I have been doing some research on DTE of options. I found the following info enlightening.
I choose 3 options on the worst day to sell them. 9/19/14. Right before a 157 drop in ES over 18 trading days. They are all about a 3.00 delta.
Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).
A lot of info in that chart.
The margin (IM) at entry was close for all 3. But the entry price was different. This caused the IM / Entry Price (IM/1.00 Price on chart) to be higher. So more margin per 1.00 of premium price for the closer to expiration options.
The increase in premium for all 3 by 10/15 was about the same. But the increase in IM (IM Diff) was vastly different. The Nov 1670 put had its' IM increase by 1303 while the Dec & Jan options only increased by 773 & 713.
The reason for the large difference in IM increase is that the IV for the Nov put was increased by 6.2%. The Others were 4.6% & 4.0%. This is due to the fact that the further out in time options are further OTM. Thus IV increases slower on them even though their IV was higher to start.
Because of the larger increase in IM, the Nov option went on margin call (Lowest Buying Power) on 10/15/14. The 2/3 cash excess did not cover the increase in IM and the loss on price. But the other two did not go on margin call.
The Net Profit at 50% exit is computed using 6.12 per RT cost and exiting on the first day the option settled below 50% of the Entry Price. This is for a $100k account at the start. Even though the exit point came sooner on the Nov put, the ROI was slightly lower than Dec because of the higher IM per 1.00 of price at entry. Jan, because of being further OTM, took even longer to get to a 50% drop in price.
Using this info I am selling ES puts at 80-110 DTE. The Jan's were safer but had a lower ROI. There is also the problem of lower volume traded for puts that are 115+ DTE. Harder to get trades done.
The following 26 users say Thank You to ron99 for this post:
I use the ES strategy presented by you for some weeks now - results are convincing. Again thank you for sharing it with us.
I thought about reducing risk and draw downs in general and on report days like last Friday, and would like to discuss the consideration to sell futures as a hedge for the short options. Here an example:
We assume to sell 100 short ES options with delta 0.03 and a price of 200 $. They are bought back at 50 % after one month (average). This gives a profit of 10,000 $ per month (disregarding fees).
We constantly hold one short ES future as partial hedge. This future was approx. 750 in March 2009 and 2100 in March 2015. Holding this short future over the period of 72 months would cause a loss of 938 $ per month.
This future would be a 33 %-hedge for the short options, and should reduce margin significantly. The cost for the hedge is less than 10 % of the profit made with option selling. This hedge would allow for selling more options at the same risk and margin or reducing risk and draw downs of the account (or both).
Any thoughts ?
Best regards, Myrrdin
The following 3 users say Thank You to myrrdin for this post:
Testing this on a worst case scenario, on 9/19/14, if you sell 100 Dec 1590 ES puts (delta 2.96) the IM is $67,000. If you add one short ES future the IM for all positions is now $61,930. A decrease of $5,070 or 7.6%. That decrease would allow you to add 7 more puts. This makes IM $66,619.
On 10/15/14 the IM for these positions would be $149,362. The ES future would have increased in value by $7,855. The additional IM on the 7 extra puts would have been $5,411. So the profit on the ES future would cover the additional IM needed to cover the 7 extra puts. But it would provide very little hedge for the rest of the positions, $3,444.
But the 7 extra puts in this example would have made an additional $551.25 (excluding costs). Starting value of $157.50 each (3.15 premium), exit at $78.75 profit. This is less additional profit than the $938 per month loss you calculated would be if you held one short future.
Even if the profit was $100 per 7 extra options, the $700 is still less than the $938 loss on the future.
Since the drop in IM is not significant, it doesn't look like this is a worthwhile option.
If you didn't add any extra puts, the ES future would give you $5,070 extra IM coverage (lower IM), plus in this example, an additional $7,855 in profit on the futures drop. So $12,925 extra to ride out a move against you. At a cost of $938 per month to get this $12,925 extra coverage. I don't think it is worth it.
You should get the CME PC-SPAN program and play around with different scenarios to see if you can find one that works.
The following 7 users say Thank You to ron99 for this post:
Thanks a lot for the detailed discussion. My conclusions:
Selling outright futures to add further puts does only make sense if the ES moves up significantly slower than in average or moves sidewards or downwards. In 2015 the move upwards was only 53 or 12-13 per month. This slow move upwards still would not make the concept profitable. Looking at the monthly chart there were no longer periods of sidewards movements. The chart moved either upwards or downwards. And in longer term downwards movements, eg. 2007 – 2009, it would probably be better to stop put selling.
Selling outright futures to hedge the options before an important report seems only to make sense, if we sell three futures (in this example) to get a reasonable protection. These futures would only be held for some hours until after the report. In about half the cases the hedge should be profitable, in the other half result in a loss. In the long run, there should be no significant profit or loss, but protection could be good for a low blood pressure …
I will let you know if I find a more promising version of this concept.
Best regards, Myrrdin
The following 2 users say Thank You to myrrdin for this post:
I am trying to understand options pricing, currently reading up on some great stuff written by LIFFE and also the CBOE. What I then get confused about is certain phrases when discussing them in short hand jargon, please see my examples:
Sold RXM5 149/157 strangle at 11 and 9 small 7.6% vol the call 11.4% - 10.75% the put with 10.5 days to expiry
Sell the June 15 EuroBund 149/157 strangles (ie the 149 put and the 157 call) at 11 and 9 for small size.
This equates to a volatility of 7.6% on the call and between 10.75% and 11.4% on the put.
Options have 10.5 days before expiry.
June 15 Bobl 127.75 Put trades 10,000 times between 13.5 and 15
Sounds like OTC Broker speech (probably IM) to me?
The following user says Thank You to SMCJB for this post:
For my 1,771 July ES puts the monthly ROI if held to expiration was 2.4%. By getting out when premium was about 50% my actual monthly ROI on them was 6.3%. Average days held was 19.6. Average entry and exit prices were 3.12 and 1.51. All numbers are weighted averages.
When I was doing July puts I was doing some further OTM strikes for my ultra low risk accounts (mainly retirement money). Thus the lower entry price. For August I switched the ultra low risk accounts to same delta as my "regular" accounts but I am now using more excess for them. Instead of using 66% cash excess I am using 75% cash excess.
For example, if IM is $500 instead of having $1,000 excess, I now use $1,500 cash excess for my ultra low risk accounts. This lowers ROI but decreases chance of being forced out of contract.
None of the data above includes these positions with the extra excess.
The following 11 users say Thank You to ron99 for this post: