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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:569,198 / 5,728
Last Reply:December 6th, 2016 (05:26 PM) Attachments:642

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Selling Options on Futures?

Old September 5th, 2014, 01:55 PM   #3611 (permalink)
Trading for Fun
St Paul, MN, USA
 
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daydayup8 View Post
Believe it or not, that was exactly what I did before.

In summary, I consider myself being a bold trader before and now transferred to a more intelligent trader.

Cheers:-)

If you're switching/have switched to a broker that offers better short options margin on the products you trade, don't add too many positions just because you now have more "selling power."

We've had an extended period of low volatility in VIX, crude oil, precious metals, and so on. One of these days that will change and you need to be prepared for short option premiums that could soar, plus margins that could double or triple. Natural gas Jan-Feb 2014 is a good example of what can happen.

I'm not a Chicken Little - just some friendly advice because option selling has been relatively easy (calm mkts) for a long time.

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Old September 5th, 2014, 02:01 PM   #3612 (permalink)
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Thank you, I was about to add a little CL option selling later today, what you said make me reconsider my decision. VIX has been at this low level for so long, that does feel uncomfortable for our option sellers.

CafeGrande View Post
If you're switching/have switched to a broker that offers better short options margin on the products you trade, don't add too many positions just because you now have more "selling power."

We've had an extended period of low volatility in VIX, crude oil, precious metals, and so on. One of these days that will change and you need to be prepared for short option premiums that could soar, plus margins that could double or triple. Natural gas Jan-Feb 2014 is a good example of what can happen.

I'm not a Chicken Little -- just some friendly advice because option selling has been relatively easy for a long time and that will eventually change.


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Old September 5th, 2014, 02:09 PM   #3613 (permalink)
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daydayup8 View Post
Thank you, I was about to add a little CL option selling later today, what you said make me reconsider my decision. VIX has been at this low level for so long, that does feel uncomfortable for our option sellers.

Since nobody knows when VIX will go up you shouldn't miss out on trades now because it may not happen till next year.

Just always have an exit plan because other things besides VIX can move futures against you.

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Old September 5th, 2014, 02:30 PM   #3614 (permalink)
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Yes, I start to have a template to manage my position now even I have only 2 ES short put, and I am very clear about the exit thanks to your strategy. I try my best to balance everything, I need to figure out SPAN now called CORE next step.
I will continue to add position but in a slow pace. I traded CL and NG future before, so I might add CL put first.


ron99 View Post
Since nobody knows when VIX will go up you shouldn't miss out on trades now because it may not happen till next year.

Just always have an exit plan because other things besides VIX can move futures against you.


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Old September 5th, 2014, 02:52 PM   #3615 (permalink)
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enderqa View Post
In this case, where the option is OTM but close and you are assigned, would you not make money?

Actually, that is very close to what happened. Back when I was pretty new to selling options I had a call that I kept holding trying to run out the clock. Prices moved high enough that it was ITM during the last day of trading, but by the close it had dropped back below my strike. I thought for sure that it had expired worthless and had nothing to worry about. I'm not sure when the buyer decided to exercise their option, but the next day I was assigned a short futures contract. I was lucky that my broker notified and by the time I exited the futures contract prices were even lower, so I was very fortunate and did make a profit.

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Old September 5th, 2014, 03:06 PM   #3616 (permalink)
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Old September 8th, 2014, 09:31 PM   #3617 (permalink)
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Sanity Check

Thanks for this thread. I need a sanity check. I'm an equity option trader and I never realized the margins seemed so good in future options.

I'm looking at Nov /CL options with a +/- 4 delta in TOS. Selling a short strangle on the 81/106 shows ~95% ITM prob and a 0.20 credit (the natural is 0.13 and the mid is 0.23). With 38 days left, the margin on 1 contract shows $860. So if held to expiration this is a 200/860=23% return on margin (ignoring commissions).

23% return for a 95% ITM prob trade seems a little amazing to me (ignoring how much actual cash you should have). Does this look correct or am I missing something? Are the fills horrible? Why does TOS not report the mid price, but something in between?

Thanks in advance

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Old September 9th, 2014, 10:16 AM   #3618 (permalink)
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dbh21 View Post
Thanks for this thread. I need a sanity check. I'm an equity option trader and I never realized the margins seemed so good in future options.

I'm looking at Nov /CL options with a +/- 4 delta in TOS. Selling a short strangle on the 81/106 shows ~95% ITM prob and a 0.20 credit (the natural is 0.13 and the mid is 0.23). With 38 days left, the margin on 1 contract shows $860. So if held to expiration this is a 200/860=23% return on margin (ignoring commissions).

23% return for a 95% ITM prob trade seems a little amazing to me (ignoring how much actual cash you should have). Does this look correct or am I missing something? Are the fills horrible? Why does TOS not report the mid price, but something in between?

Thanks in advance

I would calculate the return differently. ron99 has a better formula that takes into account the time to expiration. Basically the formula is (dailyreturn=credit/adj.margin/DTE) and then (monthlyreturn=(1+dailyreturn)^30-1). adj.margin is an adjusted margin. For simplicity say it's margin*2. A more detailed discussion of this formula can be found in the thread.

Using your TOS numbers, a 200 credit with a 860 margin with 37 DTE, gives a daily return of about 0.3% and a monthly return of about 10%.

A 95% probability that these options end OTM sounds rather reassuring, but futures, and especially CL, have the propensity to move in either direction suddenly. The point being that a 10% return entails quite a bit of risk. And selling options is managing unlimited risk.

It can be hard to get fills for CL options that are far OTM with only 37 DTE. This is because most of the theta value has decayed.

Lastly, I don't use TOS so I don't know what price they are quoting.

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Old September 9th, 2014, 01:12 PM   #3619 (permalink)
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Thanks for the response. I do understand how you are managing the actual margin, but I was just checking what I was seeing was accurate.

On another note, I wanted to backtest selling short strangles, specifically to see how bad it will get when the market makes a big move. I was thinking of having unbalanced puts and calls (more puts than calls), or hedging with OVX (but the OI is low), or even hedging the call side... just to see the performance during crisis situations. But, the backtest tools in TOS don't work with futures. I have built my own backtest tool, but the data for CL is extremely expensive compared to the equity data I already have.

Has anyone gone about backtesting strangles in CL? If so, how?

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Old September 9th, 2014, 01:34 PM   #3620 (permalink)
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dbh21 View Post
Thanks for the response. I do understand how you are managing the actual margin, but I was just checking what I was seeing was accurate.

On another note, I wanted to backtest selling short strangles, specifically to see how bad it will get when the market makes a big move. I was thinking of having unbalanced puts and calls (more puts than calls), or hedging with OVX (but the OI is low), or even hedging the call side... just to see the performance during crisis situations. But, the backtest tools in TOS don't work with futures. I have built my own backtest tool, but the data for CL is extremely expensive compared to the equity data I already have.

Has anyone gone about backtesting strangles in CL? If so, how?

I don't think back testing works. Experience works better.

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