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
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.
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.
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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