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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:570,189 / 5,734
Last Reply:December 9th, 2016 (01:01 AM) Attachments:642

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Selling Options on Futures?

Old June 22nd, 2015, 12:53 PM   #4381 (permalink)
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mu2pilot View Post
I think a more important consideration is the fact that the drawdown % was 41% trading the high delta options vs 24% trading 3 Delta options. This is an example of the market coming back. We all know that in our future is a market that exceeds the 3xIM threshold and I'm not interested in risking > 40% of my account.

Nonetheless, thank you uuu1965 for doing this study.

Very good point that needs repeating.

Selling ES put options on 9/19/2014.
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If you use the exit 3xIM threshold your loss on the highest delta options would be 40+%. A very painful loss. Much lower on lower deltas.

Also last time I had attached the Risk Test Excel file with an added column for ROI. But I screwed up and the ROI calculation wasn't including the cost per trade. (I forgot the "$" before the row number of the cell that holds the cost in the formula. V1 should have been V$1)

A corrected file is attached.

Attached Files
Register to download File Type: xlsx Risk test.xlsx (97.8 KB, 31 views)

Last edited by ron99; June 22nd, 2015 at 01:56 PM.
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Old June 22nd, 2015, 01:48 PM   #4382 (permalink)
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Markets are up again today. No chance to add on the Puts.

Waiting patiently..

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Old June 22nd, 2015, 10:01 PM   #4383 (permalink)
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Here are the results of my long term ES put selling studies. They started on 1/2/2013. The starting account balance was $100,000. I used $7.00 RT for costs. They are for deltas 2.00, 3.00, & 4.00. I exited positions the day the settlement was 50% or less of the starting premium. I exited at exactly 50% of starting premium or the next tick lower. I added new positions the same day I exited the prior position at the settlement premium of that day.

This is for 2.00 delta. The last trade is still open. This delta is ahead, number of trade wise, of the other two because its' 33rd trade closed 11 days before the other two.
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This is for 3.00 delta. The last trade closed today.
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This is for 4.00 delta. The last trade closed today.
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Old June 22nd, 2015, 10:23 PM   #4384 (permalink)
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Here is a summary of the studies.
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The Monthly ROI is just a simple average of each trade's ROI.

At no point did any position hit the exit point. So all trades were winners.

Remember the starting account balance was $100,000. Yes you make more in the 2 1/2 years of the study with higher deltas. But you also have to pick what risk you want to take using the numbers in post #4382.

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Old June 23rd, 2015, 04:49 AM   #4385 (permalink)
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ron99 View Post
Very good point that needs repeating.



If you use the exit 3xIM threshold your loss on the highest delta options would be 40+%. A very painful loss. Much lower on lower deltas.

.

With this drawdown argument are you factoring in that you sold on average 60% more 2 deltas than 4 deltas options over your record period 2013-2015?

With the example you provided on worst drawdown on your 2 deltas being -21.3% and the 4 deltas at -26.9%, holding 60% more lower delta options, I would think you would be substantially worse off in a major sell off holding the far larger number of lower deltas that fewer higher deltas.

I can understand this argument when selling an equal number of different delta options, but as the IM on lower deltas is less the tendency is to compensate by selling more options to utilise the set margin.

I'm not sure if that has been factored in, maybe it has, but I can't tell from the info provided.

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Old June 23rd, 2015, 11:23 AM   #4386 (permalink)
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Harvard16 View Post
With this drawdown argument are you factoring in that you sold on average 60% more 2 deltas than 4 deltas options over your record period 2013-2015?

With the example you provided on worst drawdown on your 2 deltas being -21.3% and the 4 deltas at -26.9%, holding 60% more lower delta options, I would think you would be substantially worse off in a major sell off holding the far larger number of lower deltas that fewer higher deltas.

I can understand this argument when selling an equal number of different delta options, but as the IM on lower deltas is less the tendency is to compensate by selling more options to utilise the set margin.

I'm not sure if that has been factored in, maybe it has, but I can't tell from the info provided.

Look at this.
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Old June 23rd, 2015, 04:18 PM   #4387 (permalink)
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Harvard16 View Post
With this drawdown argument are you factoring in that you sold on average 60% more 2 deltas than 4 deltas options over your record period 2013-2015?

With the example you provided on worst drawdown on your 2 deltas being -21.3% and the 4 deltas at -26.9%, holding 60% more lower delta options, I would think you would be substantially worse off in a major sell off holding the far larger number of lower deltas that fewer higher deltas.

I can understand this argument when selling an equal number of different delta options, but as the IM on lower deltas is less the tendency is to compensate by selling more options to utilise the set margin.

I'm not sure if that has been factored in, maybe it has, but I can't tell from the info provided.

Thanks for the study Ron.

Another factor that has to be consider is the risk of being highly leveraged. This works great in up trending market or sideways market. Of course Ron has stop in place to prevent that, with a substantial drawdown. But selling that many contracts even at lower deltas, there is significant level of risk that has to be considered.

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Old June 23rd, 2015, 04:27 PM   #4388 (permalink)
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ron99 View Post
Look at this.
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Can you run a scenario during the S&P downgrade in 2011? The announcement came on Friday evening Aug 5 after the market closed and the markets lost 6-7% that following Monday.

In the 2013-15 study, Is the 3xIM exit threshold used?


Thanks


Last edited by blb014; June 23rd, 2015 at 04:40 PM.
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Old June 23rd, 2015, 05:43 PM   #4389 (permalink)
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Came across these 3 year old video's by Andrew Falde of www.lessthanrandom.com and now SMB that I thought some of you hear might find interesting. Unlike @ron99 's naked option selling Andrew is selling Verticals and legging into iron condors. His regression analysis is an interesting way to time his trades and something he later coins into "LRC" or Linear Regression Channels. At about 40 mins into the first video he talks about buying back his options once a signidifcant part of the return has already been captured, something @ron99 has preached about here.

The second and third video's are a little more specific to his trading strategy but the first video is probably a good (and easy) watch for most people.

Using Regression Analysis for Higher Probability Credit Spreads by Andrew Falde
How to Sell Higher Probability Credit Spreads Part 1
How to Sell Higher Probability Credit Spreads Part 2
LRC Credit Spreads Back Testing Results

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Old June 23rd, 2015, 06:09 PM   #4390 (permalink)
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blb014 View Post
Can you run a scenario during the S&P downgrade in 2011? The announcement came on Friday evening Aug 5 after the market closed and the markets lost 6-7% that following Monday.

In the 2013-15 study, Is the 3xIM exit threshold used?

Unfortunately, we don't have CME SPAN files prior to 2013 so we don't have IM for 2011.

I do have prices for options back then so I can check on what happened to the premium.

I picked puts that were 90 DTE on 7/22/11. The day before ES started crashing. ES was 1341 on 7/22/11. It was 1197 on 8/5/11. It was 1111 on 8/8/11.

Here is the ESv11p1000 option. It was 2.25 on 7/22/11. The exact same price as a 2.01 delta put was on 9/19/14 that @uuu1965 used in his Risk test. When the price got to 8.50 in the Risk test 93% of the IMx3 was used.

On 8/5/11 the ESv11p1000 option was at 14.25 so I assume that the exit point would have already been hit and you would be out. The option settled at 36.50 on 8/8/11.
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Here is the ESv11p1075 option. It was 4.10 on 7/22/11. The exact same price as a 4.02 delta put was on 9/19/14 that @uuu1965 used in his Risk test. When the price got to 17.80 in the Risk test 98% of the IMx3 was used.

On 8/5/11 the ESv11p1075 option was at 25.25 so I assume that the exit point would have already been hit and you would be out. The option settled at 58.00 on 8/8/11.
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I'm guessing the exit point would have been hit on 8/4/11 for both options when ES dropped 56 that day. Using the settlements for the options that day and guessing at the IMx3 that was used if you entered on the worst day, 7/22/11, I'm guessing the drawdown would be about 33%.

No strategy is foolproof. You can't blindly acquire contracts and ignore everything else. ES started dropping 2 weeks before 8/5/11. There was talk of a possible shutdown for at least 2 weeks before it happened. When things like that may happen you just have to be on the sidelines and miss some time trading and then be ready when it is having the big rebound.

Of course if a 9/11 type thing happened with no hint prior, then yes it will be ugly. But that is the nature of all trading.

The only way to prevent huge losses is to have covered option spreads. I need to do more research on spreads. My prior research using a 3.00 delta for the spread showed no help on a 158 point move. https://futures.io/options-cfd-trading/12309-selling-options-futures-422.html#post495393 I need to look at what happens if there was a 250 point move or with narrower spreads (lower delta spreads).

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