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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:569,059 / 5,728
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Selling Options on Futures?

Old January 24th, 2014, 06:40 PM   #2961 (permalink)
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Barrington View Post
Well, does it seem that buying straddles would be an appropriate strategy at this point? Nobody knows how NG is going to react to the near term weather and drawdown numbers, volatility has come down from its peak of a couple of weeks, so it has room to move back or more ... just a thought!

Wish I had taken my own thought from Jan 4th seriously ..... Guess paying money to open a trade when the main objective is to have a steady cash inflow in the form of premiums is harder to do once you get used to selling premium.

I need to dust my options books and get back to basics .... NG this past couple of months has been a option trader's wet dream come true and I only lost money by putting on the (get credit) blinders.

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Old January 24th, 2014, 06:42 PM   #2962 (permalink)
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CafeGrande, you need to go into further detail on "watching your IVs and deltas on a regular basis". How can people apply those numbers to their trading. Putting on positions and exiting positions. Give examples.

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Old January 24th, 2014, 06:45 PM   #2963 (permalink)
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mu2pilot View Post
Well, I closed out my NG calls today and banked a pretty hefty loss. I went into it with my eyes wide open and have no one to blame but myself. Up until yesterday, I was still within my 2X margin cushion, but today, it pushed through that level substantially.

I briefly considered hedging and/or selling puts, but I just couldn't get comfortable with the big number of puts I would have had to sell to cover my loss. I will chalk this up as a learning experience. I was short quite a few options, but I'm glad I didn't have more.

When one is getting their a$$ handed to them they reflect. They analyze. They try to learn.

In my analysis, I came upon something that troubles me and wanted to get everyone's thought on it.

First off, some ground rules:

1) You sell options with a minimum monthly ROI of 2%
2) You close out a position if it goes against you = 2x initial margin
3) You only sell options with a delta of .02 or less

.

Here's my dilemma:

In looking at a single trade, in order to get a 2% ROI, the credit received has to equal 2% of what you're "risking" on a trade. If you collect $100 and the ROI is 2%, then the margin plus cushion has to equal $100/.02 or $5000. That is, if its 30 DTE. If the DTE is more or less, you normalize it to a 30 day ROI. But the gist of it is, you are risking $5000 to make $100, if your ROI is 2%. If your ROI is 3%, you're risking $3,333.

What troubles me is, based on that scenario, your percentage of winners vs losers has to consistently be 99% or greater. If you make full premium received 98 times out of 100, you lose $200. If you make full premium 99 times out of 100, you make $4900. If you are right 100 out of 100, you make $10000.

I absolutely believe what Ron and a few others have posted here about their successes with this methodology. I believe it so much that I am risking real $$ trading it. But I'm starting to question the numbers.

I also realize that you don't blindly sell options. You look at seasonal charts, you look at support and resistance areas on the charts, you look at fundamental data to help locate a higher probability trade. But the bottom line is, you have to be right at least 98+% of the time to be marginally profitable. Is that reasonably achievable for mortal men (and women)?

Would love to hear what everyone thinks about this...

mu2pilot

PS- By the way, you can currently sell a March 8.0 NG call for a 45% ROI!

I start to hedge my positions (modify) long before my losses get close to 2x initial margin
I always leave room and a plan to modify a position.

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Old January 24th, 2014, 06:50 PM   #2964 (permalink)
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NG margin going up Monday and now it is going up Tuesday too. So that is up 30% from Thursday's rate to Tuesday's rate.

I suspect these margin increases back to back will drive up NG more.

I also suspect that after Feb NG futures go off the board on Wed that things will calm down. But I could be wrong.

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Old January 24th, 2014, 07:08 PM   #2965 (permalink)
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CafeGrande View Post
This mega thread contains a lot of very good information (prior to registering, I checked it about once a month over a year or more), but there's not a lot of discussion about volatility. That's always struck me as odd, because you're selling, well... volatility.

The discussion and suggestions regarding research, diversification, trade selection, margin calculations, delta and ROI are all fine, but if you're selling very low delta options at low to moderate volatility ("teenies" to borrow from stock option jargon), you're taking on a lot of risk, more risk than you know if you're not watching your IVs and deltas on a regular basis.

I am guilty of doing that even though I have a few years of options trading experience in stocks/indices and would never ignore these factors in that market.

This week in Nat Gas, and especially today, was one of those times when the steamroller wins, but if you hang in there, I'd make a few suggestions:

1. Stay diversified so a day like today doesn't hurt so much. It makes a big difference mentally if you have some winners or at least a portion of your portfolio that's even on a steamroller day.

In the futures options market one can only diversify so much ... I have tried but haven't found many futures instruments where the options market have decent liquidity and depth. Again those I found are very seasonal, for example Coffee, the liquidity/open interest in the options is dead in the water since the past few months.

2. Keep some capital so that when your head is clear, you can benefit from the market carnage. This is different from revenge trading, which usually doesn't work very well. Reduce your position or get flat, let a few days pass, and look at the market with a fresh set of eyes. Often you can find some very high probability opportunities. But stay small; losing big back-to-back can destroy your confidence.

Again, since there are not many futures with options which can be traded due to lack of liquidity/depth, staying small means keeping a huge portion of your capital in cash. In stocks/indices you have at least 25 stocks and half a dozen indices/ETFs with active volatility and plenty of liquidity/depth so one can stay small and well diversified.

3. Learn about volatility and how it can screw you if you're short options (esp. OTM options) in a week like the one just passed.

+1

4. Learn your way around an option calculator. One with graphics (a pay off diagram) is nice but not necessary. You just want to become comfortable with how changes in price, time and implied volatility can affect your position profitability and deltas; save gamma, theta and vega and the more advanced greeks for another day.

+2

5. Here are some low cost tools:

A. ivolatility.com. Home page is hideous, but if you subscribe to 'advanced futures options' for $15/mo (you can buy it mo-to-mo), it's ad-free and you'll get decent end of day data on ATM IV, IV for a particular strike, various 'constant maturity' ATM IV figures, etc. Their IV/HV graphs are tiny, but at a glance you can get an indication of where things have been over the last year. Their skew graphs are frequently awful because they include too many outliers.

B. ivolatility.com IV Graph service. 10 underlyings at $30/mo, end of day. Decent, but dated java application. I use it for their IV INDEX (constant maturity at 30, 60, 90 days ... out to two years) and some skew charts. Again, you can buy it mo-to-mo and their data goes back to late 2005.

C. Quikstrike.net. Free "Essentials" option analysis service offered in conjunction with the CME. They recently launched an "Essentials Plus" service for $25/mo for physical commodities or $40/mo for physical and financial (you can buy mo-to-mo). Other subscriptions are at the $100/mo, $300/mo and maybe even up to $750/mo for their high-end institutional customers. I'm a subscriber at $100/mo but I think the Essentials Plus might be all a beginner or moderate-sized trader needs. Some of the charts I've posted come from Quikstrike, but what I really like about it is the ability to create, save and edit/adjust positions. The P&L, Greeks and risk graphs update throughout the day. Great feature - I looked a long time before I found something that fit the bill.

Thanks again for providing this info, I looked at the demo and its real good. Going to sign up for the free trail and then probably will start with the "Essentials Plus"

D. Moore Research Center. Mentioned elsewhere in this thread. About $35/mo. Options are not their focus but they do generate an end of day table with IV and HV for liquid options and they have some long term historical charts that include the underlying's price, IV and HV.

I tried their 14 day trail and found the website too clunky.

All three firms offer a two-week trial in which you get full access to the product you're interested in. In the case of QuikStrike you can also demo their higher end subscriptions to see if they are right for you.

Disclosure: I have no connection to any of the firms above but at one time or another, I've been a customer of all of them.

I might have missed something when I wrote about the liquidity/depth in the futures options or am not trying something which others are doing. Hopefully, in the case, I will be put on the right path.

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Old January 24th, 2014, 07:51 PM   #2966 (permalink)
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I know some of you still have some NG options on so I'll continue to post this for a few more few weeks.

29-Jan EIA Release EARLY Estimates.
First estimates coming in, still subject to a lot of changes.
First survey I have seen had 15 respondents and an average of -231.6, median -230
Range was -209 to -300 with standard deviation 21.8!!

Take out the high and low though, average is -228, median -230 but range becomes -215 to -250 and standard deviation drops to 10.3

Last year same week -191
5 year average same week -162

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Old January 24th, 2014, 08:14 PM   #2967 (permalink)
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ron99 View Post
NG margin going up Monday and now it is going up Tuesday too. So that is up 30% from Thursday's rate to Tuesday's rate.

Urhhh... don't like that...

ron99 View Post
I suspect these margin increases back to back will drive up NG more.

I'm not sure about that. An increase in margin normally means a floud of activity in the EFS and NYMEX/ICE markets. Based upon activity in the EFS and NYM/ICE today (G EFS moved from 4 to 6 either clear, H NYM/ICE moved from 1 to 1.5 and J-Z NYM/ICE moved from 1.5 to 2) I suspect people are short NG and long fin settle in general and ICE in particular. So this will probably widen both the EFS and NYM/ICE spreads widen .... Urhhh... REALLY don't like that...

ron99 View Post
I also suspect that after Feb NG futures go off the board on Wed that things will calm down. But I could be wrong.

Ohhh I'm not sure I agree with that. At least February has some connection to fundamentals. My fear (pun intended) is that once Feb expires, March will become the fear game, and start bouncing around with no respect for reality.
I suspect once Feb expires, anybody who doesnt want to play the chicken game, will need to trade April... which might as well be a completely different market... at least for the first few weeks.

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Old January 24th, 2014, 09:09 PM   #2968 (permalink)
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ron99 View Post
CafeGrande, you need to go into further detail on "watching your IVs and deltas on a regular basis". How can people apply those numbers to their trading. Putting on positions and exiting positions. Give examples.

In the context of this thread, it doesn't need to be very complicated. Anyone considering an option trade has or should have:

1. An opinion on the underlying's absolute price move over the life of the option

2. An opinion on actual and implied volatility over the life of the option

3. Risk mgmt - initial position size, position size/net deltas you can tolerate if things go against you, adjust?/don't adjust? (a topic in its own right), when to cry Uncle, etc.

Now, depending on your broker, you might have a platform that does some of this work for you and free tools to assist you with the rest. If not, two of the three firms I mentioned in my long post - Ivolatility and Quikstrike - offer free options calculators that can price an individual option and then you can play around with the underlying price, time and IV inputs so you know what that option may look like in the future. I used to do things this way - price them individually on a simple calculator, multiply by X, and record the results on paper.

Fortunately, good options technology is becoming inexpensive and widespread. A sophisticated trading platform or standalone application allows you to track your IV and individual and aggregate greeks in real time or close to real time. With one or more parameter tweaks, you can change the entire value of your portfolio to learn 1) how bad things might get, 2) if they're already bad, why did they get that way (is underlying price or IV hurting the most?) and 3) what combination of price, time and IV will allow the position to recover and are those projections realistic?

I'm far from an options geek (the quantitative guys) but I can't trade without knowing the market's IV and skew and my aggregate delta and gamma. I can't imagine hedging an initial position or adjusting an existing one by just adding or subtracting deltas to get me to neutral (or wherever I want to be).

All that said, if someone is well capitalized, has a good system and plenty of discipline to follow their rules, they can probably do fine and never concern themselves with IV or the basic greeks. They'll still get whacked in weeks like this one, but they won't get wiped out.

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Old January 24th, 2014, 09:12 PM   #2969 (permalink)
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Looking at the just released DCOT futures only report for NG as on 1/21. Specs added 13k longs and got out of 13k shorts. So net were up 26k longs.

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The Commercials and Non-Reportables are at normal levels. Swaps got out of some longs but are still long.

But the Other Reportables are major net short. I checked the combined Futures and options report and this group doesn't have many options. Mainly futures. There are short 236,764 futures and options and short 235,619 futures only. So minimal short options.

They are long 36,081 futures and options and long 29,526 futures only. Only long about 6,500 options.

OI for NG futures have been some what flat the last 10 days.

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Old January 24th, 2014, 09:35 PM   #2970 (permalink)
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ron99 View Post
No I don't get midday IM.

The IM for the 1400 was 147 on Wed. Futures were up 14.25 and the IM increased 29 to 176. With futures down 40 now the IM will be far higher than 176. I'm guessing 450+.

For ES, premiums and IM usually move in tandem. The ROI for a 1530 put using yesterday's settlement (1.00) and IM (536) was 3.0%.

I never use Total IM. I changed the spreadsheet to give me SPAN IM. Every place I trade uses SPAN IM not Total IM.

For example OX Buying Power is not the total of the premium added to the IM and subtracted from the Account Balance. It is just Account Balance minus IM.

OK I was wrong on the new IMs. The 1350 is now 185 and the 1400 is 281. Giving 6.9 & 7.5% ROIs.

I don't know that I have ever seen ES puts with that high ROI.

Of course this may be the next NG so be careful. Good ROI with covered puts here now.

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