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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:568,362 / 5,727
Last Reply:December 2nd, 2016 (12:40 PM) Attachments:642

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Selling Options on Futures?

Old December 19th, 2013, 07:42 PM   #2661 (permalink)
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SMCJB View Post
Price, Vol & Skew all spiking on the concern that we may not have enough gas in storage for the winter. If this is true the short squeeze hits March, hence why your seeing what you are in the March Calls. This is not a rare occurrence as you can see in the charts I posted.

Post 375470

If it's not true and we don't literally run out, which is again normally the case, then the March premium will disperse and March will probably trade equal to or at a discount to April. Of course we won't know whether that's the case for a while...

Why the big drop in midwest NG imports from Canada from last week? -30.83%
Natural Gas - U.S. Energy Information Administration (EIA) - U.S. Energy Information Administration (EIA)
NE & West Canadian imports up. LNG imports up. US production up.

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Old December 20th, 2013, 01:15 AM   #2662 (permalink)
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Math Error... to be corrected...


Last edited by SMCJB; December 20th, 2013 at 02:00 AM. Reason: Math Error... to be corrected...
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Old December 20th, 2013, 02:32 AM   #2663 (permalink)
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Not sure, but Canada would have had their own cold or colder weather issues last week so perhaps they diverted gas otherwise earmarked for export for their own domestic use.

Now that this larger than expected withdrawal number is out of the way and hopefully priced in fully, what is left to continue to drive this market higher in the short term? is the question I have at the moment.

The next withdrawal number should cover a period of warmer weather with lower consumption and improved production numbers, so not likely anything there to fuel the market higher. the NOAA 8-14 day forecast for 27th Dec has turned colder than the previous few days, which may continue to support prices for now, other than an orchestrated short squeeze, I don't see anything for now near term that will get this market going completely out of hand, so comfortable at this point to hold my short call positions.

I see the next EIA Nat Gas report is out 9th Jan, does that mean the next inventory number will also be on 9th Jan??

Interested what others are thinking after yesterdays move.

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Old December 20th, 2013, 02:58 AM   #2664 (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.

3rd attempt at this post. First post I didn't include skew, but then I decided it was important enough to redo it. Then I realized I had a math error in some of the T/G calcs so had to redo some of the combinations.

I've been thinking a lot about this Theta/Gamma concept, and I'm not sure I understand your point, maybe because I'm missing something. I see this identifies which single strategy has the highest Theta/Gamma but it doesn't seem to help you develop a self-hedging portfolio. It also probably follows that the highest Theta/Gamma strategies also appear to have the most dangerous risk-reward. I believe the analogy is picking up pennies in front of a steam roller.

I put together a very simple Black Scholes function in Excel, and then looked at some hypothetical option scenarios where
Underlying Price is 100
ATM Volatility is 0.25, and vol increases 0.01 for every 5 we get away from ATM
Time to Expiry is 1/6
Interest Rate is 0.02
and this is what I got

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Now this is over simplified because of the way I handle the skew but it paints a picture. If you rank these options and their combinations in Theta/Gamma order you get the following.

Note in my case Theta is Expected Annual Decay/250, and since options decay this is negative. Hence when you say the highest Theta/Gamma ratiio, I believe in this case it's the most negative ratio.

Note that I added the 80/100/120 Butterfly just to show how counter-intuitive some of the combinations could be.

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I must say the results surprised me a little. I once worked with somebody who sold a lot of in the money options rather than trading the futures it self. I used to say, "Don't you realize that selling an in the money call is the same as selling a future AND selling an out of the money put. If your really that bearish why are you selling puts." Now looking at this I wonder if he knew something I didn't!


I also pulled out the text books and looked at the greek formula's. (well okay I went to Wikipedia and looked at them!). It's very easy to see that Theta/Gamma is extremely dependent upon price and vol.

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Reducing the first half of the equation to 0.5 * S^2 * sigma^2 was the easy part. The idea of setting r=0 was not mine but it does make the formula look clean. It also makes it very apparent that Theta/Gamma scales directly in proportion to 0.5 * S^2 * sigma^2 which makes sense.

The higher the price, the greater the extrinsic value and the higher the vol the higher the extrinsic value, and hence the greater the time decay. But also the higher the vol the lower the gamma and vega, increasing the theta/gamma ration even more. Unfortunately unless I'm missing something this just says high volatility options have the highest Theta/Gamma ratio!

Oh and for what its worth, if you put 100 and 0.25 into 0.5 * S^2 * sigma^2 you get -312.5 which when divided by 250 gives -1.25 which is not coincidentally the level at which most of the options above congregate around.

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Old December 20th, 2013, 05:13 AM   #2665 (permalink)
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WOW, nice in-depth analysis SMCJB! Took some time to read through, and here are my conclusions:

In essence as you say, the t/g ratio gives you the "IV" of an option combination or portfolio. I say "IV" because it's a proxy for IV rather than a perfect measure, which would probably require much heavier math. But t/g also puts an actual monetary value on the combination via theta, it gives you the actual premium risk you hold, and for what IV you hold it at. This is central. The IV number alone doesn't do that. In addition you can't "scan" for option combinations using IV alone.

Which brings me to the issue of risk-reward as you addressed in the beginning. Now, if you looked at IV, it would tell you to sell DOTM options and make the highest profits. But looking at t/g, you can adjust for theta accross options. In essence, if you sold an ATM straddle and had $2000 theta from doing so, vs if you sold an DOTM option for $2000 theta, you would still be FAR better off with the DOTM option should the market crash. But vanna & vomma risk makes selling DOTM options a bad idea for your mark-to-market. This was mentioned in one of my above posts as well...personally I stick to max / min -20d / +20d respectively.

Also as mentioned, IV and t/g can be high for a reason. There is always usually a *reason* vol is high or low. On stocks you have idiosyncratic risks so I stay away from them and stick to indices. t/g tells you to sell options on the skew, and obviously skew is present because of non-lognormal distribution, and the skew is there in large because of the potential effects of vanna & vomma in a crash. So context is central, as always, and as mentioned in one of my above posts as well, you'll need risk graphs to view how the risks of any potential position changes with vol and spot. An understanding of sticky delta & strike and term structure behavior, especially vol-of-vol is also good to have...

Lastly an update on trades. On the SPX after the fed rally, I can't spot a single combination with any good ratios. So now would probably be a good time to buy options. I'm looking at the Jan10 1770 straddle + Dec 27 1740-1790 as having a lot of gamma per theta compared to the ATM straddle (t/g ratio of 10 vs ATM of 69, so I'll be putting on one of these and seeing if it makes any profits...


Last edited by PeterOhlson; December 20th, 2013 at 05:19 AM.
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Old December 20th, 2013, 08:54 AM   #2666 (permalink)
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Wierd on one computer I can see the reduction to 0.5 * S^2 * sigma^2 and on the other the graphic doesnt show up. Since I went to the time to write it out, and just in case I'm reposting the graphic.
SMCJB View Post
I also pulled out the text books and looked at the greek formula's. (well okay I went to Wikipedia and looked at them!). It's very easy to see that Theta/Gamma is extremely dependent upon price and vol.

Reducing the first half of the equation to 0.5 * S^2 * sigma^2 was the easy part. The idea of setting r=0 was not mine but it does make the formula look clean. It also makes it very apparent that Theta/Gamma scales directly in proportion to 0.5 * S^2 * sigma^2 which makes sense.

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Old December 20th, 2013, 10:28 AM   #2667 (permalink)
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Harvard16 View Post
Not sure, but Canada would have had their own cold or colder weather issues last week so perhaps they diverted gas otherwise earmarked for export for their own domestic use.

Now that this larger than expected withdrawal number is out of the way and hopefully priced in fully, what is left to continue to drive this market higher in the short term? is the question I have at the moment.

The next withdrawal number should cover a period of warmer weather with lower consumption and improved production numbers, so not likely anything there to fuel the market higher. the NOAA 8-14 day forecast for 27th Dec has turned colder than the previous few days, which may continue to support prices for now, other than an orchestrated short squeeze, I don't see anything for now near term that will get this market going completely out of hand, so comfortable at this point to hold my short call positions.

I see the next EIA Nat Gas report is out 9th Jan, does that mean the next inventory number will also be on 9th Jan??

Interested what others are thinking after yesterdays move.

The next two NG weekly inventory numbers come out on Friday the 27th and Jan 3rd.

The saying is the bull needs to be fed to keep moving higher. Short term the long range weather forecasts are slightly supportive with below normal cold. But that can change quickly either way.

I suspect that every electric generating plant that can switch to coal has already done it with NG over 4.00. So if imports from Canada return to normal levels then we should start to see below expectation drops in NG weekly inventory.

US NG production was down 3.3% two weeks ago. It was up 1.6, or half the drop, in the last report.

Looking at prior years NG futures volume drops by 50% during these holiday weeks. Price volatility increases with the low volumes.


Last edited by ron99; December 20th, 2013 at 10:40 AM.
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Old December 20th, 2013, 11:07 AM   #2668 (permalink)
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ron99 View Post
Why the big drop in midwest NG imports from Canada from last week? -30.83%
Natural Gas - U.S. Energy Information Administration (EIA) - U.S. Energy Information Administration (EIA)
NE & West Canadian imports up. LNG imports up. US production up.

I don't know. As Henry has rallied in the last several weeks, the Henry-AECOspread has widened, meaning that AECO/Canadian prices have NOT rallied nearly as much as US prices. Jan and Q1 have gone from tradinig 50c below Henry as recently as the beginning of the month to 75/80c below currently.

FYI AECO is the major trading and delivery point in Western Canada (think Alberta).

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Last edited by SMCJB; December 20th, 2013 at 11:09 AM. Reason: spelling
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Old December 20th, 2013, 12:08 PM   #2669 (permalink)
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eudamonia View Post
From the charts you posted earlier it looks like this typically mean reverts. Is this mean reversion based on NG prices or overall supply or a certain time period?


SMCJB View Post
Price, Vol & Skew all spiking on the concern that we may not have enough gas in storage for the winter. If this is true the short squeeze hits March, hence why your seeing what you are in the March Calls. This is not a rare occurrence as you can see in the charts I posted.

Post 375470

If it's not true and we don't literally run out, which is again normally the case, then the March premium will disperse and March will probably trade equal to or at a discount to April. Of course we won't know whether that's the case for a while...

Last 5 years March April
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Old December 20th, 2013, 02:33 PM   #2670 (permalink)
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The March NG 5.00 calls are bid 3 ticks higher than settlement. But the March NG 7.00 calls are bid 8 ticks higher than settlement??? The 8s are bid 5 ticks up??? Same thing for other nearby strikes.

Why do lower strikes have lower bids and asks?

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