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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:569,280 / 5,728
Last Reply:December 6th, 2016 (05:26 PM) Attachments:642

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Selling Options on Futures?

Old November 21st, 2014, 12:41 PM   #3811 (permalink)
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myrrdin View Post
I am aware that this thread is based on the ideas of Cordier & Gross. And I like these ideas, and most of my option selling trades since around 2005 were according to their concept. But I thought it might be interesting for some traders here to read about other concepts of selling options, which I applied successful in recent years. Anyway, in future I will only communicate and discuss trade ideas within the frame of Cordier & Gross. I hope that is ok for you.

Cordier & Gross suggest to sell options with deltas lower than 0.20 (=20 %). Thus, the trades I would like to discuss here (and I hope you allow for a small tolerance concerning delta) are

SN15 C1200
WH15 C600
NGH15 C7

I am looking forward to an interesting and fruitful discussion on these and other option selling trades.

Best regards, Myrrdin

I know their book said deltas < 0.20, but I had an account with them. They never sold options anywhere near 0.20.

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Old November 21st, 2014, 12:57 PM   #3812 (permalink)
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ron99 View Post
I know their book said deltas < 0.20, but I had an account with them. They never sold options anywhere near 0.20.

That sounds interesting. Which delta do they sell for their customers ? Are there other significant differencies between what they write and what they do ?

Best regards, Myrrdin

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Old November 21st, 2014, 01:10 PM   #3813 (permalink)
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myrrdin View Post
That sounds interesting. Which delta do they sell for their customers ? Are there other significant differencies between what they write and what they do ?

Best regards, Myrrdin

Deltas were < 0.10. Most other things were same as book. But I quit them in Dec 2011.

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Old November 21st, 2014, 01:53 PM   #3814 (permalink)
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ron99 View Post
Deltas were < 0.10. Most other things were same as book. But I quit them in Dec 2011.

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.

Good trading !

Myrrdin

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Old November 21st, 2014, 08:46 PM   #3815 (permalink)
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PeterOhlson View Post
He is basically pricing skew premium. Skew is the differences in IV accross different strikes for one spesific expiration. Term structure is the differences in IV for the same strikes accross different expirations. The volatility surface gives you both term structure and skew in a 3D chart, as such:


(Might be kind of hard to see the 3D effect but it's rotateable in the program. You can also search for volatility surface on GOOG pics and get some examples)

Your profits are dictated by the difference between the IV you sell at, and the final volatility the market realizes (HV). There is only one HV-figure per stock (but hundreds of different IV's, one for each option). As you can see the further away from ATM, the higher the IV and thus the higher the potential profit. But once you move past 10 deltas and below, things tend to break down a bit. So generally selling options lower than 10D is a bad idea, because vanna/vomma risk factors can destroy you (not getting into that here).

Anyways, if you buy an ATM straddle, whatever you pay for that is the markets expectation of future volatility. Meaning, if your straddle costs 3.00, and the stock price is currently 25, the market expects that the stock price will keep within the range of 28-22 within expiration. (Because 25 +/- 3 = 28 and 22 respectively). That is the expected volatility. Now, coming back to what atticus does, he essentially sells a "straddle" not at ATM, but outside ATM, and as said, outside ATM there is inflated IV, thus he makes more profit than what he would do selling the straight ATM straddle. He is in reality just selling delta-neutral volatility somewhere outside where the ATM straddle predicts volatility will go within expiration. So continuing on the above example, the ATM straddle predicts price will stay within 28 to 22. So what you do, is sell options at 22. You sell 3 puts and 1 calls. This essentially makes you delta neutral (Because usually the 3 puts have 25D and the 1 call has 75D. The 3-1 relationship is also why it's called a pitchfork). So, you sell a total of 4 options. That is essentially 2 "straddles" you sell at a price of 22. Because, if the stock price goes down to 22, to your 4 naked options, and you were to neutralize your deltas here, you are essentially short 2 straddles. Therefore, you can compare the price you get when you sell your two "straddles" at 22, with the price you would get for selling two straddles at 25. This difference is the "skew premium", and the skew premium represents whatever extra money you get for selling IV outside ATM. So you're essentially "pricing skew". This gives you actual monetary terms, not just a chart like the picture above. By keeping a database of skew premium you can figure out when it's expensive and when it's cheap, in monetary terms. If it's historically high then selling options becomes a very, very high probability game. Of course on some stocks you might have idiosyncratic risks so some fundamental research isn't a bad idea if you plan to do it there. Personally I sell only on indices (for now) and things are much more systemic there.

As for books....honestly there is no one book or webpage that can teach you options. What I've learnt so far is from probably hundreds of different articles on various webpages, long nights of reading forums etc. etc. It took me probably 1 year to accumulate whatever knowledge I have right now, and I work full-time as well. I'm nowhere near professional level but am now able to read most financial research papers and actually understand them, at least somewhat. I remember trying to read one of them when I was new to option trading and it was completely greek to me (pun intended)


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.

convexxx (atticus)

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Old November 21st, 2014, 10:27 PM   #3816 (permalink)
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convexxx View Post
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.

convexxx (atticus)

What if one spreads between the two, ATM vs "pitchfork" equivalent?

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Old November 22nd, 2014, 04:19 PM   #3817 (permalink)
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Updated Nat Gas confidence intervals

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.

Notes:
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.

Attached Thumbnails
Selling Options on Futures?-ng-intervals-21-nov-2014.png  

Last edited by CafeGrande; November 22nd, 2014 at 04:37 PM.
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Old November 22nd, 2014, 04:53 PM   #3818 (permalink)
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CafeGrande View Post
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.

Notes:
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.


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 ?

Any thoughts ?

Best regards, Myrrdin

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Old November 22nd, 2014, 05:27 PM   #3819 (permalink)
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myrrdin View Post
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 ?

Any thoughts ?

Best regards, Myrrdin

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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Old November 22nd, 2014, 05:49 PM   #3820 (permalink)
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Nat gas option data


I forgot to mention:

To get an understanding of what these Nat Gas contracts have done in the past, check out Barchart.com - Commodity, stock and forex; quotes, charts & analysis

Type in a symbol like NGH14 - click on "technical chart" and scroll down a bit to add "study/indicator" section. Select implied volatility and make the IV window "medium"

You can go back several years -- NGH13, NGJ12, etc and see price and IV in one place. To get historical skew, moneyness or IV charts for a particular strike, I think you'll have to buy them.

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