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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:567,857 / 5,727
Last Reply:11 Hours Ago (12:40 PM) Attachments:642

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Selling Options on Futures?

Old October 19th, 2014, 09:13 AM   #3741 (permalink)
World'sWorstTrader
Knoxville Tennessee USA
 
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ticks View Post
Thanks to Ron and other posters on this thread.

I have not had time to read this thread so what I am posting may have already been covered.

I have traded options on futures for about 8 years. My approach or strategy is quite different. I am selling what some label a synthetic strangle. My trades are entered Delta Neutral -- for example: CL long 1000 deltas and short 1000 deltas. I am ATM in most cases. Therefore I collect the highest amount of premium and of course benefit from the most time decay as I am a seller of options. Of course it would seem that I am thereby assuming the most risk.

For example say I sell 2 ATM CLZ4 Call options and receive more than $4,500 in premium which goes in part to offset my margin. My margins are relatively low due to SPAN margin on my Portfolio TOS account.

Now a typical trade I will sell the ATM calls and at the same time buy a CL futures contract creating a synthetic strangle. This will also lower margins because I have a "covered" position -- I am both long and short the CL. I am trading the active month futures with about 30 days to expiration.

Obviously if I had sold OTM options I would be collecting about $1000 in premium on 2 contracts. So far less premium but less apparent risk.

Managing the trade is my "job" during the time in the trade. I manage the deltas by taking profits on the position when the market permits. The more volatile the trading the more opportunity I have to capture profits but even without movement I am collecting about $100 per day in theta (more of course when closer to expiration). When I have profits of $300 or so on one side of the trade my deltas have increased and so I buy back the profitable calls and then sell further out of the money calls to again put the trade at close to neutral deltas. Last Friday October 17, 2014 -- I had the opportunity to make several trade adjustments which netted me $970 for the day.

Having both sides of the market (Short Calls vs. Long Futures) will allow me to book realized profits on one side of the trade and hold the other side as an "unrealized" loss waiting for the market to reverse direction and then "rinse and repeat". This method does require more monitoring than just holding till expiration but since I do not have to be glued to the screen it is not stressful. I do hold to about 10 days to expiration and have alerts in place to ring my phone should the trade ever require management when I am away from the computer.

Thanks again to all on this thread for your helpful posts which indicates a knowledgeable group of posters. I may have to spend more time with BM group and even pop for an elite membership


This is very interesting. You are basically staying delta neutral, and hopefully making gains while staying delta neutral.

"hold the other side as an "unrealized" loss waiting for the market to reverse direction"
On the average, how large has your "unrealized" loss become for this period.

Can you share how your performance has been over the last 8 years? How did things work during last weeks
sell off. What was your worst loss using this method?

Isn't your vega very large when selling ATM calls. Doesn't your vega move your position quite a bit?

Thanks for sharing.

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Old October 19th, 2014, 04:18 PM   #3742 (permalink)
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leinster View Post
@ticks how do u deal with option market been closed yet futures open. Do you just do this in futures or stocks also I presume just futures as more volatile? Have you tested this with option vue or otherwise ?

Leinster: Thanks for the question. Options on some futures are open on the overnight markets but the spreads are wide and volume is low so good fills are a problem. The futures are also slow and wider during the the nighttime markets. So I rarely trade during that time but I sometimes put in a limit order at my price and occasionally get a good fill. Futures are my preferred markets but I do trade stocks when they meet my criteria. In any underlying either stocks, bonds or futures I am interested only in larger priced underlying products. That is I prefer stocks trading at higher prices like NFLX, PCLN, GOOG rather than MSFT or WMT. Of course the reason for that is I want stocks that move and have Higher Premiums on the options.

Volatility always is a consideration on both options and futures. I like high vol, as then I collect more premium as an option seller. Plus it is a determinant for what strategy I employ.

As to using optionvue or other backtesting tools: I have not used these to backtest. I have enough "testing" from my own fairly sizable time trading this style or strategy. I have had a trial on optionvue and believe it to be a great tool but I don't need it as my platform has most of the same analytical tools that I found with optionvue and it is free. Optionvue, I believe, is pricey for the tools needed to trade profitably especially when you have a good free broker platform.

Does this clarify? If not please let me know...

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Old October 19th, 2014, 04:36 PM   #3743 (permalink)
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Response to Datahogg:



datahogg View Post
This is very interesting. You are basically staying delta neutral, and hopefully making gains while staying delta neutral.

"hold the other side as an "unrealized" loss waiting for the market to reverse direction"
On the average, how large has your "unrealized" loss become for this period.

Can you share how your performance has been over the last 8 years? How did things work during last weeks
sell off. What was your worst loss using this method?

Isn't your vega very large when selling ATM calls. Doesn't your vega move your position quite a bit?

Thanks for sharing.

Datahogg, (love your handle) Re: "hold the other side as an "unrealized" loss waiting for the market to reverse direction" On the average, how large has your "unrealized" loss become for this period.

This is not a "fixed amount" but I determine how far to let this loss accumulate based on several factors: How much time do I have left till expiration, How do I now view the market from the standpoint of when will I again get a "two sided market" so that the losing side will now become a winning side. I have a good determinant for this but it is perhaps best shared with some pictures and I am not sure how to post those. If anyone could assist me how to post I would appreciate the help. Perhaps someone could either direct me to a place on this forum to learn or maybe skype me at "before618" on skype. Most markets I trade and not trending in one direction for very long and become cyclical. After-all the Black Sholes and other options pricing models are based on Random Market action and not on the belief that markets "trend".

If I must be forced to give a number I probably would say about $500 before I would consider taking some defensive action which is rather easily done without closing the position.

Does this answer????

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Old October 19th, 2014, 04:37 PM   #3744 (permalink)
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Hi @ticks the reason I asked was if ur selling put options on cl for instance and market as we know is not fully trade able with large spreads on option if ur future is gaining in price the spread on the option could be quote significant to mean the trade is in a losing position. If volatility spikes then the option u have sold gains value significantly how do u deal with that I'm very interested in ur method as I have seen on multiple occasions undervalued deep itm options relative to future or stock prices.

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Old October 19th, 2014, 04:57 PM   #3745 (permalink)
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Futures Edge on FIO
Datahogg:

Just noticed I did not answer this question: "Can you share how your performance has been over the last 8 years? How did things work during last weeks sell off. What was your worst loss using this method?"

When I first started trading using this method I did have some losing trades. My biggest loss back then was $2700 and change. I made stupid mistakes that looking back now where due to a lack of understanding the greeks and my use of the trading tools that were part of my platform.

Since that loss I am reluctant to say that my losses are almost a non-event. That is if I follow my mechanical trading plan I will rarely have a losing trade and the loss would be tiny. I don't want to come off as bragging but my results are not due to some genius but lots of hard work and analysis. I do have the probabilities on my side as well as the math and science -- if that exists.

As to last weeks sell off in oil: It did not affect my trades or P&L. (Today is Sunday and I did go to Thank The Lord at church for His Grace in allowing me to be engaged in such a wonderful business of Self Directed Trading.)

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Old October 19th, 2014, 05:34 PM   #3746 (permalink)
World'sWorstTrader
Knoxville Tennessee USA
 
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ticks View Post
Datahogg:

Just noticed I did not answer this question: "Can you share how your performance has been over the last 8 years? How did things work during last weeks sell off. What was your worst loss using this method?"

When I first started trading using this method I did have some losing trades. My biggest loss back then was $2700 and change. I made stupid mistakes that looking back now where due to a lack of understanding the greeks and my use of the trading tools that were part of my platform.

Since that loss I am reluctant to say that my losses are almost a non-event. That is if I follow my mechanical trading plan I will rarely have a losing trade and the loss would be tiny. I don't want to come off as bragging but my results are not due to some genius but lots of hard work and analysis. I do have the probabilities on my side as well as the math and science -- if that exists.

As to last weeks sell off in oil: It did not affect my trades or P&L. (Today is Sunday and I did go to Thank The Lord at church for His Grace in allowing me to be engaged in such a wonderful business of Self Directed Trading.)

Thanks
Looking at some positions similar (close to) yours on TOS, it looks like the largest risk factor is implied volatility (VEGA).
Since you put your positions on about 30 DTE, this helps a lot with VEGA. But still it looks like VEGA is about
3 to 8 times larger than THETA. It looks like the worst case scenario is to put on the position with a very low IV
and have it to increase dramatically as CL did last week. When DELTA does go some amount + or - do you
sell any far out of the money puts or calls to re balance? The ideal would seem to be put on this position when IV is
very high and have a significant gain when IV decreases.

Thanks again for sharing.

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Old October 19th, 2014, 06:55 PM   #3747 (permalink)
Market Wizard
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datahogg View Post
it looks like the largest risk factor is implied volatility (VEGA).

If you fully delta hedge an option portolio, and keep it flat all the time, you are effectively trading vega. If you buy an option and realized volatility is greater than the implied volatility you paid, then the profits on your dalta hedging plus options will be greater than the premium paid on the option purchases. This is how many option market makers manage their business.

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Old October 19th, 2014, 07:30 PM   #3748 (permalink)
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leinster View Post
Hi @ticks the reason I asked was if ur selling put options on cl for instance and market as we know is not fully trade able with large spreads on option if ur future is gaining in price the spread on the option could be quote significant to mean the trade is in a losing position. If volatility spikes then the option u have sold gains value significantly how do u deal with that I'm very interested in ur method as I have seen on multiple occasions undervalued deep itm options relative to future or stock prices.

Leinster: You are correct that options that are Far Out of the Money are not widely traded and therefore the bid/ask spreads on those options may be wider. Please note that I do not trade Far OTM options. I am usually close to the money, which almost always have narrow bid/ask spreads. Leinster, you are also correct that a large move in the future will, of course, in most cases increases the vega (implied volatility) which would increase the price of the options. How would that affect my trade -- well, the futures that I sold short would be losing money in your above scenario (short puts and short futures); at the same time the puts would be gaining value. So I sell the puts at a Profit and replace those with puts that are further out of the money to bring the trade back to a near delta neutral position. A big spike in volatility is usually "forecast-able" so if I was diligent in following my trading plan I may have prepared for that increase in vol.

If this is not clear please let me know so that I may give you some examples. Thanks Leinster.

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Old October 19th, 2014, 08:20 PM   #3749 (permalink)
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datahogg View Post
Thanks
Looking at some positions similar (close to) yours on TOS, it looks like the largest risk factor is implied volatility (VEGA).
Since you put your positions on about 30 DTE, this helps a lot with VEGA. But still it looks like VEGA is about
3 to 8 times larger than THETA. It looks like the worst case scenario is to put on the position with a very low IV
and have it to increase dramatically as CL did last week. When DELTA does go some amount + or - do you
sell any far out of the money puts or calls to re balance? The ideal would seem to be put on this position when IV is
very high and have a significant gain when IV decreases.

Thanks again for sharing.

Datahogg: You are right in what you say. Remember that the Vega is one of the Risk Perimeters that I must be aware of and take necessary steps to manage. As a seller of the options I am rewarded by the Premium for writing the options and therefore are collecting Theta. It is nice to try to have low ratios of Vega to Theta. Yes, you can ameliorate the "bad ratio" by selling some puts or calls. So far, I have not addressed my entry requirements as to whether or not I am selling volatility or buying vol. If volatility is relatively Low when I entered I may decide to buy rather than sell the options. I do monitor the OVX (crude oil vol index) as well as look at the statistical vol vs. the implied vol when entering the trade position. As you know, Volatility is mean reverting so a lot of my decision is based on how close to expiration I am. I am often reluctant to fore-go Theta -- so I need to be reasonably certain that vol will not go back to its mean during the duration of my trade. I can also hedge the vol in other ways to overcome the increase in vega. I sometimes do this by adding trades in other markets some related like XLE, XOP, QM or even further out Crude Oil Future contracts.

You are correct that: "The ideal would seem to be put on this position when IV is very high and have a significant gain when IV decreases." Lower vol has not, however, precluded me from entering this trade -- knowing that I am able to hedge the vega when necessary. I love the Theta too much to become a buyer rather than a net seller. This is in part a matter of each trader's preference for the type of risk he likes. Do you like to pay theta and therefore have positive Gamma and limit risk to what you paid for the options? For me, I do not mind the risk of the possibility of increased vega. You mention that Vega is the "largest risk" in your mind. For me it is the Gamma. To each his own. As the song says: "One man's Ceiling is another man's Floor." Viva la difference. That is what makes trading. I love it. BTW, last week I was not hurt by the increased vol which was dramatic.

Hope this gives some insight. I do respect your view. Thanks

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Old October 19th, 2014, 08:23 PM   #3750 (permalink)
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SMCJB View Post
If you fully delta hedge an option portolio, and keep it flat all the time, you are effectively trading vega. If you buy an option and realized volatility is greater than the implied volatility you paid, then the profits on your dalta hedging plus options will be greater than the premium paid on the option purchases. This is how many option market makers manage their business.

SMCJB: Brilliantly stated. Thanks!

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