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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:569,836 / 5,734
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Selling Options on Futures?

Old August 7th, 2014, 03:19 PM   #3511 (permalink)
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Question


k20a View Post
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.

Dear k20a,

I am young trader who has been selling options over the past 6 months. While I have had no loosing trades so far, I believe I should be constantly learning. Several of your posts on the "Selling Options on Futures?" forum have really resonated with my trading style. So I just wanted to reach out to you and as a few simple questions:

1. What ETFs do you follow most heavily? Which futures do you follow most heavily? I too am a concentrationist, and understand the value of only following a few underlyings, and not spreading your eggs too far apart.

2. I just want to clarify, do you place your stop order to buy back your naked positions when the loss is equal to 3 times the credit you initially received?

3. I currently use similar methodologies as you but with bull put spreads. I am curious, what sort of advantages come with using naked puts instead? My account is not really large enough for naked puts at the moment, but I still want to prepare myself for strategies I could use in the future.

Thank you in advance for taking the time to help me with some of these questions, it is appreciated.

Thank you,
djcline94

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Old August 7th, 2014, 03:43 PM   #3512 (permalink)
Market Wizard
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djcline94 View Post
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.

Welcome. Thanks for your input. We agree on some things and disagree on others. That is OK.

You are correct that we don't agree on the fundamentals. You certainly can predict some black swan moves. If there is a drought in the US during grain growing season you know that there will be a huge price increase. Drought in Brazil? Coffee is going much higher. Abnormally cold US winter? NG is going higher. Hogs get virus? LH going higher. And all of this has just happened in the last two years.

Your opinion on black swans applies more to equities than commodities. Black swans on equities are harder to predict. Commodities not so hard.

You have just been doing options on futures for a few months. You haven't been through some of the fundamental changes that have affected markets that many of us have. Experience is a great teacher. Five years from now you will have a different opinion of things.

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Old August 7th, 2014, 04:02 PM   #3513 (permalink)
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ron99 View Post
Welcome. Thanks for your input. We agree on some things and disagree on others. That is OK.

You are correct that we don't agree on the fundamentals. You certainly can predict some black swan moves. If there is a drought in the US during grain growing season you know that there will be a huge price increase. Drought in Brazil? Coffee is going much higher. Abnormally cold US winter? NG is going higher. Hogs get virus? LH going higher. And all of this has just happened in the last two years.

Your opinion on black swans applies more to equities than commodities. Black swans on equities are harder to predict. Commodities not so hard.

You have just been doing options on futures for a few months. You haven't been through some of the fundamental changes that have affected markets that many of us have. Experience is a great teacher. Five years from now you will have a different opinion of things.

Ron,

Thanks for the quick reply, but the section you quoted is from user K20a, not myself . Though I would like your opinion on the advantages of selling naked puts instead of selling bull put spreads? While I do not think my account is large enough to sell naked puts, I really look forward to when I can try out the strategy. Secondly, are you aware of which broker is currently providing the best margin requirements and exchange minimums?

Thank you,
djcline94

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Old August 7th, 2014, 04:03 PM   #3514 (permalink)
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djcline94 View Post
Ron,

Thanks for the quick reply, but the section you quoted is from user K20a, not myself . Though I would like your opinion on the advantages of selling naked puts instead of selling bull put spreads? While I do not think my account is large enough to sell naked puts, I really look forward to when I can try out the strategy. Secondly, are you aware of which broker is currently providing the best margin requirements and exchange minimums?

Thank you,
djcline94

Oops!

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Old August 8th, 2014, 12:49 PM   #3515 (permalink)
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Futures Edge on FIO

ron99 View Post
Welcome. Thanks for your input. We agree on some things and disagree on others. That is OK.

You are correct that we don't agree on the fundamentals. You certainly can predict some black swan moves. If there is a drought in the US during grain growing season you know that there will be a huge price increase. Drought in Brazil? Coffee is going much higher. Abnormally cold US winter? NG is going higher. Hogs get virus? LH going higher. And all of this has just happened in the last two years.

Your opinion on black swans applies more to equities than commodities. Black swans on equities are harder to predict. Commodities not so hard.

You have just been doing options on futures for a few months. You haven't been through some of the fundamental changes that have affected markets that many of us have. Experience is a great teacher. Five years from now you will have a different opinion of things.

Very interesting. Yes my statements were for equities. I have not looked at predicting commodities so it may be there. Still my belief is that all liquid, freely traded markets by world wide participants have the same degree of predictability/unpredidctability for the retail trader. You have raised somedthing worthwhile for me to investigate that may change my belief.

But another is thought is if you able to predict black swans with consistency, do you have the confidence to trade the moves outright directionally instead of selling options ? You can sell options normally until you detect a black swan, then switch to futures or a options directional strategy - you would make much more wouldn't you ?



djcline94 View Post
Dear k20a,

I am young trader who has been selling options over the past 6 months. While I have had no loosing trades so far, I believe I should be constantly learning. Several of your posts on the "Selling Options on Futures?" forum have really resonated with my trading style. So I just wanted to reach out to you and as a few simple questions:

1. What ETFs do you follow most heavily? Which futures do you follow most heavily? I too am a concentrationist, and understand the value of only following a few underlyings, and not spreading your eggs too far apart.

2. I just want to clarify, do you place your stop order to buy back your naked positions when the loss is equal to 3 times the credit you initially received?

3. I currently use similar methodologies as you but with bull put spreads. I am curious, what sort of advantages come with using naked puts instead? My account is not really large enough for naked puts at the moment, but I still want to prepare myself for strategies I could use in the future.

Thank you in advance for taking the time to help me with some of these questions, it is appreciated.

Thank you,
djcline94

I will just answer the futures part here, this is the futures thread I have already went offtopic on equities stuff enough in the futures thread.

1. I only like CL & NG, I have trouble getting filled at fair prices in other stuff for far OTM strikes. When I ramp up the account size, these are the only 2 I have found that are tradeable for me. CL & NQ are also somewhat correlated, so it's not ideal but I have no solution at the moment.

2. Depends on what R:R you want, if you want 1:3, you place order FOUR times the premium you received. You received $10 and want to risk $30, you place order at $40 if you get stopped you lose $40 minus $10 you received equalling $30 net, your risk. If you have place 3x premium means you are risking 1:2. That's upto you, I personally use 1:3 for monthly trades.

3. Naked gives you more range. You can sell a put strike of 80 for 13c naked, you get the 13c. If you do a bull put you sell the 80 you have to buy a 75 for around half the premium. So you only get 6c. Now if you are happy just picking up the 6c, you might as well just sell the 75 put naked instead of the spread for 6c. Your short strike will be at 75 naked vs 80 with the spread. Further OTM means lower delta means less risk when price goes against you. You save on commissions too which adds up in selling options.

Risk you are paying is of course being prone to unlimited risk (until underlying is 0 on downside). If you can manage your risk properly I think it is worthwhile to get the extra range.

If you have $1000 you should be able to sell 1 contract of CL, after factoring in 2x free margin. So you definitely should be able to sell naked if you are alreadying do verticals/bull puts..


----
Interesting that you are young and your style reasonates with mine. I am also quite young, currently trying to finish my undergraduate in finance. I started trading in high school, my happiest goal for 21st birthday was that I could open a damn US options account lol (it's 18 for equities only and 21 for options margin).

Maybe it is our youth's impatience & risk-taking that pushes us towards selling less time & concentrated positions. best of luck, well done for getting compounding on your side while you are young..you probably have a fair bit to learn when your first few losses comes - preserve through it and you should find good stuff after that. Keep the compounding going I have built up a decent size from compounding when I was 18 and now make what my friends who are now entering the workforce are quite jealous of.

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Old August 8th, 2014, 01:05 PM   #3516 (permalink)
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Thank you


k20a View Post
Interesting that you are young and your style reasonates with mine. I am also quite young, currently trying to finish my undergraduate in finance. I started trading in high school, my happiest goal for 21st birthday was that I could open a damn US options account lol (it's 18 for equities only and 21 for options margin).

Maybe it is our youth's impatience & risk-taking that pushes us towards selling less time & concentrated positions. best of luck, well done for getting compounding on your side while you are young..you probably have a fair bit to learn when your first few losses comes - preserve through it and you should find good stuff after that. Keep the compounding going I have built up a decent size from compounding when I was 18 and now make what my friends who are now entering the workforce are quite jealous of.

Wow, more similar than I even imagined! I'm 20 right now, just starting my junior year of undergraduate school as a finance major, and began trading initially when I was high school. My first few trades were simply buying stocks, but I quickly found myself diving into buying options. From there I moved on to credit spreads, and now I am entering the naked options arena . Great to see there are others like me out there! While credit spread were a great introduction to selling options for me, I definitely see the benefits of selling the naked options instead, which is what has brought me here, to continually learn more. My account has grown quite nicely over the last few years, and I want to continue to learn new strategies, so thank you for the input.

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Old August 8th, 2014, 04:39 PM   #3517 (permalink)
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Hey K20a,

You say that only CL and NG are liquid enough for you. Have your tried selling ES? It is very liquid. I have no problems with fills. Last week when we had the big sell off I was rolling out with no problems at all.

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Old August 8th, 2014, 05:11 PM   #3518 (permalink)
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Blaine View Post
Hey K20a,

You say that only CL and NG are liquid enough for you. Have your tried selling ES? It is very liquid. I have no problems with fills. Last week when we had the big sell off I was rolling out with no problems at all.

ES is liquid yes but I don't trade that as I already trade SPY/IWM in my equities account. No reason why you can't trade it in addition to other futures if you don't trade SPY.

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Old August 8th, 2014, 05:55 PM   #3519 (permalink)
Market Wizard
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k20a View Post
But another is thought is if you able to predict black swans with consistency, do you have the confidence to trade the moves outright directionally instead of selling options ? You can sell options normally until you detect a black swan, then switch to futures or a options directional strategy - you would make much more wouldn't you ?

I have been doing that. But I don't move 100% from one type of trading to the other.

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Old August 12th, 2014, 11:41 AM   #3520 (permalink)
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Options Spread management


Hi,
I would ask about option spread management. For example, sell LEV4 P145 and buy LEVP140. Spread price about 1$ and IM = 704$ (according to Zaner). Would you apply the same margin rule as for simple selling options or another formula?

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