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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:568,534 / 5,727
Last Reply:December 2nd, 2016 (12:40 PM) Attachments:642

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Selling Options on Futures?

Old January 24th, 2014, 09:39 PM   #2971 (permalink)
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Barrington - Yes, you're right, it's difficult to find good, liquid non-correlated candidates in futures options right now. Not only does the 'risk on, risk off' thing affect multiple asset classes (that it didn't use to), but implied volatility across a range of commodities is quite low, just like in the equity indices. I guess we're going to have to move to biotech start ups and bankrupt Chinese solar stocks to find some juice.

Here's a chart I update once per week. I also have shorter timeframes but this is the long term one, from 8.8 to 9.1 years. NG will spike once this week's chart is done, but the rest of them will be in about the same place. Crude IV hit that 9-year low recently (see chart) and according to a Bloomberg story, it was actually the lowest IV since 1996. That's why I would not sell very many crude options. A geopolitical spat could be just like the NG explosion in IV this week.

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Selling Options on Futures?-atm-iv-long-term.png  
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Old January 24th, 2014, 09:53 PM   #2972 (permalink)
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CafeGrande View Post
Barrington - Yes, you're right, it's difficult to find good, liquid non-correlated candidates in futures options right now. Not only does the 'risk on, risk off' thing affect multiple asset classes (that it didn't use to), but implied volatility across a range of commodities is quite low, just like in the equity indices. I guess we're going to have to move to biotech start ups and bankrupt Chinese solar stocks to find some juice.

Here's a chart I update once per week. I also have shorter timeframes but this is the long term one, from 8.8 to 9.1 years. NG will spike once this week's chart is done, but the rest of them will be in about the same place. Crude IV hit that 9-year low recently (see chart) and according to a Bloomberg story, it was actually the lowest IV since 1996. That's why I would not sell very many crude options. A geopolitical spat could be just like the NG explosion in IV this week.

But for how long will the IV stay low? It could be low for months and you will have not traded anything in that time waiting for IV to go up and it doesn't.

What did that chart look like 4 months ago?

I understand you can make more profit and that would make a perfect trade after IV increases but you just don't know when that could happen. Kinda like the people waiting for the stock market correction last year. They never got in and missed the whole move.

The next geopolitical spat could be Sat or it could be 6-12 months from now.


Last edited by ron99; January 24th, 2014 at 10:08 PM.
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Old January 24th, 2014, 10:27 PM   #2973 (permalink)
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ron99 View Post
But for how long will the IV stay low? It could be low for months and you will have not traded anything in that time waiting for IV to go up and it doesn't.

I agree with everything in your post. Here's what I do/have done in the last two years of this low IV environment:

- Increase diversification

- Sell more strangles

- Sell more credit spreads. With such low IV, the long leg is cheap protection against a price or IV spike

- Buy more options. Judiciously, of course; I still sell more than I buy, but I used to rarely buy.

- Find a product where I get paid more for taking on risk. In a previous post I was half-joking about bankrupt Chinese stocks and their 70-100% ATM IV (OTM is even higher). About half of the money I used to have allocated to futures and futures options is now being used for selling stock options.

Because of my background in commodities and commodities trading, I'm reasonably familiar with parts of the agriculture and natural resource sectors. I find producers or companies that sell picks and shovels to the producers and that's been working very well. A side benefit of researching these companies is that I learn more about the costs of production and S&D for certain exchange-traded commodities.

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Old January 24th, 2014, 11:34 PM   #2974 (permalink)
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CafeGrande View Post
Barrington - Yes, you're right, it's difficult to find good, liquid non-correlated candidates in futures options right now. Not only does the 'risk on, risk off' thing affect multiple asset classes (that it didn't use to), but implied volatility across a range of commodities is quite low, just like in the equity indices. I guess we're going to have to move to biotech start ups and bankrupt Chinese solar stocks to find some juice.

Here's a chart I update once per week. I also have shorter timeframes but this is the long term one, from 8.8 to 9.1 years. NG will spike once this week's chart is done, but the rest of them will be in about the same place. Crude IV hit that 9-year low recently (see chart) and according to a Bloomberg story, it was actually the lowest IV since 1996. That's why I would not sell very many crude options. A geopolitical spat could be just like the NG explosion in IV this week.

Well, I'm still able to find stocks with high IV around earnings and been doing spreads and condors and also, some ETFs like EEM which don't have the earnings binary events. Its much easier to put on these defined risk trades and to stay small than in futures options. Its much efficient to trade spreads on the SPX than the ES and then leg into condors as the trade progresses. Of course, the current low IV means low ROI but staying small and keeping the spread width smaller keeps things getting out of hand when the IV will eventually jump.

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Old January 25th, 2014, 09:27 AM   #2975 (permalink)
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ron99 View Post
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.

Ron,

I could be mistaken, but it appears as though terminology used by the brokerages is rather misleading. Brokerages seem to only use the terms Initial Margin or Initial Requirements, when in fact what they are displaying is what PC-SPAN would refer to as the Total Requirements or Total Initial Margin.

When you run a portfolio through PC-SPAN and look at the requirements there are four categories:
1) Core Maintenance Requirement / Span Requirement (Span MM= based off risk scenarios)
2) Core Maintenance Requirement / Total Requirement (Total MM= #1 plus Net Option Value)
3) Core Initial Requirement / Span Requirement (Span IM= #1 * Initial to Maintenance Ratio)
4) Core Initial Requirement / Total Requirement (Total IM= #3 plus Net option Value)

I have two accounts that currently have almost identical positions, one with OX and one with RJO. The RJO has 5% more positions, but they are almost worthless and add very little margin requirement. RJO's website gives a detailed breakdown of the margin requirements by commodity showing Net Option Value, Scan Risk, Calendar and Intercommodity Spread Credits, Short Option Minimum, Maintenance Requirement, and Initial Requirement. The numbers they give me on the website matches what they give me on my statements, and those match what PC-SPAN calculates. However, what RJO lists as Maintenance Requirement, PC-SPAN shows as Core Maintenance Requirement / Total Requirement, and what RJO lists as Initial Requirement, PC-SPAN shows as Core Initial Requirement / Total Requirement.

My requirements for RJO and OX are always pretty close, but OX is typically 10-20% higher (as you and others noted earlier in the thread). OX, as far as I have found, does not give you a detailed breakout of you margin requirements for your portfolio, but they do go into a little more detail with the Trade Calculator. I looked at one commodity where I had only one position and plugged it into OX's Trade Calculator so I could compare that with what RJO and PC-SPAN had for that position. It displayed four numbers under the Requirements section:
1) Total Cost (Net Option value)
2) Initial Requirement (matched Core Initial Requirement / Span Requirement)
3) Maintenance Requirement (matched Core Maintenance Requirement / Span Requirement)
4) Total Requirements (matched Core Initial Requirement / Total Requirement)

OX lists just IM and MM under their balances, but I believe that what they are displaying as IM is actually the Total Requirements (Core Initial Requirement / Total Requirement). That would not contradict what you observed in OX where the buying power was the account balance minus IM, and not the additional subtraction of the option value, because the option value would already be incorporated into the IM. My line of reasoning (and I could be wrong) is that if OX were using Span IM and not adding the net option value to the margin requirements, then the requirements on my OX account should be substantially less than my RJO, which I can confirm uses Total IM. OX is currently about 15% higher.

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Old January 25th, 2014, 12:04 PM   #2976 (permalink)
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When I calculate the SPAN IM for each contract in my OX account , figuring in the OX multiplier (like 10% for CL) and subtract it from the account balance I get about the same buying power number as OX. Buying Power is Account Balance minus SPAN IM. I have been at OX for 4 years. This formula has worked the entire time.

I don't run my OX account portfolio thru SPAN. Impossible to get same number unless all of your options are in commodities where OX is at SPAN.

At Zaner/OEC (Gain) they have different labels.

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Their IM is Total IM. Their Risk Initial is SPAN IM.

At Crossland their IM matches SPAN IM exactly. They don't list Total IM on their statement.

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At ADM their IM matches SPAN IM exactly. They don't list Total IM on their statement.

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Old January 25th, 2014, 03:03 PM   #2977 (permalink)
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I spent a little time comparing how Feb & Mar ES puts acted this week.

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As far as the hit on your Buying Power (decrease in your account balance and increase for IM) the Mar puts at the same premium on 1/17 faired far better than Febs. By around 50%.

But interestingly even puts at the same strike, say 1450, and with the Mar 1450 being a higher delta (1.68 vs 0.70 for Feb) on 1/17, the premium + IM change was about the same. But you could have had on 1.6 times as many Feb 1450s as Mar 1450s. So the hit to your account would have be worse if you had on Feb 1450s and used the same amount of IM + excess to cover these options as Mar 1450s.

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Old January 25th, 2014, 07:06 PM   #2978 (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!


************************************************************************************
Kelly%=W-[(1-W)/R]

There are two key components to the formula: the winning probability factor (W) and the win/loss ratio (R). The winning probability is the probability a trade will have a positive return. The win/loss ratio is equal to the total positive trade amounts divided by the total negative trading amounts. The result of the formula will tell investors what percentage of their total capital that they should apply to each investment. (copied online)

This is just some info you may find interesting. If the probability is 1 that you will win, you probably want to
bet the farm. If the probability is 50 - 50 you probably want to quit. If the win/loss ratio is 0.5 (your average loss is twice your average win) your probability of success should be at least 0.66. Or you should win 2 out of 3 times.


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

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Old January 26th, 2014, 01:33 PM   #2979 (permalink)
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datahogg View Post
************************************************************************************
Kelly%=W-[(1-W)/R]

There are two key components to the formula: the winning probability factor (W) and the win/loss ratio (R). The winning probability is the probability a trade will have a positive return. The win/loss ratio is equal to the total positive trade amounts divided by the total negative trading amounts. The result of the formula will tell investors what percentage of their total capital that they should apply to each investment. (copied online)

This is just some info you may find interesting. If the probability is 1 that you will win, you probably want to
bet the farm. If the probability is 50 - 50 you probably want to quit. If the win/loss ratio is 0.5 (your average loss is twice your average win) your probability of success should be at least 0.66. Or you should win 2 out of 3 times.


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

only sell strangles
lets say you collect 50$ from put 50$ from call you exit is when both are worth about 200$ so if you right above 50% you make money if you not selling against spikes on seasonals or strong trends you will make money ?

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Old January 26th, 2014, 02:09 PM   #2980 (permalink)
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aron1234 View Post
only sell strangles
lets say you collect 50$ from put 50$ from call you exit is when both are worth about 200$ so if you right above 50% you make money if you not selling against spikes on seasonals or strong trends you will make money ?

That is good in theory, but in reality it is much harder (currently not possible?).

At least for the ES it is. Take a look at my attachment. This is an ROI matrix on the Feb ES. I've highlighted similar deltas on both sides of a strangle. The Calls are selling for less that 50% of what the Puts are selling for AND they require 5 times the SPAN margin. This is Total SPAN IM, by the way.

So, its not possible to put on a balanced strangle and use the profit from one side to cover additional premium or losses on the other.

I have not done an extensive analysis on other futures options so it may be more possible with other instruments.

Attached Thumbnails
Selling Options on Futures?-es-roi-matrix.pdf  

Last edited by mu2pilot; January 26th, 2014 at 02:59 PM. Reason: grammar cleanup
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