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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:568,200 / 5,727
Last Reply:December 2nd, 2016 (12:40 PM) Attachments:642

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Selling Options on Futures?

Old June 10th, 2014, 03:37 PM   #3381 (permalink)
Market Wizard
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thinktrader View Post
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.

With the low vol right now I have been going out 90-120 DTE to get high enough premiums.

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.

There is a big difference between 10 delta and < 3 delta.

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.

Nope. Not when I am so far OTM.

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

An option with a 2 delta will move 5X less than an option with a 10 delta.

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?

That is why I use 3X IM. The 2X excess is to cover moves against you. When you are far OTM you have less worry that you will have to close or adjust positions.

Hope you can provide your experience and insights.

For example a Oct CL 10 delta put is the 91 strike. That's only $10 away from being ITM. IMO, WAY TOO RISKY.

The 80 strike is about 1.3 delta. Much less risky because it is $21 away from ITM.

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Old June 10th, 2014, 03:45 PM   #3382 (permalink)
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Mo111 View Post
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 commodities, the percent chance that all would use your margin is .03 x .03 x .03 percent chance = .0027%.

Just some food for thought.

That's a good return! Good job.

I still recommend 3X because right now we are being lulled into a false sense of security. Volatility will not stay this low forever.

See kevindog's comment previously about what happened when he thought the same as you are thinking about "borrowing" margin from other contracts to cover when one set of options uses up its' excess.

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Old June 10th, 2014, 03:51 PM   #3383 (permalink)
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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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Old June 10th, 2014, 10:49 PM   #3384 (permalink)
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Attachment 148806
thinktrader View Post


If volatility expands after we sell, the premium will increase and the margin will increase.

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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Old June 11th, 2014, 12:11 AM   #3385 (permalink)
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For you CL option sellers

Futures Edge on FIO
Don't want to go off topic in Ron's thread, so I posted a link to a story about oil production in another forum. Check it here.

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Old June 11th, 2014, 12:13 AM   #3386 (permalink)
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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?

Thanks for the work here everyone.

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Old June 11th, 2014, 12:35 AM   #3387 (permalink)
Market Wizard
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effective View Post
Attachment 148806

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.

Wow those margins are way higher than SPAN minimum. The Aug is 629 each. Sep is 370 each. Oct 361.

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Old June 11th, 2014, 12:39 AM   #3388 (permalink)
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Blaine View Post
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?

Thanks for the work here everyone.

Blaine-

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.

mu2pilot

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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Old June 11th, 2014, 12:56 AM   #3389 (permalink)
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ron99 View Post
Wow those margins are way higher than SPAN minimum. The Aug is 629 each. Sep is 370 each. Oct 361.

Yep. Darn thing does overestimate it, I noticed it before. Probably default margin parameters are off.

Zaner gives somewhat higher values though?

-10 OCLQ4 C113 Initial Margin $7,204.00
-10 OCLU4 C117.5 Initial Margin $4,817.00

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Old June 11th, 2014, 02:18 AM   #3390 (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.

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?

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