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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:568,925 / 5,728
Last Reply:15 Hours Ago (05:26 PM) Attachments:642

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Selling Options on Futures?

Old February 13th, 2014, 12:22 PM   #3051 (permalink)
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It's a financial spread option on the March-April spread that expires on March penultimate so Tuesday 25th February.

Payout is exactly the same as any normal financially settled call option but the payout is based upon the settlement price of the March-April spread on that date.

Spread Options are priced very differently than normal options. Inputs to a spread option model are the normal Strike, Interest Rate & Days to Expiration, plus the underlying Price and Volatility for both March and April individually, plus the correlation between March and April. The biggest factor in pricing being the correlation for (hopefully) obvious reasons.

CPT- Central Prevailing Time

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Old February 13th, 2014, 12:27 PM   #3052 (permalink)
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SMCJB View Post
It's a financial spread option on the March-April spread that expires on March penultimate so Tuesday 25th February.

Payout is exactly the same as any normal financially settled call option but the payout is based upon the settlement price of the March-April spread on that date.

Spread Options are priced very differently than normal options. Inputs to a spread option model are the normal Strike, Interest Rate & Days to Expiration, plus the underlying Price and Volatility for both March and April individually, plus the correlation between March and April. The biggest factor in pricing being the correlation for (hopefully) obvious reasons.

CPT- Central Prevailing Time


Thanks! So, if I understand you first comment correctly:


SMCJB View Post
At 10:01 this morning (CPT) with March/April at 41.2c the March-April Spread Option $2 Call traded 3c and came back bid over.

That is telling me that someone is betting big that the Mar/Apr spread is going to increase significantly? Are am I interpreting it wrong?

Sorry for being dense today...

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Old February 13th, 2014, 12:31 PM   #3053 (permalink)
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Yes. Somebody is paying 3c to own a spread option call that is almost $1.60 out of the money and only has 12 days to expiry!

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Old February 13th, 2014, 12:31 PM   #3054 (permalink)
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kevinkdog View Post
That is telling me that someone is betting big that the Mar/Apr spread is going to increase significantly? Are am I interpreting it wrong?

Sorry for being dense today...

Or they are buying protection to cover losses if their being short the spread goes against them.

Spread is .430 now.

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Old February 13th, 2014, 12:33 PM   #3055 (permalink)
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SMCJB View Post
Yes. Somebody is paying 3c to own a spread option call that is almost $1.60 out of the money and only has 12 days to expiry!

What was the volume? Is it a big bet from some big fish or just a few of contracts from odd lot traders??

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Old February 13th, 2014, 12:45 PM   #3056 (permalink)
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Physicsman View Post
What was the volume? Is it a big bet from some big fish or just a few of contracts from odd lot traders??

400 I believe
These things trade all day long OTC in some pretty decent volumes.
I just happened to see it trade when typing a message here so thought I would share.

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Old February 13th, 2014, 01:11 PM   #3057 (permalink)
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Here is why NG is up today.


Quoting 
U.S. natural gas pipeline company NiSource Inc said it shut part of its key Columbia Gulf Transmission interstate natural gas pipeline following an explosion in Adair County, Kentucky that injured at least one person.
...
Natural gas traders and analysts said this was a tough day to lose a big pipeline due to the winter storm battering the East Coast. The pipeline supplies some of the fuel used to heat millions of homes and businesses in the Northeast and Midwest.

Blast rocks NiSource Kentucky Columbia Gulf natgas pipeline | Reuters

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Old February 13th, 2014, 04:09 PM   #3058 (permalink)
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A May CL 75 put is 62 DTE. Premium in dollars is $40. Margin is $142. Delta .0094. ROI 4.2%

A Apr ES 1325 put is 63 DTE. Premium in dollars is $40. Margin is $273. Delta .0096. ROI 2.1%

The question is, is a CL put $25 OTM riskier than a ES put 500 OTM. The strikes are both about 75% of futures.

Since the recession the largest 56 day drop in futures was 28.54 for CL and 240.50 for ES.

That drop would put the CL put ITM. The ES drop is only about 50% of the difference between futures and the option strike.

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Old February 13th, 2014, 07:34 PM   #3059 (permalink)
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ron99 View Post
A May CL 75 put is 62 DTE. Premium in dollars is $40. Margin is $142. Delta .0094. ROI 4.2%

A Apr ES 1325 put is 63 DTE. Premium in dollars is $40. Margin is $273. Delta .0096. ROI 2.1%

The question is, is a CL put $25 OTM riskier than a ES put 500 OTM. The strikes are both about 75% of futures.

Since the recession the largest 56 day drop in futures was 28.54 for CL and 240.50 for ES.

That drop would put the CL put ITM. The ES drop is only about 50% of the difference between futures and the option strike.


I would say the ROI is telling you that the ES is less risky. The only difference in the ROI for both is the margin required. The exchange is saying Crude is riskier, and therefore demands more margin. The exchange always wants to balance risk and volume (they want margins low to stimulated trading, but not so low that people run into trouble with positions).

Look at NG for an example. ROIs were 20-40% over the past month. It is because they are very risky.


The trick, then, becomes finding high ROI where the margin requirement does not necessarily mean a position is riskier.

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Old February 13th, 2014, 09:12 PM   #3060 (permalink)
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^ On a related note, can you find sufficient liquidity to sell a bunch of 1-Delta (.01) options with a premium of $40? I imagine there is plenty of liquidity in ES and maybe CL if you pick common, round number strikes, but what about some of the other physical commodity markets?

I realize everyone has their own number, but let's say to cover trade research and monitoring time, commissions and provide a decent profit, a trade won't be considered unless it's $1000 in gross premium (or $2000 or $10,000 or whatever). Even with a $1000 hurdle, can you get filled on 25 options without selling at or close to the bid?


Last edited by CafeGrande; February 13th, 2014 at 09:18 PM.
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