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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:568,065 / 5,727
Last Reply:Yesterday (12:40 PM) Attachments:642

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Selling Options on Futures?

Old September 2nd, 2014, 03:59 PM   #3581 (permalink)
World'sWorstTrader
Knoxville Tennessee USA
 
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ron99 View Post
I have never done the ratio calculation. I look at delta and monthly ROI.

Please pardon my error. But on average what would your ratio of (Initial Margin)/ (Premium Sold) be?

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Old September 2nd, 2014, 04:27 PM   #3582 (permalink)
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SMCJB View Post
Different people have different rules but must people risk 2%-5% of their account on one trade.

It depends on how much you lost on the open trade. It's possible that you could not only wipe out your entire account but also that your broker could require you to send them more money to cover your losses.

It sounds really scary:-(

If your allocating 20% of your account to a single trade I think its likely that you'll blow the account.

I won't do this ever again.

Remember that while the intent of margin is to cover potential losses on the position, it's not guaranteed to cover them. When excessive moves happen the daily PnL change can easily surpass the margin requirement.

Thanks for the clarification.

I have an IB account as well. I find that their margin requirements are very high compared to some other brokers, especially for options. Their liquidation process is rather harsh as well - market orders - hopefully there is a liquidate market when they liquidate. Given that they internalize a lot of their order flow to an affliate it's probably not surprising. There are lots of complaints that they will actually force liquidate BEFORE you actually run out of margin money. Did you know that you can go in an designate the order in which you would like them to liquidate.

I didn't know this. I will close my IB acct anyway.


I will be really cautious in option selling by managing risk closely, thanks for all the information and knowledge I learn in this thread so far.


Last edited by daydayup8; September 2nd, 2014 at 04:41 PM.
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Old September 2nd, 2014, 04:57 PM   #3583 (permalink)
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datahogg View Post
Please pardon my error. But on average what would your ratio of (Initial Margin)/ (Premium Sold) be?

To be honest I have no idea. I didn't start keeping track of the beginning IM for a trade in my database until mid last year.

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Old September 2nd, 2014, 05:36 PM   #3584 (permalink)
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Cleveland Ohio/United States
 
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datahogg View Post
Please pardon my error. But on average what would your ratio of (Initial Margin)/ (Premium Sold) be?

FWIW, my ratio is 5.3 over approx 340 trades over the last year. I have no idea if this is good or bad.

If you have any questions please send me a Private Message or use the futures.io "Ask Me Anything" thread
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Old September 2nd, 2014, 05:54 PM   #3585 (permalink)
Trading for Fun
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daydayup8 View Post
I didn't know this. I will close my IB acct anyway.


I will be really cautious in option selling by managing risk closely, thanks for all the information and knowledge I learn in this thread so far.

If I were just starting with selling futures options, I think I'd stick with IB for a while. Reasons:

1. It's a large and very financially sound firm. They have a high excess capital ratio and on an absolute basis, it's a big number, too.

2. You'll get real time quotes, an options chain with real time IV and greeks (including a mouseover bid/ask IV), and a position manager to view your greeks and IV by individual option plus the greeks in the aggregate.

3. A good margin reporting system that lets you know before you put on a trade how much it's going to take. Likewise it tells you how much you'll free up if you exit a position.

4. Commissions are 85 cents per side plus exchange fees. For $3/mo (waived if you meet the base commission requirement) you can get decent Reuters commodity news and limited analysis.

5. Top notch daily and monthly activity reports, margin reports, portfolio analysis, and two types of risk reports - VaR and Stress Test. I don't think there are many firms that can match them in this aspect.

6. A good, free mobile app that's offers more than just quotes and a snapshot of existing positions.

The downside, of course, is that some of their margins for short futures options are way higher than SPAN. I've written about this before as have others, and I included a comparison table with RJO. You can offset some of this with strangles or other spreads but here's the bigger issue: It sounds like you are new to selling options and getting the most bang for your margin buck should not be the priority at this stage.

Even at IB, selling options outright (no strangles or defined risk spreads), you'll have plenty of room to make outsized returns, or to hang yourself. You can be more profitable by finding a firm with SPAN minimum margins, but first I think you should really understand what you're doing and knowing how price-time-IV affect the greeks and your risk:reward.


Last edited by CafeGrande; September 2nd, 2014 at 06:04 PM.
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Old September 2nd, 2014, 06:05 PM   #3586 (permalink)
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IV rank for futures for TOS (source Tastytrade)

declare lower;
declare hide_on_intraday;

def vol =
if (close-close("/ES"))==0 then close("VIX")/100
else if (close-close("/CL"))==0 then close("OIV")/100
else if (close-close("/GC"))==0 then close("GVX")/100
else if (close-close("/SI"))==0 then close("VXSLV")/100
else if (close-close("/NQ"))==0 then close("VXN")/100
else if (close-close("/TF"))==0 then close("RVX")/100
else if (close-close("/YM"))==0 then close("VXD")/100
else if (close-close("/6E"))==0 then close("EVZ")/100
else if (close-close("/ZN"))==0 then close("VXTYN")/100
else imp_volatility();
input DisplayIVPercentile = yes;
input DisplayImpVolatility= yes;
input DisplayDaily1StandardDev = yes;
input DisplayWeekly1StandardDev = yes;
input DisplayMonthly1StandardDev = yes;

input TimePeriod = 252;

def data = if !isNaN(vol) then vol else vol[-1];
def hi = highest(data, TimePeriod);
def lo = lowest(data, TimePeriod);
plot Percentile = (data - lo) / (hi - lo) * 100;
def lowend = Percentile < 25;
def highend = Percentile > 50;

addlabel(DisplayIVPercentile , concat("IV Rank: ",aspercent(Percentile /100)), if lowend then color.red else if highend then color.green else color.yellow);

addlabel(DisplayImpVolatility, concat("ImpVolatility: ",aspercent(vol)), if lowend then color.red else if highend then color.green else color.yellow);

def ImpPts = (vol / Sqrt(252)) * close;
AddLabel(DisplayDaily1StandardDev , Concat("Daily 1 SD +/- $", Astext( ImpPts, NumberFormat.TWO_DECIMAL_PLACES)), if lowend then color.red else if highend then color.green else color.yellow); ;

def ImpPts2 = (vol / Sqrt(52)) * close;
AddLabel(DisplayWeekly1StandardDev, Concat("Weekly 1 SD +/- $", Astext( ImpPts2, NumberFormat.TWO_DECIMAL_PLACES)), if lowend then color.red else if highend then color.green else color.yellow); ;

def ImpPts3 = (vol / Sqrt(12)) * close;
AddLabel(DisplayMonthly1StandardDev, Concat("Monthly 1 SD +/- $", Astext( ImpPts3, NumberFormat.TWO_DECIMAL_PLACES)), if lowend then color.red else if highend then color.green else color.yellow); ;

plot LowVol = 25;
plot HighVol = 50;

LowVol.SetDefaultColor(GetColor(5));
HighVol.SetDefaultColor(GetColor(6));

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Old September 2nd, 2014, 06:08 PM   #3587 (permalink)
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CafeGrande View Post
If I were just starting with selling futures options, I think I'd stick with IB for a while. Reasons:

1. It's a large and very financially sound firm. They have a high excess capital ratio and on an absolute basis, it's a big number, too.

2. You'll get real time quotes, an options chain with real time IV and greeks (including a mouseover bid/ask IV) and a position manager to view your greeks and IV by individual option and the greeks in the aggregate.

3. A good margin reporting system that lets you know before you put on the trade how much it's going to take. Likewise it tells you how much you'll free up if you exit a position.

4. Commissions are 85 cents per side plus exchange fees. For $3/mo (waived if you meet the base commission requirement) you can get decent Reuters commodity news and limited analysis.

The downside, of course, is that some of their margins for short futures options are way higher than SPAN. I've written about this before as have others, and I included a comparison table with RJO. You can offset some of this with strangles or other spreads but here's the bigger issue: It sounds like you are new to selling options and getting the most bang for your margin buck should not be the priority at this stage.

Even at IB, selling options outright (no strangles or defined risk spreads), you'll have plenty of room to make outsized returns, or to hang yourself. I don't understand this, how to do that? for example, if I want to sell 1 ES put 1650 with 90 DTE, the IM will possible be $3000, if I use the 3x rule, I maybe only sell 2 at most in my 20K acct, it will be hard to have outsized returns. You are right, I am pretty new to option selling, but not very new to option. I started by day trading option buying in 2008 when I just started to trade (a very different beginning with most traders), I lost a fortunate by doing that. Now I am pretty conservative with the trading (lesson learned in a hard way). Thank you very much for the suggestions.
You can be more profitable by finding a firm with SPAN minimum margins, but first I think you should really understand what you're doing and knowing how price-time-IV affect the greeks and your risk:reward.

I am not familiar the post style yet, my reply can't even be posted. "
The message you have entered is too short. Please lengthen your message to at least 1 characters."

Edit: IB is a great broker with a lot of good tools, I have been with them since 2008. The only reason I leave is because the margin issue with option selling.

Edit: I have about 10 books about option greeks and strategies and I read most of them, but they are all for option buying, Cordier's book is the first and only one about option selling. His book is by far the best:-)


Last edited by daydayup8; September 2nd, 2014 at 06:44 PM.
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Old September 2nd, 2014, 07:19 PM   #3588 (permalink)
Trading for Fun
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DayDayUp -

Re IB, it's going to depend on time of year, product and strategy, but in periodic checks, I've found them to be OK on the grain and lean hog options, and as noted above, especially if one employs a spread to offset some of the risk. The base contract size and the leverage is so much greater in futures (and short futures options) compared to equities, that there are plenty of opportunities to make or lose a good chunk of money at IB, even if you're not using SPAN minimum margins.

That said, perhaps IB is still not close to competitive with ES margins even if you were to buy a lower priced put (put vertical aka bull put spread) or sell a call (strangle). I stick to physical commodities and I've moved some of my crude oil and softs trades elsewhere because of the margin situation.

I think the Cordier book is pretty good (it also doesn't have a lot of competition). If I recall,

(1) a lot of his examples brought in $300 to $700 per option in credit, so they were probably less than 20% out of the money and more than 20 delta.

(2) he also suggested using up to 50-70% of Net Liquidating Value (NLV) as margin. I don't remember if that % was based on initial margin or maintenance margin.

Cordier offers one way to skin a cat, but his style is a lot more aggressive than the method Ron opened this thread with.

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Old September 2nd, 2014, 08:50 PM   #3589 (permalink)
World'sWorstTrader
Knoxville Tennessee USA
 
Futures Experience: Intermediate
Platform: TOS
Favorite Futures: ES, NQ, CL, /6E futures options.
 
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kevinkdog View Post
FWIW, my ratio is 5.3 over approx 340 trades over the last year. I have no idea if this is good or bad.

I don't have an exact number , but it seems to range between 5 and 7. I don't consider anything over 10.
Thanks.

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Old September 2nd, 2014, 09:50 PM   #3590 (permalink)
Elite Member
tennessee/USA
 
Futures Experience: Intermediate
Platform: Quotetracker, TOS
Broker/Data: OX TOS
Favorite Futures: ES
 
Posts: 83 since Aug 2014
Thanks: 267 given, 8 received


You are right, Cordiers' method is pretty aggressive, so I will stick to Ron's since there are quite a few successful traders here to be models;-) thank you again for your help.

CafeGrande View Post
DayDayUp -

Re IB, it's going to depend on time of year, product and strategy, but in periodic checks, I've found them to be OK on the grain and lean hog options, and as noted above, especially if one employs a spread to offset some of the risk. The base contract size and the leverage is so much greater in futures (and short futures options) compared to equities, that there are plenty of opportunities to make or lose a good chunk of money at IB, even if you're not using SPAN minimum margins.

That said, perhaps IB is still not close to competitive with ES margins even if you were to buy a lower priced put (put vertical aka bull put spread) or sell a call (strangle). I stick to physical commodities and I've moved some of my crude oil and softs trades elsewhere because of the margin situation.

I think the Cordier book is pretty good (it also doesn't have a lot of competition). If I recall,

(1) a lot of his examples brought in $300 to $700 per option in credit, so they were probably less than 20% out of the money and more than 20 delta.

(2) he also suggested using up to 50-70% of Net Liquidating Value (NLV) as margin. I don't remember if that % was based on initial margin or maintenance margin.

Cordier offers one way to skin a cat, but his style is a lot more aggressive than the method Ron opened this thread with.


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