

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Do you know why OI on CL is dropping?

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