NexusFi: Find Your Edge


Home Menu

 





Selling Options on Futures?


Discussion in Options

Updated
      Top Posters
    1. looks_one ron99 with 2,221 posts (4,489 thanks)
    2. looks_two SMCJB with 346 posts (733 thanks)
    3. looks_3 kevinkdog with 341 posts (400 thanks)
    4. looks_4 myrrdin with 288 posts (408 thanks)
      Best Posters
    1. looks_one SMCJB with 2.1 thanks per post
    2. looks_two ron99 with 2 thanks per post
    3. looks_3 myrrdin with 1.4 thanks per post
    4. looks_4 kevinkdog with 1.2 thanks per post
    1. trending_up 1,934,752 views
    2. thumb_up 9,259 thanks given
    3. group 458 followers
    1. forum 7,370 posts
    2. attach_file 794 attachments




 
Search this Thread

Selling Options on Futures?

  #3281 (permalink)
 
SMCJB's Avatar
 SMCJB 
Houston TX
Legendary Market Wizard
 
Experience: Advanced
Platform: TT and Stellar
Broker: Advantage Futures
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,033 since Dec 2013
Thanks Given: 4,359
Thanks Received: 10,172

I am not currently an options trader (I trade energy futures) but I have traded quite a lot of options in my past. This is one of several threads at nexusfi.com (formerly BMT) that I subscribe to and read with great interest. I have found it to be very thought provoking, informative and educational.

I have found the recent few days discussions and videos regarding Karen #Supertrader and Craig Stevenson very interesting.

Not the intent of my post - but I think it should be pointed out that if every month you sell an option that has only a 5% chance of expiring in the money then there is a 54% chance at year end you have had 12 consecutive winning months and even a 29% chance of 24 consecutive winning months. Question is what happens when the streak ends.

Anyway back to the point of my post. All the discussion regarding the 'sweet spot' of option decay encouraged me to pull up a spreadsheet and analyze the Theta of different options. While Blueroo posted some interesting charts of CLM4 90P over time a few pages back, I wanted to see how the sweet spot of decay looked, once we exclude market movement. The following chart shows Theta versus Days to Expiry of different out of the money calls, and selected call spreads. Price is held constant at 100, Volatility held constant at 20% (with no skew) and Interest Rates held at 1%. Hence the only thing changing is Days to Expiration. All of this analysis was done with a simple black scholes model programmed in VBA/Excel. This is obviously over simplifying real life markets and may completely nullify the entire analysis.



Nothing particularly surprising here. With regards to outright calls the further out of the money you go, the further out you sell them the greater the decay. I wonder how significantly this is effected by the lack of skew in the analysis. I suspect the skew increases as we move closer to expiry, effecting the analysis of OTM options the most.

I then rescaled the charts to look at "Theta as a Percentage of Premium" vs Days to Expiration. Unfortunately as we approach expiry the rate of change of price significantly exceeds the rate of change of theta, and the charts go exponential, limiting their use. It was interesting to see how differently the call spreads were in comparison to the first chart though.



Next I rescaled the first chart, setting Theta with 100 days to expiration to be a base of 100. This enables us to see more clearly whether Theta is increasing or decreasing and to identify the sweet spots of decay easier.



Again nothing particularly surprising regarding the outright calls, but I did find the shapes of the call spreads to be interesting.

Finally just out of curiosity I decided to scatter plot Theta vs Delta for the last 100 days to expiry. Sorry that the chart has different color scaling than the previous three. Obviously points in the upper left represent 100 DTE and points in the lower right 1 DTE.



If one believes that delta is indicative of or at least highly correlated to the probability of expiring in the money, somebody who is trying to collect theta regardless of price direction, would probably be interested in selling options with low delta's and high theta's. ie Options as close as possible to the bottom left of the above chart.

What does all this mean? I'm honestly not sure, but since I did the analysis I thought I would at least share it.

Reply With Quote
The following 17 users say Thank You to SMCJB for this post:

Can you help answer these questions
from other members on NexusFi?
Request for MACD with option to use different MAs for fa …
NinjaTrader
ZombieSqueeze
Platforms and Indicators
NexusFi Journal Challenge - April 2024
Feedback and Announcements
My NT8 Volume Profile Split by Asian/Euro/Open
NinjaTrader
 
Best Threads (Most Thanked)
in the last 7 days on NexusFi
Retail Trading As An Industry
67 thanks
Battlestations: Show us your trading desks!
48 thanks
NexusFi site changelog and issues/problem reporting
47 thanks
GFIs1 1 DAX trade per day journal
32 thanks
What percentage per day is possible? [Poll]
31 thanks

  #3282 (permalink)
 datahogg 
Knoxville Tennessee USA
 
Experience: Intermediate
Platform: TOS
Trading: ES, NQ, CL, /6E futures options.
Posts: 346 since Oct 2012
Thanks Given: 135
Thanks Received: 154


SMCJB View Post
I am not currently an options trader (I trade energy futures) but I have traded quite a lot of options in my past. This is one of several threads at nexusfi.com (formerly BMT) that I subscribe to and read with great interest. I have found it to be very thought provoking, informative and educational.

I have found the recent few days discussions and videos regarding Karen #Supertrader and Craig Stevenson very interesting.

Not the intent of my post - but I think it should be pointed out that if every month you sell an option that has only a 5% chance of expiring in the money then there is a 54% chance at year end you have had 12 consecutive winning months and even a 29% chance of 24 consecutive winning months. Question is what happens when the streak ends.

Anyway back to the point of my post. All the discussion regarding the 'sweet spot' of option decay encouraged me to pull up a spreadsheet and analyze the Theta of different options. While Blueroo posted some interesting charts of CLM4 90P over time a few pages back, I wanted to see how the sweet spot of decay looked, once we exclude market movement. The following chart shows Theta versus Days to Expiry of different out of the money calls, and selected call spreads. Price is held constant at 100, Volatility held constant at 20% (with no skew) and Interest Rates held at 1%. Hence the only thing changing is Days to Expiration. All of this analysis was done with a simple black scholes model programmed in VBA/Excel. This is obviously over simplifying real life markets and may completely nullify the entire analysis.



Nothing particularly surprising here. With regards to outright calls the further out of the money you go, the further out you sell them the greater the decay. I wonder how significantly this is effected by the lack of skew in the analysis. I suspect the skew increases as we move closer to expiry, effecting the analysis of OTM options the most.

I then rescaled the charts to look at "Theta as a Percentage of Premium" vs Days to Expiration. Unfortunately as we approach expiry the rate of change of price significantly exceeds the rate of change of theta, and the charts go exponential, limiting their use. It was interesting to see how differently the call spreads were in comparison to the first chart though.



Next I rescaled the first chart, setting Theta with 100 days to expiration to be a base of 100. This enables us to see more clearly whether Theta is increasing or decreasing and to identify the sweet spots of decay easier.



Again nothing particularly surprising regarding the outright calls, but I did find the shapes of the call spreads to be interesting.

Finally just out of curiosity I decided to scatter plot Theta vs Delta for the last 100 days to expiry. Sorry that the chart has different color scaling than the previous three. Obviously points in the upper left represent 100 DTE and points in the lower right 1 DTE.



If one believes that delta is indicative of or at least highly correlated to the probability of expiring in the money, somebody who is trying to collect theta regardless of price direction, would probably be interested in selling options with low delta's and high theta's. ie Options as close as possible to the bottom left of the above chart.

What does all this mean? I'm honestly not sure, but since I did the analysis I thought I would at least share it.

There is a difference between probability over time and conditional probability. Say for the game of black jack when
cards are dealt, the probability of cards that remain changes. The same for selling DOT puts. When risk reaches a level and adjustments are made, the probabilities change.

Reply With Quote
  #3283 (permalink)
 
SMCJB's Avatar
 SMCJB 
Houston TX
Legendary Market Wizard
 
Experience: Advanced
Platform: TT and Stellar
Broker: Advantage Futures
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,033 since Dec 2013
Thanks Given: 4,359
Thanks Received: 10,172



datahogg View Post
There is a difference between probability over time and conditional probability.

Agree.


datahogg View Post
Say for the game of black jack when cards are dealt, the probability of cards that remain changes.

Of course.


datahogg View Post
The same for selling DOT puts. When risk reaches a level and adjustments are made, the probabilities change.

Not sure what you are saying here?

Reply With Quote
  #3284 (permalink)
 ron99 
Cleveland, OH
 
Experience: Advanced
Platform: QST
Broker: QST, DeCarley Trading, Gain
Trading: Options on Futures
Posts: 3,081 since Jul 2011
Thanks Given: 980
Thanks Received: 5,785

SMCJB, nice work.

Could you run the first chart with calls and puts and with no spreads.

I believe CL puts decay faster than calls and want to see it graphed out.

Thanks

Started this thread Reply With Quote
  #3285 (permalink)
 effective 
Richland WA/USA
 
Experience: Intermediate
Platform: tws, tos
Trading: RUT, GC, CL
Posts: 38 since Mar 2013
Thanks Given: 10
Thanks Received: 20

I don't how if it is of any help, but here is a screenshot that I took of optionvue matrix for CL for Friday 12 pm.
Optionvue presumably includes current volatility skew in their calculations. Looking at Aug options both OTM calls and puts have nice premium, but for the same Prb. ITM (probability in the money) puts have a little more premium and theta.



Reply With Quote
The following user says Thank You to effective for this post:
  #3286 (permalink)
 ron99 
Cleveland, OH
 
Experience: Advanced
Platform: QST
Broker: QST, DeCarley Trading, Gain
Trading: Options on Futures
Posts: 3,081 since Jul 2011
Thanks Given: 980
Thanks Received: 5,785

effective, I'm looking for options further out in time, ~100 DTE, and further OTM. 80 and less on puts and 125 and higher on calls.

Started this thread Reply With Quote
  #3287 (permalink)
 effective 
Richland WA/USA
 
Experience: Intermediate
Platform: tws, tos
Trading: RUT, GC, CL
Posts: 38 since Mar 2013
Thanks Given: 10
Thanks Received: 20


ron99 View Post
effective, I'm looking for options further out in time, ~100 DTE, and further OTM. 80 and less on puts and 125 and higher on calls.

I did not realize you go out that far. Could you explain your rationale for that? The open interest would be low that far out in strikes and time.


Reply With Quote
  #3288 (permalink)
 ron99 
Cleveland, OH
 
Experience: Advanced
Platform: QST
Broker: QST, DeCarley Trading, Gain
Trading: Options on Futures
Posts: 3,081 since Jul 2011
Thanks Given: 980
Thanks Received: 5,785


effective View Post
I did not realize you go out that far. Could you explain your rationale for that? The open interest would be low that far out in strikes and time.

Far less risky. You will get burned selling options that close to ITM.

We like to sell options with a delta < 0.03.

Take the time to read the thread or at least the summary on page one.

Started this thread Reply With Quote
  #3289 (permalink)
 effective 
Richland WA/USA
 
Experience: Intermediate
Platform: tws, tos
Trading: RUT, GC, CL
Posts: 38 since Mar 2013
Thanks Given: 10
Thanks Received: 20


ron99 View Post
Far less risky. You will get burned selling options that close to ITM.

We like to sell options with a delta < 0.03.

Take the time to read the thread or at least the summary on page one.

I did read the summary on page one before and it actually says:


Quoting 
- SELL options with LESS than 90 DTE (days to expiration)

I am still going though the posts, so may be somewhere along the way the rules have changed. I did not come here for rules though but as a place to connect with people that do similar things.

The deltas on the strikes that I posted originally were covering the range below 3 delta (or 0.03 in your notation). They may differ from other platforms but not by much.


Reply With Quote
  #3290 (permalink)
Zero85
NYC +NY/ United States
 
Posts: 33 since Mar 2014
Thanks Given: 13
Thanks Received: 10


I do the same thing as Ron. We go further out b/c there is less risk of the option going in the money, and more likely the trade will be profitable. Here's our baseball analogy, we hit singles often, we don't go trying to smack that home run ball and risk striking out. Risk management is key to option selling, we take small winners and avoid that one big loser as much as we possibly can, hence why we go for very low deltas.

Reply With Quote
The following user says Thank You to Zero85 for this post:





Last Updated on July 28, 2023


© 2024 NexusFi™, s.a., All Rights Reserved.
Av Ricardo J. Alfaro, Century Tower, Panama City, Panama, Ph: +507 833-9432 (Panama and Intl), +1 888-312-3001 (USA and Canada)
All information is for educational use only and is not investment advice. There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
About Us - Contact Us - Site Rules, Acceptable Use, and Terms and Conditions - Privacy Policy - Downloads - Top
no new posts