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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:569,332 / 5,728
Last Reply:December 6th, 2016 (05:26 PM) Attachments:642

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Selling Options on Futures?

Old January 22nd, 2014, 08:46 PM   #2921 (permalink)
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Great Posts in this thread! Thank you all for posting such great info.


Ron, your post here back in April 2013 caught my eye:


ron99 View Post
I worked through getting a more real life accurate ROI% for selling options.

Using that 2.1% from the prior example.

Reducing the cash excess the last 14 days from 2X to 1X at 14 days (if the option is still far OTM) and then 0X at 7 days reduces the excess factor from 2X IM to 1.4. That turns the 2.1% into 2.8%.

The margin drops off when the option gets closer to expiration (as long as futures don't go the wrong way) Assuming flat futures, the margin will average 65% of the IM at 56 days (calculated using SPAN for ES options weekly and EOM). That turns the 2.8% into 3.8%.

Compound the 3.8% monthly and in a year that equals 56.4%.

So 2.1% sounds low but 56% sounds real good to me.

The real life formula now is

option premium-fees / (IM*.65*2.4) / DTE *30

This gives you monthly ROI%. Then this number needs to be compounded for a year. I did that using a spreadsheet table. (is there a way to do that in a formula?)

Does that calculation look correct?

I was curious if you are still doing this strategy and how it has worked for you?

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Old January 22nd, 2014, 09:18 PM   #2922 (permalink)
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rani View Post
SMCJB, thank for the explanation. Just that the Feb vs Mar is accelerating more than usual last couple of days. So that higher Feb demand surpasses Mar fear of gas in storage, right?

Yes ~ higher the demand in Feb the greater the chance we run out in March. But it's still a binary event. We either run out or we don't. If we don't March prices relative to April, if we do March prices where?

Looking at some EIA numbers, raw numbers UNadjusted for weather, you can probably see why Feb trades at a premium

Feb 2011 consumption 2452 = 87.6/day
Mar 2011 consumption 2230 = 71.9/day (-17.9% vs Feb)

Feb 2012 consumption 2502 = 86.2/day
Mar 2012 consumption 2129 = 68.7/day (-20.3% vs Feb)

Feb 2013 consumption 2559 = 91.4/day
Mar 2013 consumption 2512 = 81.0/day (-12.3% vs Feb)

Just FYI, Apr numbers are all <2000 or <66/day. May and June are even lower.

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Old January 22nd, 2014, 09:19 PM   #2923 (permalink)
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Something else worth considering is that at extreme times like this pipelines get full and demand>supply at certain locations, no matter what the storage situataion. For example, some of the extreme physical prices today for delivery tomorrow where
Northeast (very heavily constrained)
Algonquin (aka Boston) $78.50
Transco Z6 (NYC) $82.00
Tetco M3 (NJ) $73.75
So whose idea was it to have a Superbowl in an outdoor stadium in the North????
And compared with less constrained prices...
MidWest
Chicago Citygate $8.90

Gulf (the cheap gas!)
Henry $4.91
HSC (Houston) $4.95

West (the otherside of the Rockies and at times, a completely different market)
PG&E Citygate (San Fran) $4.86
Socal Border $4.86
Socal Citygate (LA) $4.91
Platts News:-
NE US spot natural gas up nearly $40/MMBtu on wintry weather
Eastern US power prices continue to rise on soaring gas market

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Old January 22nd, 2014, 10:08 PM   #2924 (permalink)
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Good info & links, SMCJB.

If someone is new to Nat Gas options, they need to be extra careful in March. As you've noted, the Mar/Apr futures spread can be treacherous, and unlike say, Grains, a Nat Gas options trader planning to hang in there until options expiration is also essentially hanging in until futures expiration. He's going to be subject to any craziness that may occur in the last couple of days of options and futures trading.

Example:

Mar Nat Gas options expire Feb 25, futures expire Feb 26.

Mar Grain options expire Feb 21, futures expire Mar 14. A grain option trader is OUT before first notice day, before the delivery month, before the 'games' that can happen depending on delivery economics, and he's typically OUT before the most illiquid and volatile spread trade occurs in Mar/May or Mar/any-other-month.


Last edited by CafeGrande; January 22nd, 2014 at 10:13 PM.
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Old January 22nd, 2014, 10:27 PM   #2925 (permalink)
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Futures Edge on FIO
Today in NG Mar options was an example of a day where if you were short calls, you definitely lost money, and if you were short puts at strikes < $3.70, you lost a little money in those too.

Vol curve comparison Wed Jan 22 v Tue Jan 21. Red vertical marker is the Jan 21 close.

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Selling Options on Futures?-ng-jan-22-v-jan-21.png  
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Old January 22nd, 2014, 10:52 PM   #2926 (permalink)
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CafeGrande View Post
Example:

Mar Nat Gas options expire Feb 25, futures expire Feb 26.

Mar Grain options expire Feb 21, futures expire Mar 14. A grain option trader is OUT before first notice day, before the delivery month, before the 'games' that can happen depending on delivery economics, and he's typically OUT before the most illiquid and volatile spread trade occurs in Mar/May or Mar/any-other-month.

NG expires 3rd to last business day of the month and NG options expire the business day prior.


CafeGrande View Post
Today in NG Mar options was an example of a day where if you were short calls, you definitely lost money, and if you were short puts at strikes < $3.70, you lost a little money in those too.

Vol curve comparison Wed Jan 22 v Tue Jan 21. Red vertical marker is the Jan 21 close.

Excellent chart. Thank You.

As I mentioned once before if you'd like to read about March/April madness check out the book Hedge Hogs: The Cowboy Traders Behind Wall Street's Largest Hedge Fund Disaster

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Old January 22nd, 2014, 10:56 PM   #2927 (permalink)
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Mo111 View Post
Great Posts in this thread! Thank you all for posting such great info.

Ron, your post here back in April 2013 caught my eye:

I was curious if you are still doing this strategy and how it has worked for you?

If you are asking if I reduce excess when <14 DTE the answer is most of the time. But it depends how far OTM the strike is and how volatile are futures.

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Old January 23rd, 2014, 09:00 AM   #2928 (permalink)
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Sorry @ron99 - I quoted the wrong post. What I was referring was this strategy, where you bought back ES puts:



ron99 View Post
I tried something a little different the last month.

On 3/19 I sold 5 ESm3 1000p options for 0.50 or $25 in one of my very low risk IRA accounts. ES was 1542 that day. Delta was .0040. Very low. They were very far OTM (542). 95 DTE

I immediately placed a GTC order to buy them back at 0.10 or $5. Today 2 of them traded.

So I held those 2 for 24 days.

Per contract.
3/19 IM 128 excess 256 If kept to expiration 1.8% monthly ROI. Or 3.4% real ROI per month. Decent but not that great.
4/12 IM 52 excess 104

So if you average the 384 IM + excess when i put them on and the 156 IM + excess when I bought them back you get an average of 270 IM + excess held for that position for 24 days.

I netted 12.88 each. $12.88 / 270 = 4.8% ROI for 24 days or 6.0% for 30 days. That's a real good ROI for something that low risk.

Of course ES went 40 points in my favor so that shortened the time held. But even if I held them 30 days the 4.8% ROI for a month is very good.

I'm sure you could move to a higher strike and do as well. You just wouldn't want to move too high because options about 95 DTE are more volatile since they are closer to ITM.

Some traders in this thread have been selling and then buying back before expiration. I wondered the ROI of that and paying another set of fees vs riding to expiration. It looks good to me. Thanks for teaching me something new.

I'm sure my brokers will be happen to get a lot more commissions.


I am curious because tomorrow is 56 DTE for March ES Puts, or whether to do ES Puts at 90+ days DTE.


Last edited by Mo111; January 23rd, 2014 at 09:50 AM.
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Old January 23rd, 2014, 09:17 AM   #2929 (permalink)
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EIA Natural Gas Storage Report Expectations 23-Jan-14 for week ending 17-Jan-14

The largest survey I see (37 respondents) shows
Average -103
Median -103
Range -84 to -123
Std Dev 7.5

This week last year -168
5yr Average -181

Actual report will be available at Weekly Natural Gas Storage Report - EIA at 1030 EPT

At time of writing 8:11 EPT, NG market is already up almost 25c (5.1%) for the second day in a row, so it could be yet another 'interesting' day.

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Old January 23rd, 2014, 09:59 AM   #2930 (permalink)
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Mo111 View Post
Sorry @ron99 - I quoted the wrong post. What I was referring was this strategy, where you bought back ES puts:

I am curious because tomorrow is 56 DTE for April ES Puts, or whether to do ES Puts at 90+ days DTE.

Buying back before expiration works very well. Most times you can double the ROI if timed and priced correctly. You have to sell at a high enough premium so that the costs to trade out of the position don't take all of the profit.

As to whether to do ES at 56 or 86 DTE? With more research I am finding it doesn't matter as far as ROI. The price decay of an equally priced but lower strike further out in time is the same as the closer in DTE option for ES. There is more volume on the 56 DTE than higher DTEs so easier to get trades done.

Comparing the same strike 56 or 86 DTE the ROI will be better on the 86 DTE because of the higher premium.

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