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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:568,629 / 5,727
Last Reply:December 2nd, 2016 (12:40 PM) Attachments:642

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Selling Options on Futures?

Old June 9th, 2014, 06:01 PM   #3371 (permalink)
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rrvb View Post
I'm confused. How are you calculating ROI?

My understanding:

You start with a ROI of 2% -- for example, you put up $1000 margin to well a short option for $20
Then, a few weeks later, the margin requirement drops to $300 and you can buy your short option back for $5. So, now your ROI is $15/$300 = 5%

Is that the way you are calculating ROI?

Thanks,
Randy

Post with ROI calculation on page 202.
https://futures.io/options-cfd-trading/12309-selling-options-futures-202.html#post353103

Or another more accurate way of calculating ROI
365/DTE/12*Net Profit/(Beginning Initial Margin + Excess)


Last edited by ron99; June 9th, 2014 at 06:07 PM.
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Old June 9th, 2014, 06:30 PM   #3372 (permalink)
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ron99 View Post
Post with ROI calculation on page 202.
https://futures.io/options-cfd-trading/12309-selling-options-futures-202.html#post353103

Or another more accurate way of calculating ROI
365/DTE/12*Net Profit/(Beginning Initial Margin + Excess)

Probably stating the obvious, but if you close the trade early, the ROI calculation would be:

365/Days Held/12*Net Profit/(Beginning Initial Margin + Excess)

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Old June 9th, 2014, 07:33 PM   #3373 (permalink)
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rrvb View Post
I'm confused. How are you calculating ROI?

My understanding:

You start with a ROI of 2% -- for example, you put up $1000 margin to well a short option for $20
Then, a few weeks later, the margin requirement drops to $300 and you can buy your short option back for $5. So, now your ROI is $15/$300 = 5%

Is that the way you are calculating ROI?

Thanks,
Randy

I might do it a little differently than most people. If my initial margin when I open the trade is $1000, I keep that amount "locked up" until I exit the position or until expiration. So, my ROI is based on the $1000.


Now, most people might say "Hey, Kevin, that's pretty dumb. If the margin requirement decreases to $100, that is $900 you aren't utilizing. You could then sell a bunch more options with the freed up margin Your method is pretty inefficient."

I agree, but I want to avoid getting caught with too many contracts. Let's say I initially sell 10 contracts. You sell 10 too. Then, when the margin drops, you sell 10 more. I sell zero more. Now, if the price goes back up, you are short 20, and you could get into trouble. I only have 10 though.

Hope this explains it a little bit.

If you have any questions please send me a Private Message or use the futures.io "Ask Me Anything" thread
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Old June 9th, 2014, 08:39 PM   #3374 (permalink)
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kevinkdog View Post
I might do it a little differently than most people. If my initial margin when I open the trade is $1000, I keep that amount "locked up" until I exit the position or until expiration. So, my ROI is based on the $1000.

Now, most people might say "Hey, Kevin, that's pretty dumb."

Hey, Kevin, that's pretty dumb.

Actually, that method sounds fine. It's more conservative and you may avoid too much concentration in certain products.

There are lots of ways to skin a cat and if someone is not a fulltime trader, they may not have the time or the desire to micro-manage the allocated margin, margin cushion and ROI. And while I think DudeTooth's application is a great tool, it's not the final word on margin use, unless, I suppose:

- you're certain your FCM uses SPAN minimums all the time
- you're spot on with all your spreads and offsets so they match the FCM
- your FCM doesn't raise margins intra-day, which they certainly can do

If someone is setting aside up to 3x initial margin, the events listed above should not put them in a margin deficit with their FCM, but they can certainly cause the theoretical ROI calculations to be incorrect.


Last edited by CafeGrande; June 9th, 2014 at 08:50 PM.
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Old June 9th, 2014, 08:52 PM   #3375 (permalink)
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Futures Edge on FIO

CafeGrande View Post
Hey, Kevin, that's pretty dumb.

Actually, that method sounds fine. It's more conservative and you may avoid too much concentration in certain products.

There are lots of ways to skin a cat and if someone is not a fulltime trader, they may not have the time or the desire to micro-manage the allocated margin, margin cushion and ROI. And while I think DudeTooth's application is a great tool, it's not the final word on margin use, unless, I suppose:

- you're certain your FCM uses SPAN minimums all the time
- you're spot on with all your spreads and offsets so they match the FCM
- your FCM doesn't raise margins intra-day, which they certainly can do

If someone is setting aside up to 3x initial margin, the events listed above should not put them in a margin deficit with their FCM, but they can certainly cause the theoretical ROI calculations to be incorrect.

I started doing it this way after I ran into trouble adding on to positions because I had "freed up" margin. The positions got big, and when the market went against me, I got in trouble.

If you have any questions please send me a Private Message or use the futures.io "Ask Me Anything" thread
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Old June 10th, 2014, 12:11 AM   #3376 (permalink)
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CafeGrande View Post
Hey, Kevin, that's pretty dumb.

Actually, that method sounds fine. It's more conservative and you may avoid too much concentration in certain products.

There are lots of ways to skin a cat and if someone is not a fulltime trader, they may not have the time or the desire to micro-manage the allocated margin, margin cushion and ROI. And while I think DudeTooth's application is a great tool, it's not the final word on margin use, unless, I suppose:

- you're certain your FCM uses SPAN minimums all the time
- you're spot on with all your spreads and offsets so they match the FCM
- your FCM doesn't raise margins intra-day, which they certainly can do

If someone is setting aside up to 3x initial margin, the events listed above should not put them in a margin deficit with their FCM, but they can certainly cause the theoretical ROI calculations to be incorrect.

Your post highlights the main reasons I left OX and never traded at IB. They charge more than SPAN minimum margin and randomly raise the margin. For an option seller that is a deal killer.

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Old June 10th, 2014, 07:00 AM   #3377 (permalink)
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How Far OTM Is A Sweet Spot?

Hi Ron,

I have been successfully selling options on Crude Futures. I tend to sell between 45 to 60 days to expiration.

And I tend to pick about 90% Probability Out-Of-The-Money or roughly equivalent to 10 delta.

Some of my other traders argue that it is safer to sell 95% Probability OTM or 5 delta. But I often found that there is not enough premium ("meat") to sell so far. I also think that when the trade goes against us, there is not much difference that the 95% probability OTM or 5 delta would be much safer.

So, I like to hear your personal experience of this on Crude.

Now the volatility for Crude is quite low. I use the symbol OIV which is the CBOE NYMEX WTI Volatility Index to guage the level of IV. It is now about 14.4% which is at the low end. Do you consider volatility when selling options on futures.

I believe in your video you mentioned that you sold quite far OTM so volatility is less an issue. Can you expand on this?

If volatility expands after we sell, the premium will increase and the margin will increase. Unless one is comfortable and believe that Crude will remain within the short strikes, then it is may be necessary to close the position or to adjust the positions. Can you comment as well?

Hope you can provide your experience and insights.

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Old June 10th, 2014, 11:44 AM   #3378 (permalink)
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ron99 View Post
Yes. Found that ROI was greater if you exited early. Depends on if futures are going your way.

My spreadsheet calculates the beginning ROI and the ROI if I exited today. If futures aren't moving against you, you can sometimes make double the ROI by exiting early vs riding to expiration.

Please explain. How do you make double the ROI by exiting early?

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Old June 10th, 2014, 12:28 PM   #3379 (permalink)
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rrvb View Post
Please explain. How do you make double the ROI by exiting early?

Here's an example. I sold some LHN4 102 Puts on March 13 at $0.125 with an IM of $124.74. If I'd held them to expiry (on 17 July) using 3x IM that would have given me an ROI of approx 4.8% per month.

By closing that trade out today at $0.025 that's freed up my margin, and returns approx 8.3%.

Not quite double the ROI, but worth doing IMO.


HTH

Chris

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Old June 10th, 2014, 12:38 PM   #3380 (permalink)
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I just wanted to give a quick post on how selling options on futures has been going for me. I discovered this thread back in Dec 2013, and sold my first future option on Jan 20, 2014. Before, I was only doing index option iron condors and calendar spreads, but since Jan 2014, I have been utilizing Ron's and other peoples methods in this forum.

Since 1/20/14, I have sold 1442 options, 100% of which have expired worthless (excluding the approximately 350 I still have open now). I want to say thanks

I have the following allocations: 30% ES, 16% 6E, 27% CL, and 27% Softs (split between cocoa, soybeans, soymeal, live cattle, coffee, and cotton - using recommendations from seasonalgo.com).

Thank you to everyone who contributed to this thread!

YTD return is about 18%. My goal is to make 2.93% per month, = 41.5% per year compounded, = 100% every two years.

My 2 cents on allocating margin: I currently allocate 3x SPAN minimum margin for each trade. With diversifying in different commodities, and each trade having a delta of less than 5 (most are less than 2-3), then I've noticed that after a week or two of holding my trades, I easily drop to 25-20% of my total margin being allocated.

I was curious if anyone would recommend still allocating 3x to each trade, but utilizing 1.5 or 2x total account value towards the trades, because the chance of 2 - 3 commodities going wrong are very slim (and utilizing all your margin ) - ie if deltas are less than 3 for 3 different commmodities, the percent chance that all would use your margin is .03 x .03 x .03 percent chance = .0027%.

Just some food for thought.


Last edited by Mo111; June 10th, 2014 at 02:10 PM.
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