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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:568,080 / 5,727
Last Reply:Yesterday (12:40 PM) Attachments:642

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Selling Options on Futures?

Old February 6th, 2015, 08:05 PM   #3971 (permalink)
World'sWorstTrader
Knoxville Tennessee USA
 
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Gold


psears View Post
Hi all,

This is my first post since the total destruction of my trading account courtesy of naked Gold puts explosion of a couple of years back :-(
I have been reading this threat from the start, and am currently at post 86. Good stuff-can't believe it's still going!

I'm thinking about getting back into option selling (with a few changes from the last time :-) and was thinking about just concentrating on the grains (specifically corn) to start with. My long-term goal is to learn one market at a time and become good at that, then slowly adding more markets until I can talk about them like Ron99 and the rest of you players do.

I want to start reading fundamental reports and get knowledgable about what is causing the longer-term trends. I know The Hightower Report has been mentioned here, although I know it talks about more than just grains. Is it worth the money? How about the USDA reports like WASDE? Good or a waste of time (40 pages!)? Any other reports y'all can think of that might help me become knowledagble in the corn/grains?

Currently reading Cordier's book, listening to a book on the grains business while driving, and reading your posts. I know this can be done for the long-term, since you all can't be just lucky over so many years :-) so I am in this for the long haul (retirement), and ready to study...

Thoughts?

This is my first post since the total destruction of my trading account courtesy of naked Gold puts explosion of a couple of years back :-(

Can you share what risk you took with gold? Were you loaded with short gold puts? What would you do differently?

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Old February 6th, 2015, 09:43 PM   #3972 (permalink)
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dade fl
 
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selling options naked

Hey if you like all those reports and then some DeCarley Trading gives them for free. I get so many of them it is impossible to read them all everyday. I would like to know what was your risk management strategy to protect your positions when they were taking heat? I have sold some really murderous options and taken some serious blows but I would like to know your strategy. Thanks

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Old February 7th, 2015, 12:10 AM   #3973 (permalink)
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Richmond, VA/USA
 
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I don't have the exact prices and positions on hand to share, but if memory serves me correctly I had a $30,000 trading account that had 3 short put gold options. I don't remember at what delta they were, although I think it is safe to say the were not at Ron99's recommended <.02 level...

I think the strikes were about 60 points lower than the market before the crash; so if the price was at 1400, 2 of those puts were around 1340. I had just put on my 3rd put that was closer to the money than those-maybe 30 points below the market. (I did this because DTE was rapidly approaching and I thought I could take the chance-wrong!)

When the crash came, that 30 below put went into the money, and my other two further out puts went from something like $300 in premium left to $3000! in two days time. Totally ridiculous. And mind you, these options were all front month with something like <20 days to expiration. Talk about a Black Swan coming in for a landing!

As for risk control for these trades, well I really didn't have any. And to be honest, what risk control could you have for this event? Not sell options? Not sell naked options? Buy options only? Ron99 himself said he got burned that day too, and we know how far out of the money his sales are.

Looking back, I know I had too many positions on, and they were too close to the money, especially being naked. But I was getting greedy because I wanted to become a millionaire overnight, and the small premiums that you get from selling options were just not coming in fast enough.

I have read many books on trading and world-class hedge fund managers/traders and they all have pretty much blown up one or multiple accounts during their "learning phase". The ones that claw their way out and become millionaires or billionaires learn from those painful blowups and use that pain to guide their future risk taking.

For those who haven't gone through a blowup, I really can't explain what it feels like, anymore than a combat veteran can really explain to you what being shot at or killing someone is like. You can read about it, watch movies about it, and that certainly helps, but it is still not the same. I know one thing, I will be VERY careful in my future option selling endeavors, and have realistic expectations (which btw, are still pretty killer when you think about it-it just won't happen overnight!).

For those planning on selling options or shorting financial instruments, I would suggest the following books:

"Fooled by Randomness" by Nassim Taleb
"The Black Swan" by Nassim Taleb
"When Genius Failed-The Rise and Fall of Long-Term Capital Management" by Roger Lowenstein

Please read them.

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Old February 7th, 2015, 06:10 AM   #3974 (permalink)
Elite Member
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psears View Post



When the crash came, that 30 below put went into the money, and my other two further out puts went from something like $300 in premium left to $3000! in two days time. Totally ridiculous. And mind you, these options were all front month with something like <20 days to expiration. Talk about a Black Swan coming in for a landing!

There are some measures of precaution, which often avoid trouble. But still option selling is something else than buying T-Bills.

First and most important: Get out of a trade when you have to get out. Obviously the move against you in Gold went over two days. Thus, there should have been enough time to get out.

I get out when the value of the option has doubled. That is not a hard criterion, I also look at the fundamentals and at the charts. But I do not get significantly above doubling. I often get out of a trade before it has doubled - in case the fundamentals have changed, an important resistance in the chart has been hurt, or the put (call) option gains value on a bulish (bearish) report.

Ron is very successful riding out trades far beyond doubling in value of the option. But this requires a very large account and the ability to be right more than 90 %. (Remember: If your rule is to get out of a trade when the value of the option is 8-fold you need 8 further perfect trades to get break-even. Not regarding fees.) My percentage of winners is only about 70 %, but losses in average are significantly lower than 100 % of the original price when I sold the option.

Another important point is to keep the lot sizes small and to avoid clump risk. Additionally, I try to balance put and call options. Currently - and this is typical longterm - I hold short options in 7 different commodities, 3 calls, 3 puts, and 1 strangle. Of course it is possible to start with only one commodity. But in this case you have to be very disciplined to keep lot sizes small.

It is a common misunderstanding in option selling that selling very far out of the money (FOTM = delta approx. 0.02) helps against the black swan. Selling very far out of the money does have advantages (and disadvantages). But in case of a black swan, volatility usually rises quickly, and FOTM options are hurt more than OTM options (delta approx. 0.2). The advantage of the FOTM options only exists in case you have been able to ride out the black swan: You might still be OTM, whereas the seller of an OTM option might be in the money. But in case you have to liquidate before, losses for FOTM options are at least in the same order of magnitude as for OTM option. (Always assuming, that you sell FOTM options for the same amount than OTM options.)

Therefore: Keep lot sizes small and diversify.

Selling bear call spreads / bull put spreads instead of selling naked of course reduces risk in case of a black swan, but this insurance costs money. Thus, I only use it occasionally.

Try to avoid the front month, as for some commodities - grains, meats, softs, energies - they show the biggest moves. Get out of the trades before. If you sell options 3 to 6 months before expiry, they should have reduced value to less than 20 % when getting the front month. (If not, they do not work as expected, and you should get out.)

I hope this helps. (Please apologize my language - I am not a native speaker of English)

Best regards, Myrrdin

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Old February 7th, 2015, 06:36 AM   #3975 (permalink)
Elite Member
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Futures Edge on FIO

ron99 View Post
Also check out https://www.seasonalgo.com/ for seasonal data. I think they are better than MRCI.

Ron,

I work with MRCI for many years, and I am very satisfied with them. Seasonal data for outrights and spreads is good, and additionally they provide longterm volatility and price data. But of course I would like to further improve.

I would appreciate your comment on what seasonalalgo.com is doing better.

Thank you !

Best regards, Myrrdin

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Old February 7th, 2015, 09:32 AM   #3976 (permalink)
World'sWorstTrader
Knoxville Tennessee USA
 
Futures Experience: Intermediate
Platform: TOS
Favorite Futures: ES, NQ, CL, /6E futures options.
 
Posts: 257 since Oct 2012
Thanks: 126 given, 75 received

Hedge


myrrdin View Post
There are some measures of precaution, which often avoid trouble. But still option selling is something else than buying T-Bills.

First and most important: Get out of a trade when you have to get out. Obviously the move against you in Gold went over two days. Thus, there should have been enough time to get out.

I get out when the value of the option has doubled. That is not a hard criterion, I also look at the fundamentals and at the charts. But I do not get significantly above doubling. I often get out of a trade before it has doubled - in case the fundamentals have changed, an important resistance in the chart has been hurt, or the put (call) option gains value on a bulish (bearish) report.

Ron is very successful riding out trades far beyond doubling in value of the option. But this requires a very large account and the ability to be right more than 90 %. (Remember: If your rule is to get out of a trade when the value of the option is 8-fold you need 8 further perfect trades to get break-even. Not regarding fees.) My percentage of winners is only about 70 %, but losses in average are significantly lower than 100 % of the original price when I sold the option.

Another important point is to keep the lot sizes small and to avoid clump risk. Additionally, I try to balance put and call options. Currently - and this is typical longterm - I hold short options in 7 different commodities, 3 calls, 3 puts, and 1 strangle. Of course it is possible to start with only one commodity. But in this case you have to be very disciplined to keep lot sizes small.

It is a common misunderstanding in option selling that selling very far out of the money (FOTM = delta approx. 0.02) helps against the black swan. Selling very far out of the money does have advantages (and disadvantages). But in case of a black swan, volatility usually rises quickly, and FOTM options are hurt more than OTM options (delta approx. 0.2). The advantage of the FOTM options only exists in case you have been able to ride out the black swan: You might still be OTM, whereas the seller of an OTM option might be in the money. But in case you have to liquidate before, losses for FOTM options are at least in the same order of magnitude as for OTM option. (Always assuming, that you sell FOTM options for the same amount than OTM options.)

Therefore: Keep lot sizes small and diversify.

Selling bear call spreads / bull put spreads instead of selling naked of course reduces risk in case of a black swan, but this insurance costs money. Thus, I only use it occasionally.

Try to avoid the front month, as for some commodities - grains, meats, softs, energies - they show the biggest moves. Get out of the trades before. If you sell options 3 to 6 months before expiry, they should have reduced value to less than 20 % when getting the front month. (If not, they do not work as expected, and you should get out.)

I hope this helps. (Please apologize my language - I am not a native speaker of English)

Best regards, Myrrdin

I get out when the value of the option has doubled.

When the short option (put) has doubled or tripled in value, IV usually has increased. At this point I hedge to
approximately delta neutral by selling calls.

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Old February 7th, 2015, 09:53 AM   #3977 (permalink)
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datahogg View Post
I get out when the value of the option has doubled.

When the short option (put) has doubled or tripled in value, IV usually has increased. At this point I hedge to
approximately delta neutral by selling calls.

In some cases I also hedge as described or roll out to a more distant expiry date. But I consider this strangle or rolled out option as a separate trade, and only enter it if I would have entered it as a new trade as well.

I do not want to take any action simply to prove that I am right. I want to make money.

Best regards, Myrrdin

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Old February 7th, 2015, 10:31 AM   #3978 (permalink)
Market Wizard
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datahogg View Post
I get out when the value of the option has doubled.

When the short option (put) has doubled or tripled in value, IV usually has increased. At this point I hedge to
approximately delta neutral by selling calls.

This only works if the move is moderate. If the move down is large you still can lose a lot of money. Just a little less with the income from the call.

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Old February 7th, 2015, 10:33 AM   #3979 (permalink)
Market Wizard
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myrrdin View Post
Ron,

I work with MRCI for many years, and I am very satisfied with them. Seasonal data for outrights and spreads is good, and additionally they provide longterm volatility and price data. But of course I would like to further improve.

I would appreciate your comment on what seasonalalgo.com is doing better.

Thank you !

Best regards, Myrrdin

Try the free trial at seasonalalgo.com and you will see. Many things available at seasonalalgo.com that is not available at MRCI.

One thing is the ability to set your own beginning and ending dates to check the seasonal trend.

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Old February 7th, 2015, 12:20 PM   #3980 (permalink)
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psears View Post
I don't have the exact prices and positions on hand to share, but if memory serves me correctly I had a $30,000 trading account that had 3 short put gold options. I don't remember at what delta they were, although I think it is safe to say the were not at Ron99's recommended <.02 level...

I think the strikes were about 60 points lower than the market before the crash; so if the price was at 1400, 2 of those puts were around 1340. I had just put on my 3rd put that was closer to the money than those-maybe 30 points below the market. (I did this because DTE was rapidly approaching and I thought I could take the chance-wrong!)

When the crash came, that 30 below put went into the money, and my other two further out puts went from something like $300 in premium left to $3000! in two days time. Totally ridiculous. And mind you, these options were all front month with something like <20 days to expiration. Talk about a Black Swan coming in for a landing!

As for risk control for these trades, well I really didn't have any. And to be honest, what risk control could you have for this event? Not sell options? Not sell naked options? Buy options only? Ron99 himself said he got burned that day too, and we know how far out of the money his sales are.

Looking back, I know I had too many positions on, and they were too close to the money, especially being naked. But I was getting greedy because I wanted to become a millionaire overnight, and the small premiums that you get from selling options were just not coming in fast enough.

I have read many books on trading and world-class hedge fund managers/traders and they all have pretty much blown up one or multiple accounts during their "learning phase". The ones that claw their way out and become millionaires or billionaires learn from those painful blowups and use that pain to guide their future risk taking.

For those who haven't gone through a blowup, I really can't explain what it feels like, anymore than a combat veteran can really explain to you what being shot at or killing someone is like. You can read about it, watch movies about it, and that certainly helps, but it is still not the same. I know one thing, I will be VERY careful in my future option selling endeavors, and have realistic expectations (which btw, are still pretty killer when you think about it-it just won't happen overnight!).

For those planning on selling options or shorting financial instruments, I would suggest the following books:

"Fooled by Randomness" by Nassim Taleb
"The Black Swan" by Nassim Taleb
"When Genius Failed-The Rise and Fall of Long-Term Capital Management" by Roger Lowenstein

Please read them.

Thank you so much for sharing, I can relate to your story in oil and silver. Too many times I go naked and get burned but I figured what if I could protect my short puts with a short futures contract or the short call with a long futures contract. In theory the trade is bullet proof. The problems come with the slippage and all the other chinanigans. Any thoughts on my risk management?

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