I checked all options fulfilling the conditions of Cordier & Gross (minimum value 400 US $, maximum time period until expiry 6 months), adding delta less than 0.1 .
As of today, there remain Energies, Metals and Coffee. No Grains, no currencies, no indices, no financials, almost no softs.
The only way seems to be to compromise on one of the conditions. Either sell options on futures of the commodities mentioned above. Or sell cheaper options taking the risk of being short a larger number of options and failing in a large move of the underlying against them. Or sell options with a longer time until expiry taking the higher risk of changes in the fundamentals. Or sell options with a delta of up to 0.2, which I personally prefer in many cases. But this is a matter of the personal style of trading, and all of these compromises have their pros and cons.
Thanks for the cogent explanation. It's something you want to express as a rolling 30-day OTC figure if you're intent on getting into historical data. I trade these from time to time. They're a large haircut if done under RegT ($150K one lot in NDX). Stick to FOs or look to trade a 132 in share vol. Shoot me a note if you have any questions.
A few weeks ago when I posted the first chart, a 2 Std Dev move for March futures based on futures price, days to expiration and ATM implied volatility was about 7 bucks.
Now it's about 9 bucks. Even though time was whittling away the range of possible outcomes, it was far outweighed by changes in price and implied volatility. That's neither here nor there, just a reminder to those selling far OTM options that it doesn't take a crazy period like we had in Jan/Feb 2014 to have a position go against you.
The blue line is a monthly average of Henry Hub spot/cash as reported by the EIA. I have updated it through Friday, Nov 21.
The price range is very narrow for Dec 2014 option expiration - it's Monday, Nov 24.
Last edited by CafeGrande; November 22nd, 2014 at 04:37 PM.
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I sold some NGH C7 a couple of days ago for 1500 - 1600 US$.
The distribution of volatility over time in your chart brought me to the thought to buy low volatility cheap NGJ C5 or C6 options to protect the spread. They closed at 430 or 130 US$, respectively. Obviously it is a bear spread, the closer option being sold, and the further out option being bought. But does volatility change everything ? For the current price of the NGH C7 of 1180 you could buy a NGJ C4.3 or C4.4. In the first quarter of 2014 the maximum spread of NGH-NHJ futures was 1.2, thus buying the NGJ C5 would give a good cushion.
Cost would be about 25 or 30 % of the profit, but the result would be a good sleep. (And margin requirement would be reduced.)
Can it be expected that high volatility will "roll out" into April in case of very low temperatures in January ? Does anybody remember how it was last year ?
You're thinking the right way about ways to limit the risk on the short March call, but to add some context:
- Look at some price charts for last year and previous years. Make sure you look at DAILY charts all the way back to at least 2003 to see how bad things can get in nearby futures in late winter. I highlight daily because if you look at some of the weekly continuation charts that roll before contract expiration, you'll miss March futures hitting $6.49 one or two days before expiration last year. Near expiration it also had a couple of 50 cent or more ranges ($5000) in a day.
- Same with "cash" at the Henry Hub. If you just look at a weekly settlement (Friday) you might miss a couple of days where it settled at ~$8.00
- Look at some implied volatility charts from last year. March ATM IV got up to 85 to 100% and there was a steep skew, which means a $7.00 call could have been 125% or more (I don't have them at my fingertips). Make sure you look at April 2014 IV charts too - not just ATM, but skew charts.
- Make sure your account is well capitalized because if it gets a little crazy again, the CME may raise margins a couple of times a week and your broker might add something on top.
- A trade for the time period you are discussing (Mar and Apr) is called the widow maker in the futures markets. Do some research; there's even a book about it.
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