Maybe this is obvious, maybe if your very new it's not, but 13.50 is where other people are also trying to sell. The best buyers are only willing to pay 12.90. So unless the market or vol moves your unlikely to get filled at 13.50
You are selling a call that is 525 points or almost 15% out of the money.
Premium as a percentage of distance out of the money? Not sure I understand the relevance.
Option pricing is an extremely complicated subject that is debated by some of the greatest financial minds in the world.
The first and easiest model was the Black Scholes model, which for anybody other than the most sophisticated traders will be sufficient (especially when you adjust your volatility skew).
A google of Black Scholes will give you an enormous list of potential references. Wikipedia has a good and precise page developed to it. While at first the formula may look daunting, it's actually very easy to build into excel.
The Black–Scholes /ˌblæk ˈʃoʊlz/ or Black–Scholes–Merton model is a mathematical model of a financial market containing certain derivative investment instruments. From the model, one can deduce the Black–Scholes formula, which gives a theoretical estimate of the price of European-style options. The formula led to a boom in options trading and legitimised scientifically the activities of the Chicago Board Options Exchange and other options markets around the world. lt is widely used, although often with adjustments and corrections, by options market participants.:751 Many empirical tests have shown that the Black–Scholes price is "fairly close" to the observed prices, although there are well-known discrepancies such as the "option smile".:770–771
The Black–Scholes model was first published by Fischer Black and Myron Scholes in their 1973 paper, "The Pricing of Options and Corporate Liabilities", published in the Journal of Political Economy. They derived a partial differential equation, now called the Black–Scholes equation, which estimates the price of the option over time.
Ron, I have been using this strategy for some months. The only problem using the excellent PC-SPAN spreadsheet is that you can't find all the ES contracts (EOM for instance). But this is not a problem for me. I try to use the contract closer to 100 DTE as possible.
I am trying to use this strategy in CL as well. Do you think delta 0.03 in CL is ok? or it could be better to take 0.02?
On the other hand I would like to give my 2 cents in this threat:
I agree with Ron that it doesn't matter when you sell your ES contracts as it is very easy to earn your premium in about 20-25 days. But if you are able to sell them in a bottom it can fast your trade at least 7-12 days. I know Ron doesn't use technical analysis, but if you can find a strategy that give you 15-20 set ups a year (longs) in order to enter a trade in the proper day it can improve your ROI very much.
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I also thought about entering at a low when I began trading this system. There are two problems:
1. While you are waiting for the optimum point to enter you do not receive time value. In average, the advantage of entering at the optimum point does not outweigh the advantage of being invested permanently.
2. If I knew a strategy that gives me perfect and reliable entry points for a long trade, I would trade it using outright futures. But I do not have such strategy. The concept of selling OTM options has the advantage that it is not necessary to find this optimum entry point.
Best regards, Myrrdin
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For CL there is a problem that is not a problem in ES. A movement is ES that would force you out of your positions has only happened once since 2008. A movement in CL that would force you out of your position happens every year. Sometimes multiple times a year.
Here's a back of the napkin quick way to look at it. The Sep CL 41.50 put is 93 DTE and 0.0299 delta. The IM is 334 and premium is 0.17.
A Sep 49 put is 977 IM and 0.62 premium.
The 49 put is $450 more in premium and $643 more in IM than the 41.50 put. That totals $1,093. If you take the IM for the 41.50 put (334) times 3 to get the margin and excess we are using to cover a position, you get 1002.
1002 is less than the 1093 for the 49 put. So assuming IV remains the same (normally it increases with a big move) your 41.50 put would be forced out by a 7.50 move down in CL. Moves of that amount or greater happen often.
Applying the same quick look, a Aug ES 1660 put is 98 DTE and 0.0300 delta. Premium is 3.55 or $177.50. IM is 598. Three times 598 is $1,794.
A Aug ES 1900 put is priced at 14.90 or $745. IM is 1840.
The 1900 put is $567.50 more in premium dollars and $1,242 more in IM than the 1660 put. It totals $1809.50.
The $1,809.50 for the 1900 put is more than the $1,794 for the 1660 put. The difference between 1900 and 1660 strikes is 240.
There has never been a movement in 30 days since 2008 greater than 231.25.
So yes you can use the exit at 50% premium drop for any commodity and increase your ROI. But any commodity other than ES (that I have looked at) will not offer the safety of ES.
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Yes. It is also in post #2 Quick Summary on the first page.
When your (CURRENT IM + (CURRENT PREMIUM$ - OPENING PREMIUM$)) > (3 * OPENING IM), you exit your trade
I find that when you hit this exit point, you will lose about 25% of the account if it is full of this position. But waiting for this point keeps you from exiting too early and miss keeping on a profitable position.
Hopefully you have picked your positions well and rarely hit this exit point.
Last edited by ron99; May 16th, 2015 at 10:26 AM.
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Yes, this is also my experience after selling options on many commodities for years. I permanently hold short options in 8 - 15 different commodities (currently 11). And there is only one that I sell without regarding charts or fundamentals: ES.
In my opinion, the reason is the following: Prices for corn, crude oil or coffee are dependent on a limited number of factors (eg. supply & demand, weather, seasonals, COT data), many of which only change longterm. Whereas the indices are dependent on a myriad of parameters, which can change from one minute to the other. Thus, it is possible with quite a good probability to foresee where the prices for corn, crude oil or coffee will not go. This is the basis for selling options. The only thing you can foresee for the indices is that in the very long run they move upwards. But I do not know any model - based on charts or fundamentals - being able to foresee the price of the ES for the next one, two or three weeks. Thus, there are many people around the world buying options to protect their stock portfolio, keeping prices for puts high.
Best regards, Myrrdin
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I read the whole thread over last 2-3 weeks. Thanks for sharing the vast amount of knowledge.
The summary on the first page says:
- 2/3 of account in cash for increased margin requirements / ride out positions if move towards strike over time
- Consider adding to positions as OTM options get closer to expiry and margin drops (subject to having 67% of account in cash)
I'm still confused about the cash excess on the account level. I interpret to keep 2/3 of the account in cash in three different ways, i.e, 2/3 cash is:
1) (2 * the opening IM of all open positions) / (account equity)
2) (2 * the current IM of all open positions) / (account equity)
3) (2 * the nominal value of all open positions) / (account equity)
What is the correct interpretation? Thanks
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I just went through and updated the Quick Summary. Fixed links and changed or dropped some wording.
I dropped the line thats says, "Consider adding to positions as OTM options get closer to expiry". I no longer believe that. I now say keep the IM and excess from day one for the entire time you hold the position. It is just safer that way. (Unless you are riding to expiration and the option is far OTM at about 7 or less DTE. Then I would use some of that cash excess to acquire new position without waiting for the option to expire)
What is 2/3 cash? If you have $15,000 account and you want to add positions that require $500 IM then you can add 10 positions.
$500 IM (1/3 for IM) plus $1,000 cash excess (2/3 for cash excess) equals $1,500 per contract. $15,000 acct balance divided by $1,500 per contract equals 10 contracts. Keep this $1,500 per contract the entire time you hold the position.
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