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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:569,059 / 5,728
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Selling Options on Futures?

Old July 12th, 2014, 03:04 PM   #3471 (permalink)
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datahogg View Post
For those who are experienced with the short strangle. After a short strangle is sold ( a far out of the money put and call) generally is it good to make adjustments or just monitor for conditions that will require an exit from a portion or all of the strangle? Does maintenance of delta within a certain range by buying or selling work well??

I like to adjust my strangles using zero cost synthetic short/long or split strike combo. So lets say you want to get +10 delta - you buy call with ~ 5 delta and finance it by selling put at ~ -5 delta. This type of adjustment does not impact your profit curve, theta value, and is somewhat forgiving to market reversal.

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Old July 12th, 2014, 08:19 PM   #3472 (permalink)
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effective View Post
I like to adjust my strangles using zero cost synthetic short/long or split strike combo. So lets say you want to get +10 delta - you buy call with ~ 5 delta and finance it by selling put at ~ -5 delta. This type of adjustment does not impact your profit curve, theta value, and is somewhat forgiving to market reversal.

Have you found this works better than simply buying OTM wings/tail protection?

Maybe it's just this example - the gold contract has a high notional value - but I noticed the cost to hold the short put leg is at least $3500 in maint margin.

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Old July 12th, 2014, 09:05 PM   #3473 (permalink)
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CafeGrande View Post
Have you found this works better than simply buying OTM wings/tail protection?

It depends. Buying protection behind the shorts is certainly a viable option, but it will depress you theta and lower your profit. It is more of a permanent adjustment compared to synthetic which will dissolve after a while. Also
the question was about far OTM strangle so there may not be much to buy there. Still if the market is going nuts buying call/puts would be very good way to limit your losses.

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CafeGrande View Post
Maybe it's just this example - the gold contract has a high notional value - but I noticed the cost to hold the short put leg is at least $3500 in maint margin.

OV does not do a good job on margin calculation, but this adjustment will increase your margin


Last edited by effective; July 13th, 2014 at 02:47 AM.
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Old July 14th, 2014, 12:13 AM   #3474 (permalink)
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I just spent the weekend reading this entire thread and taking notes on the side. This is the best thread on selling options I have come across, and I love the collaborative and idea sharing attitude of the contributors.

I have been selling options on equity (and indicies) and returning 4%-6% per month. Because of the premiums/margin ratio, and the fact that the instruments I pick aren't as volatile, I have been selling mainly naked around .20 delta, and this has worked well for me. I only do this on instruments which are trading at the high end of their IV so that I have vol working with me regardless of how the underlying moves. Generally, I never let options expire as I prefer to take profits in the 35%-50% range and then reload the capital into other trades.

Selling premium on futures is attractive to me as it allows one to get a better ROI given the margin requirements (I trade on TOS, and IM for /CL is roughly 50% of IWM).

I am however going to heed the caution of ron99 and others in that trading options on futures is a different beast due to volatility, fundamentals, etc and take it slow and start with small size. I'll keep folks updated with my trades/logic like manye on here have.

Also, maybe a thread like this, but focused on equities/equity indicies might be a good one to start as well?

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Old July 14th, 2014, 10:43 AM   #3475 (permalink)
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vswami View Post
I just spent the weekend reading this entire thread and taking notes on the side. This is the best thread on selling options I have come across, and I love the collaborative and idea sharing attitude of the contributors.

I have been selling options on equity (and indicies) and returning 4%-6% per month. Because of the premiums/margin ratio, and the fact that the instruments I pick aren't as volatile, I have been selling mainly naked around .20 delta, and this has worked well for me. I only do this on instruments which are trading at the high end of their IV so that I have vol working with me regardless of how the underlying moves. Generally, I never let options expire as I prefer to take profits in the 35%-50% range and then reload the capital into other trades.

Selling premium on futures is attractive to me as it allows one to get a better ROI given the margin requirements (I trade on TOS, and IM for /CL is roughly 50% of IWM).

I am however going to heed the caution of ron99 and others in that trading options on futures is a different beast due to volatility, fundamentals, etc and take it slow and start with small size. I'll keep folks updated with my trades/logic like manye on here have.

Also, maybe a thread like this, but focused on equities/equity indicies might be a good one to start as well?

For futures options (TOS) span margin is used. For others Reg - T margin is used.

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Old July 14th, 2014, 02:32 PM   #3476 (permalink)
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ron99 View Post
Trade Alert

FWIW There is an opportunity to sell milk (Class III) options right now. Sell the Aug 18.75 put for 0.04 or $80. Symbol DA on some systems. There are 150 bid there now. I suspect the person bidding is taking profit on the 362 options that traded (OI increase) on June 3rd between 0.23-0.29.

If kept to expiration the ROI would be about 3% (IM=298 today but should be lower tomorrow). I would recommend buying back at .01 which shouldn't take too long to get there. That should easily get your monthly ROI over 5%. The Joly 18.75s are priced at 0.005 or cabinet.

Milk closes trading at 5pm ET. Reopens at 6pm ET.

I know we're not supposed to "pollute" this thread with thank you messages (and I typically follow that rule) but I wanted to say "THANKS" to Ron99 for his milk trade recommendation. I bought my 20 lots back in today @ $0.01 as planned. This was a good trade, although it got a bit worrisome when it traded down near 20.

Thanks for your contributions here Ron.

mu2pilot


Last edited by mu2pilot; July 14th, 2014 at 06:30 PM.
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Old July 15th, 2014, 02:37 PM   #3477 (permalink)
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Hi all, new here. This thread is simply epic.

I have been selling options on etfs for a few years and have been testing futures options with small amount for the past few months. I was mainly involved in weeklies so fops are a little different. my style is a bit more "unorthodox" and probably contradict what some of you guys do. I will summarise it and state my opinions on them.

Time
I am much more experienced in weeklies so I always go for only 1 month until expiry. Actually I prefer weeklies but theres no volume at the moment on the weekly fops. My reasoning is, say a stop loss is 3x the premium, with a monthly option, it takes 2 months to make it back (assuming you win). With a weekly, it only takes 2 weeks to make it back. A big move against you will most of the time result in a loss, either you are in monthly or weekly. It's almost always the "tail" end 2 std+ moves that get you. It is better for this to happen on a weekly than a monthly. Rarely do you get consecutive losing weeks as after the big move, volatility adjusts premium for the next period or you moved onto another market.

Also weekly compound over the long term makes a difference. For example 1% per week compounded against 4.33% per month (52%/12weeks) results in a 20% difference over 3 years.

Strike selection
I have tested alongside each other a few different methods and my conclusion is: sell as godamn far away as possible for an acceptable return. Go as far away where the premium:margin gives you the return you desire. I have had 2 times where a decent move against me, I had both 0.03 delta entry and as far as possible positions on. The delta strike premium went against me about double the premium. The far option the premium was lower than entry price. Further strikes helps,p remium decay works more

Expire or close early
This goes along with time and strike. Low time and far strikes means low premium. I usually enter for around $30/contract on a few hundred margin. Doesn't make sense to close it for $10. Expire, and repeat, I have already made the target amount for the period. Selling option should NOT be like trend following pyramiding, piling into winning trades (aka selling for 10c and closing for 2c and then selling more). When a big move comes, it will get you bad as you roll closer to extract more premium. Consistent low risk profits is better long run than milking a lot out of trades and then having a big loss as you progressively take on higher risk by rolling.

Margin
Ron's margin rule is absolutely spot on. Having 2x spare margin saved my ass when I entered with 66% free margin and then margin increased resulting in my having only 15% free margin left. Using Ron's words, I rode the position out with the excess margin as premium had not reach my stop yet. Coming from equities where margin barely changes I was always using upto 90% of margin. For naked selling on fops having spare margin is a must.

Diversification vs Concentration
I think almost everyone diversifies into a lot of different positions. I am of the opposite view. I do not think spreading your eggs out in multiple baskets should apply to selling options. We lose by "oh crap" moves. We want to avoid them as much as possible. By having less positions, you automatically dramatically lower the chance of catching one. If you have 10 soldiers and there are 10 different paths but you know for sure that 1 or 2 of the paths have landmines which you cannot possible analyse which one, you should not send everyone to the 10 different paths. I think 2 or maybe 3 different UNCORELLATED (avoid ng and cl @ same time, count them as "one" position) commodities is the max that should be spread.

Our risk to reward is very bad. We have capped profit. You cannot avoid it by selling OTM options. We rely on high probability win to make profits - having too many position simply goes against our edge. I think high diversifications is only for high R:R trading such as trend following, you do not know which market is going to trend hard, so you enter a lot to catch the big one and get stopped out on others. We are the opposite of this. We sell lottery tickets/death insurance ~ we want to sell to as less people as possible for the same profit.

Analysis/Projection
This is probably going to stir some people up, so please note this is only my opinion. Forget all your crystal balls/projections//reports/seasonals. If they work on a VERY consistent basis go trade directional, you will make more money. If they don't ~ sell options and throw it all out. Fundamental has no place for predicting the next 30 days move. It is pure sentiment. Do some very basic TA if you want, trendlines/sup&res. We are just managing the trade and letting time decay work its magic. Van Tharp has stated random entries work - it is in correct trade management that the profit lies. We are simply punting where price will not go and I truly believe a random entry(say when your positions expire), just looking at the numbers and if they add up, trade it and managing it correctly will be enough. You cannot guess where the bloody black swans will pop up - it certainly does not show up in the crop report or your freaking trendlines.

I only use very basic TA on a more macro view. We option sellers are mean reversionists. At whichever point you sell at some point it hopefully will revert back to the mean. You cannot perfect the entry. Selling a bit late or a bit early will result 1 or 2 strikes closer - no big deal.


---

All criticisms are welcome ! Opposing views always gets me thinking more and may open up more breakthroughs, I am ready to change any of my views above with more feedback and evidence.

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Old July 15th, 2014, 02:49 PM   #3478 (permalink)
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k20a, welcome and thanks for the interesting post. Good insight.

You are correct we disagree on some points but that is OK. There is more than one way to sell options. Whatever works for you is good.

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Old July 15th, 2014, 02:55 PM   #3479 (permalink)
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k20a View Post
I am much more experienced in weeklies so I always go for only 1 month until expiry. Actually I prefer weeklies but theres no volume at the moment on the weekly fops. My reasoning is, say a stop loss is 3x the premium, with a monthly option, it takes 2 months to make it back (assuming you win). With a weekly, it only takes 2 weeks to make it back. A big move against you will most of the time result in a loss, either you are in monthly or weekly. It's almost always the "tail" end 2 std+ moves that get you. It is better for this to happen on a weekly than a monthly. Rarely do you get consecutive losing weeks as after the big move, volatility adjusts premium for the next period or you moved onto another market.

Also weekly compound over the long term makes a difference. For example 1% per week compounded against 4.33% per month (52%/12weeks) results in a 20% difference over 3 years.

Nice post! Have you thought about or perhaps done weekly trades on ES. I personally would probably be uncomfortable with just naked shorts on any weeklies but was thinking more along the lines of horizontal or vertical spread or combination of thereof.

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Old July 15th, 2014, 03:07 PM   #3480 (permalink)
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effective View Post
Nice post! Have you thought about or perhaps done weekly trades on ES. I personally would probably be uncomfortable with just naked shorts on any weeklies but was thinking more along the lines of horizontal or vertical spread or combination of thereof.

I have done and continue to do weekly on SPY & other etf for many years naked. ES essentially equals SPY with portfolio margin, on the surface. But SPY has better liquidity, less commission & most importantly, the portfolio cross margining system which reduces overall margin for other positions. In other words, SPY has less margin. Nothing to be scared of naked for DIVERSIFIED etfs./indices I think it is very hard to sell covered horizontals/verticals for weeklies as the range is just too close. Individual stocks I wouldn't ever touch naked, period.

I will post some recent trades up later, probably in another thread as this is the futures thread, going to sleep now..

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