I will also say that option sellers need to do some fundamental analysis of the commodity. Just looking at seasonals and trends is not enough.
For example, LH had a virus go through the country killing thousands of pigs. In 2012 the drought affected grains. This past winter NG was affected by the weather. Coffee was affected by Brazil drought.
You don't have to get into minute detail. Just know the macro events affecting the commodities.
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This issue worries me as well. I ran scenario in OptionVue increasing volatility by 4% and 8%, projecting 7 days in the future for three different DTE on CL with the fixed price. For each DTE I chose strike that gave me ~0.1 premium. Here are the results:
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The bottom line is no matter how far in time you go, the increase in volatility will get you. The furthest DTE is the worst because of higher vega value. However the furthest DTE carries the least risk with respect to price movement. Since in reality the vol spike will be accompanied by the price spike, both have to be considered. It does seem that 67 DTE has the best balance of both.
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Hey Ron and crew. i'm new here and have read the entire thread over the last couple of weeks. I have been selling .05 delta naked puts, spreads and condors on RUT, ETFs and stocks for the last three years and I'm adding in Futures options. I have an IB account which is great for equity options but it is a deal killer on FOPs as you have said.
I have some questions about risk management:
When you have a position that goes against you and uses up your 3X SPAN Margin, what does your delta and your premium look like? I would think they would be correlated. I know when I trade and I see my delta double in short order that my premium to close the trade doubles. Is the Span Margin calculated using the greeks or is it something different?
So when you hit 3X Margin has the delta or premium tripled? Do you have some real examples you could share. If they are correlated to the greeks what is the advantage of using this method to close a trade?
Welcome to the thread. Always good to have another option seller aboard.
When you calculate how much a trade has gone against you, you include the increase in margin AND loss of premium. This was a point I missed until a few months back. I thought you held the trade until you've lost 3x initial margin and that's not correct. You get out when the combination of margin increase and loss on the trade = 3X initial margin.
I'll give you an example that I unfortunately traded, March NG.
I sold some NGH4 6.9 Calls on 1/2/14 for $100 and an initial margin of $198. On 1/23/14, this option closed at $310 and the margin had increased to $552. As of 1/23, I was down $210 on my option and margin had increased by $354 or a combination of $564. My initial margin x 3 = $594, so I was getting close to needing to close the position.
Sadly, this option closed at $1430 the next day and margin increased to $1424. I bought my position back in at $530, losing $430 per contract on the trade.
The nuance I didn't realize until then was that if you close your position when the combination of margin increase and trade loss = 3x IM, you'll never lose 3x IM. That is, except when the market goes crazy and blows through your "stop". Which is pretty likely when there is a lot of volatility. That is just one of the negatives to this approach. But the positives more than outweigh the negatives, IMHO.
Ron99 told me that in a normal year, he has 11 decent months and one month where he takes a hit. If we're making 3-5%/month and we lose 5-10% in one month, we're still up 25-50% (or more) on the year. I can live with that.
PS- You asked about Delta and I didn't provide that. Delta on 1/2 was 3.55. On 1/23, it was 6.1. On 1/24, it was 17.03. The U/L was 4.296, 4.579 & 4.998, respectively.
Last edited by mu2pilot; June 11th, 2014 at 01:11 AM.
Reason: To add Delta and U/L info
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Obviously if you have alternative opportunities with higher ROIs exiting the current trade and entering the new trade makes sense. But what about if you don't have other opportunities. Are you still exiting because the risk/reward or ROI is to low now?