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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:569,198 / 5,728
Last Reply:December 6th, 2016 (05:26 PM) Attachments:642

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Selling Options on Futures?

Old May 30th, 2015, 07:27 PM   #4251 (permalink)
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hi Ron and all others who are subscribers to Ron's fantastic thread

I had a question regarding Price Limits on the Agricultures ( Grains ) and the Meats ....

1. for Corn, it shows that its Limit Price is .40 cents
So does this mean that if I got Long at 350'0 ( 3.50 ) , and it went up to a high of 420'0 ( 4.20 ) by the close of that day, that I would be capped at only profiting the .40 cents ?
OR
would I be able to make the full upward move , and thus make the full .70 cents profit ?


2. Using the above example ..... where it shows the Price Limit for Corn at .40 cents
What then would this be in Dollars ?

Would the math be ..... .40 x $50 = $20
or would it be ..... .40 x $5,000 ( 5000 bushels ) = $2,000

I'm just trying t make sure that I am understanding the potential " Max " profit/loss that I could incur , based on what each commodities Price Limit price is


I have attached a screenshot showing all of the recent Price Limits ( from the CME website )

Thanks again for the help and for this great thread
Really appreciate it

Attached Thumbnails
Selling Options on Futures?-2015-05-30-price-limits.png  
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Old May 30th, 2015, 07:29 PM   #4252 (permalink)
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Update ..... sorry, I just looked at the scrrenshot I attached with my post.

Corn is actually at .45 based on the CME's " Expanded Price Limits " update

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Old May 30th, 2015, 08:49 PM   #4253 (permalink)
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mdsvtr View Post
hi Ron and all others who are subscribers to Ron's fantastic thread

I had a question regarding Price Limits on the Agricultures ( Grains ) and the Meats ....

1. for Corn, it shows that its Limit Price is .40 cents
So does this mean that if I got Long at 350'0 ( 3.50 ) , and it went up to a high of 420'0 ( 4.20 ) by the close of that day, that I would be capped at only profiting the .40 cents ?
OR
would I be able to make the full upward move , and thus make the full .70 cents profit ?

If the limit is 40 cents, and the previous close was 3.50, then the highest the price could go the next day would be 3.90. It could never go to 4.20, since that would be a 70 cent move.



mdsvtr View Post

2. Using the above example ..... where it shows the Price Limit for Corn at .40 cents
What then would this be in Dollars ?

Would the math be ..... .40 x $50 = $20
or would it be ..... .40 x $5,000 ( 5000 bushels ) = $2,000

I'm just trying t make sure that I am understanding the potential " Max " profit/loss that I could incur , based on what each commodities Price Limit price is


$50 per cent is the value for the whole contract. So, if you had a 40 cent move, then that would be a 40 x 50 = $2000 move per contract.



mdsvtr View Post
I'm just trying t make sure that I am understanding the potential " Max " profit/loss that I could incur , based on what each commodities Price Limit price is

This statement scares me a little bit. With a limit move (or even an expanded limit move), that is the amount you could could gain or lose in a single day. BUT, the market could make limit moves for multiple consecutive days, even a week. And, the option prices could move a lot more than what you'd theoretically calculate. So, don't think of a limit move in terms of potential gain/loss, because that might only be a very temporary profit/loss (until next trading session starts).

As an example, back in 2003, I went long Live Cattle in the morning of December 23. In the afternoon I believe they announced that Mad Cow was found in the US. The market was locked limit down for a number of days. The limit (and later expanded limit) per day dragged out my loss for a week or so. Limits truly limited my daily loss, but not my eventual loss.

In general, though, I personally like limits, because it gives the market a chance to pause, and for participants to think about the trade decisions, rather than making a panic move. Sometimes that smooths the peaks and valleys in price that might otherwise occur.

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Old May 31st, 2015, 01:44 AM   #4254 (permalink)
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Identifying trend?

Thanks, Ron for your reply.
Karen, the supertrader, also mentioned that she hates calls.
As for trend identifying how does one do it? There are so many suggestions like 50 and 200 MA cross etc. I find these methods and indicator-based identification are lagging. Even if you wait for price to indicate trend eg two higher lows or two lower highs, you need to wait. I guess there is no other choice.
Being newbie, I shall be thankful if you could advise.
Regards,
Dilip

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Old May 31st, 2015, 02:16 PM   #4255 (permalink)
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Futures Edge on FIO
kevinkdog,
I really appreciate your reply
helped me understand the P/L of the Grains

So if I understand Limit up/down correctly ...... It can be a double edged sword,
depending on ...

1. If you we're short say CL , and a negative report or something oversees occurred that sent oil plummeting
In this scenario ( and assuming a Limit Down ) stayed locked for 3 days in a row , you would make a nice size profit , without having the ability to get out of your trade,
since you can't get out of the trade, BUT you were short CL and it kept dropping for those 3 Limit Down ' Locked " days ?

2. Does this mean, that your stops are pretty much irrelevant when a Limit Up/Down occurs ?
There is basically no way to get out of the trade if it's going against you ?

3. What is the worst case scenario Limit " Lock " day that has occurred in past 20 years ..... The longest consecutive number of days that that Future was Locked ?

Thank you again for the explanation on my Corn question ,
I understand the calculations for the Grains Now... finally lol

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Old May 31st, 2015, 03:01 PM   #4256 (permalink)
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mdsvtr View Post
kevinkdog,
I really appreciate your reply
helped me understand the P/L of the Grains

So if I understand Limit up/down correctly ...... It can be a double edged sword,
depending on ...

1. If you we're short say CL , and a negative report or something oversees occurred that sent oil plummeting
In this scenario ( and assuming a Limit Down ) stayed locked for 3 days in a row , you would make a nice size profit , without having the ability to get out of your trade,
since you can't get out of the trade, BUT you were short CL and it kept dropping for those 3 Limit Down ' Locked " days ?

If you were short, and wanted to buy in a locked limit situation, I am sure you could find someone willing to take the other side (they'd be selling). Almost a no risk trade for them...


mdsvtr View Post
2. Does this mean, that your stops are pretty much irrelevant when a Limit Up/Down occurs ?
There is basically no way to get out of the trade if it's going against you ?

Yes, and yes. Although you might be able to figure out something with other non-locked contract month, maybe options, etc. But, your stops could easily be hanging out there unfilled. Remember a stop turns into a market order when the stop price is hit. If there is no market, no market orders will be filled...


mdsvtr View Post
3. What is the worst case scenario Limit " Lock " day that has occurred in past 20 years ..... The longest consecutive number of days that that Future was Locked ?

Thank you again for the explanation on my Corn question ,
I understand the calculations for the Grains Now... finally lol

I have no idea. Ags and Meats have had many locked limit days, but the limits were tighter years ago.

Personally, I know locked limits can happen, but I don't spend a lot of time worrying about the possibility. Of course, maybe I should!

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Old May 31st, 2015, 03:19 PM   #4257 (permalink)
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kevinkdog View Post
I have no idea. Ags and Meats have had many locked limit days, but the limits were tighter years ago.

Personally, I know locked limits can happen, but I don't spend a lot of time worrying about the possibility. Of course, maybe I should!

I remember several limits up or down for significantly more than a week. Examples are commodities with little open interest, eg. Orange Juice, Rough Rice or Minneapolis Wheat. All some years ago. You will find them on the long time chart.

Options do not have a limit, thus, you can always get out via buying options. But these options tend to get really expensive in a limit situation. (Options price is then based on the price the market thinks will be reached at the end of the limit situation.)

Best regards, Myrrdin

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Old May 31st, 2015, 03:47 PM   #4258 (permalink)
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When trading Futures ,
is it usually advisable to buy Calls on corn if you're going short corn on the Future
and vice versa ( buy puts if you're going long ) ?

Or should this only be considered on the products that myrrdin mentioned ...... Orange Juice, Rough Rice or Minneapolis Wheat ?

If you were going to purchase Options as a Hedge ( to take the opposite side , in a worse case scenario... I.E. Limit up/down Locked times ) , would you want to buy the ATM strikes ?

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Old May 31st, 2015, 05:07 PM   #4259 (permalink)
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mdsvtr View Post
When trading Futures ,
is it usually advisable to buy Calls on corn if you're going short corn on the Future
and vice versa ( buy puts if you're going long ) ?

Or should this only be considered on the products that myrrdin mentioned ...... Orange Juice, Rough Rice or Minneapolis Wheat ?

If you were going to purchase Options as a Hedge ( to take the opposite side , in a worse case scenario... I.E. Limit up/down Locked times ) , would you want to buy the ATM strikes ?

Of course you can do that. But in case the price of the underlying stays constant, the value of the future will stay constant, and the ATM option will expire worthless. Thus, you loose money, if nothing happens.

The majority of the options being bought expires worthless. That means that the buyer looses money, and the seller of the option receives this money. That is what most people in this thread are doing - they sell options instead of buying them.

If you want to begin trading commodity futures you should get familiar with the fundamentals of one commodity. You will learn when the probability of a limit move is high, and when it is low. There are important reports, which often cause limit moves. You should know the date of these reports. There are influences, eg. weather, that can cause limit moves. You should know when there is a critical phase of growth, that can be severely influenced by weather. Etc. With this knowledge, you will be able to avoid most (not all) of the limit moves against you. You should only trade a commodity with significant open interest. And you should use careful money management so that a limit move does not hurt you too much.

Good luck !

Myrrdin

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Old May 31st, 2015, 05:17 PM   #4260 (permalink)
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Myrrdin,
I really appreciate your reply

I know that traders look at the USDA reports for the agriculture based commodities

What specific reports do you recommend knowing and keeping an eye on, for when they are reported that can cause the most likely Limit moves ?
Mainly the one or two reports that could cause Limit locks on the grains or the Meats, etc.. ?

I learned this lesson the hard way in trading Forex, back when the Swiss crash hit, and my stops were blown through ..... I had no idea the significance of the report that was coming out and the possible impact that it could cause to CHF pairs ( I was Long the EUR/CHF ) of all pairs lol
That was a tough and expensive lesson learned

Thanks again

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