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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:568,925 / 5,728
Last Reply:15 Hours Ago (05:26 PM) Attachments:642

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Selling Options on Futures?

Old August 2nd, 2014, 12:22 PM   #3501 (permalink)
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That article focuses mostly on PROFIT and leaves out a very important RISK, delta. For a extracting max profit goal, selling further away in time is the position to go for. From a risk managing standpoint, closer in expiry and taking it to expiry, closer in time is optimal.

Go look at delta risk for different DTE. More time you sell higher delta risk you are taking on, in exchange for a higher decay.

It's all a tradeoff, it's quite stupid to simply conclude 60 DTE is better than 30 DTE. Yes you will get higher decay and make more if you time really well and close it early, if you are right. But is it worth the extra risk or not - that's the factor you have consider which the article leaves out on the delta aspect. It does address the vega part but I can't believe he leaves out delta.

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Old August 2nd, 2014, 12:34 PM   #3502 (permalink)
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k20a View Post
That article focuses mostly on PROFIT and leaves out a very important RISK, delta. For a extracting max profit goal, selling further away in time is the position to go for. From a risk managing standpoint, closer in expiry and taking it to expiry, closer in time is optimal.

Go look at delta risk for different DTE. More time you sell higher delta risk you are taking on, in exchange for a higher decay.

It's all a tradeoff, it's quite stupid to simply conclude 60 DTE is better than 30 DTE. Yes you will get higher decay and make more if you time really well and close it early, if you are right. But is it worth the extra risk or not - that's the factor you have consider which the article leaves out on the delta aspect. It does address the vega part but I can't believe he leaves out delta.

If you go further out DTE then you should also go further OTM so the delta is the same, not higher.

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Old August 2nd, 2014, 03:47 PM   #3503 (permalink)
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ron99 View Post
If you go further out DTE then you should also go further OTM so the delta is the same, not higher.

Not on a relative basis.

Let's look at 0.03 delta.

SEP will be 104.5 (6.88% away from price) with 13 DTE
OCT will be 109(11.3% away from price) with 46 DTE
NOV will be 112(14.7% away from price) with 75 DTE

Current price 97.88.

SEP daily range will be 6.88%/13 days = 0.51% per day available
OCT daily range will be 11.3%/46days = 0.25% per day available
NOV daily range will be 14.7%/75 days = 0.19% per day available

Notice how it gets smaller the further out you go ? This is your higher delta risk. Further you go, less "range" (for option sellers, more "range" = less risk)

Another way to look at this: from Sep to Oct you get an extra 4.5 of range for extra month. From Oct to Nov you only get an extra 3 for another extra month. To Dec, you only get an extra 2.5 for another month. You are taking on the same extra time risk, but only given a smaller portion of safety.

Not many consider this, they only chase maximum time decay. You are compensated for this higher risk by the higher theta you get.

It's all down to personal preference if the extra theta is worth the extra risk. If you're chasing maximum profit for smallest amount of time, then go for the higher DTE. Options are 3 dimensional you can't look at it in 2 dimensions and only look at "75 DTE highest decay = best strike to sell" and ignore other factors.

If anyone can show me a fact/truth as the best DTE to sell which performs the best in ALL market conditions, then I will show you an arbitrage trade. No I probably won't show you I will probably put my life savings into it.

EDIT: data I used was for CL at the close of Fri the 1st of August.


Last edited by k20a; August 2nd, 2014 at 04:03 PM. Reason: added which contract
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Old August 2nd, 2014, 04:41 PM   #3504 (permalink)
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k20a View Post
Not on a relative basis.

Let's look at 0.03 delta.

SEP will be 104.5 (6.88% away from price) with 13 DTE
OCT will be 109(11.3% away from price) with 46 DTE
NOV will be 112(14.7% away from price) with 75 DTE

SEP daily range will be 6.88%/13 days = 0.51% per day available
OCT daily range will be 11.3%/46days = 0.25% per day available
NOV daily range will be 14.7%/75 days = 0.19% per day available

I don't use .03 delta for CL. I have stated previously in this thread that I trade CL options that are further than +25 strikes on calls and -20 on puts. So right now the closest strike for Nov CL calls I would consider is 125. 75 for puts.

That is what I consider a safe distance based on how much CL can move over time.

We'll have to agree to disagree on far OTM timing.

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Old August 3rd, 2014, 03:44 AM   #3505 (permalink)
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ron99 View Post
I don't use .03 delta for CL. I have stated previously in this thread that I trade CL options that are further than +25 strikes on calls and -20 on puts. So right now the closest strike for Nov CL calls I would consider is 125. 75 for puts.

That is what I consider a safe distance based on how much CL can move over time.

We'll have to agree to disagree on far OTM timing.

I think you missed the point of my post..I didn't say you use 0.03, I could've used 0.01 or 0.10 doesn't matter results are the same(as long as it's below 0.5). I simply showed that the article does not consider other risk and simply dismissed 30 DTE as the worse scenario. Yes it is if you only compare time decay. But I doubt anyone trades for maximum time decay without other factors considered.

This is what I posted for another group, my 2 option selling accounts for first 5 months of 2014 comparing selling weekly and monthly. This is for equities so it may not apply to futures, I tend to think they do as they are all options.

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Top one is selling weeklies bottom one is selling monthlies - weekly gave a smoother curve & slightly higher return.

After May I stopped doing higher DTE in equities.

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Old August 3rd, 2014, 05:19 PM   #3506 (permalink)
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k20a View Post
I think you missed the point of my post..I didn't say you use 0.03, I could've used 0.01 or 0.10 doesn't matter results are the same(as long as it's below 0.5). I simply showed that the article does not consider other risk and simply dismissed 30 DTE as the worse scenario. Yes it is if you only compare time decay. But I doubt anyone trades for maximum time decay without other factors considered.

This is what I posted for another group, my 2 option selling accounts for first 5 months of 2014 comparing selling weekly and monthly. This is for equities so it may not apply to futures, I tend to think they do as they are all options.

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Top one is selling weeklies bottom one is selling monthlies - weekly gave a smoother curve & slightly higher return.

After May I stopped doing higher DTE in equities.

Thanks for the info.

Can you summarize your methods and criteria for selling options? Do you sell naked options or verticals?

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Old August 3rd, 2014, 07:32 PM   #3507 (permalink)
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k20a View Post
I think you missed the point of my post..I didn't say you use 0.03, I could've used 0.01 or 0.10 doesn't matter results are the same(as long as it's below 0.5). I simply showed that the article does not consider other risk and simply dismissed 30 DTE as the worse scenario. Yes it is if you only compare time decay. But I doubt anyone trades for maximum time decay without other factors considered.

This is what I posted for another group, my 2 option selling accounts for first 5 months of 2014 comparing selling weekly and monthly. This is for equities so it may not apply to futures, I tend to think they do as they are all options.

Top one is selling weeklies bottom one is selling monthlies - weekly gave a smoother curve & slightly higher return.

After May I stopped doing higher DTE in equities.

Too small a sample size to give a true ROI difference between types of trading over different market conditions.

How did the weeklies do last week?

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Old August 3rd, 2014, 10:16 PM   #3508 (permalink)
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ron99 View Post
Too small a sample size to give a true ROI difference between types of trading over different market conditions.

How did the weeklies do last week?

I have been interested in this part of the thread as I trade a lot of weeklies. I like them because they expire so fast and you have a nice equity curve. Then you have a week like last week. I got hammered pretty good before I even had chance to act. My delta went from like .04 to .18 on ES in hours. I looked at what the move would have done on a .02 60 dte and it went to a .03. I'm thinking I need to start moving out to protect myself and close them early once I hit a profit target. The weeklies are like crack. You get instant gratification watching them expire every week.

Anymore thoughts on this? Good stuff here.

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Old August 4th, 2014, 02:01 AM   #3509 (permalink)
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datahogg View Post
Thanks for the info.

Can you summarize your methods and criteria for selling options? Do you sell naked options or verticals?

Keep in mind this is for equities but I think everything applies to all options except margin.

-Naked strangle, sometimes only one side if other side has crap premium. Verticals I don't like really kills your win rate.
-ETFs only, absolutely NO individual stock. Eliminates individual market risks like company fraud or invention of cancer cure.
-As far OTM as possible. I also use volatility(both IV & HV) to determine how far is safe probability wise to sell.
-Almost max margin, don't need to leave spare. Your premium stop will trigger before you get margin called 99% of time. If you get margin called then you didn't follow your premium stop and you should stop selling options.
-Can enter end of last week or start of week or even middle of week if premium are good. That is up to discretion.
-I have a friend that enters on Thursday/Friday and closes on Tuesday/Wednesday and he is doing equally as well as me.
-Stop loss is 3x premium (total premium - combined if strangle).
-Usually margin frees up as trade nears end and premium evaporates then you can sell more for extra icing, I like to do intraday trades.


ron99 View Post
Too small a sample size to give a true ROI difference between types of trading over different market conditions.

How did the weeklies do last week?

Yes I agree it is quite a small sample size but we have had most market conditions.

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Start of year til end of may we've have up, sideways and violent downswings during my testing period. I may pick this up again in futures forward live testing of 60ish DTE vs 30ish DTE since I am not going to be trading weeklies yet in futures until liquidity picks up.

Weeklies had no drama last week.

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I did not really make 4% last week, just the open positions fluctuated and IB statements exaggerate it a bit for such a short period as they use the ask price for closing price to calculate end of day and far OTM options tend to have wide spreads.

FYI, last week's positions at no point during anytime of the week did the premium go above what I sold them for mainly because the move happened on Thu & Fri. If they happened on Mon & Tue and today was Wednesday I would probably be under pressure right now. My last loss happened at end of Jan, rest of year has been smooth sailing.

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Old August 4th, 2014, 11:15 AM   #3510 (permalink)
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k20a View Post
Not on a relative basis.

Let's look at 0.03 delta.

SEP will be 104.5 (6.88% away from price) with 13 DTE
OCT will be 109(11.3% away from price) with 46 DTE
NOV will be 112(14.7% away from price) with 75 DTE

Current price 97.88.

SEP daily range will be 6.88%/13 days = 0.51% per day available
OCT daily range will be 11.3%/46days = 0.25% per day available
NOV daily range will be 14.7%/75 days = 0.19% per day available

Notice how it gets smaller the further out you go ? This is your higher delta risk. Further you go, less "range" (for option sellers, more "range" = less risk)

Another way to look at this: from Sep to Oct you get an extra 4.5 of range for extra month. From Oct to Nov you only get an extra 3 for another extra month. To Dec, you only get an extra 2.5 for another month. You are taking on the same extra time risk, but only given a smaller portion of safety.

Not many consider this, they only chase maximum time decay. You are compensated for this higher risk by the higher theta you get.


It's all down to personal preference if the extra theta is worth the extra risk. If you're chasing maximum profit for smallest amount of time, then go for the higher DTE. Options are 3 dimensional you can't look at it in 2 dimensions and only look at "75 DTE highest decay = best strike to sell" and ignore other factors.

If anyone can show me a fact/truth as the best DTE to sell which performs the best in ALL market conditions, then I will show you an arbitrage trade. No I probably won't show you I will probably put my life savings into it.

EDIT: data I used was for CL at the close of Fri the 1st of August.

Thats because volatility increases at the rate of square root of time and not linearly/1:1.
ie 2 month volatility ~ 1 month volatility * SQRT(2)

Also commodities like CL have very distinct forward curve structures. Deferred contracts are less volatile than prompt contracts.

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