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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:568,065 / 5,727
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Selling Options on Futures?

Old July 2nd, 2015, 02:59 PM   #4431 (permalink)
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ron99 View Post
Btrader11, if you want to have a discussion with me you need to use reasonable numbers. 30 to 50% one day drops are not reasonable.

A -21% move was considered unreasonable and impossible...until it happened. That's exactly the point - neither you or I can sit here and define what can reasonably happen. If you're saying that it's such a low probability that you're willing to risk your entire account on it, then fine. However...

The second point was that it doesn't take anywhere close to an unprecedented scenario to wipe you out. As mentioned in the previous post, there's a decent chance a 5% gap could take you out and 10% almost certainly will.



ron99 View Post
According to barchart.com, the lowest ES trade on the first day trading after 9/11 was down 7.2%. Settlement that day was down 5%.

I can't post links or images yet, but I used SPY as a proxy for the 9/11 return. Closed at 110.05 and re-opened at 101.00 (-8.2%) with a low of 100.00 (-9.1%). Doesn't matter...the differences are rounding errors and the larger point stands.


Again, limiting risk assessment (and position sizing) to historical prices fails to consider an entire world of unknowns that we just haven't seen (yet). Even if that were sufficient, the sizing being used here almost certainly would not have survived the IV explosion.

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Old July 2nd, 2015, 04:10 PM   #4432 (permalink)
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That table I posted earlier from CNBC with the biggest one day drop in history for S&P 500 was from 2010.

Here is another table.

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https://en.wikipedia.org/wiki/List_of_largest_daily_changes_in_the_S%26P_500


Last edited by ron99; July 2nd, 2015 at 04:15 PM.
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Old July 2nd, 2015, 04:25 PM   #4433 (permalink)
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Btrader11 View Post
I'm not trying to be argumentative, so please don't it take it that way. Just trying to do a healthy exploration of the risks - can never be a bad thing. To that end, a couple of points:

1. Why should we assume that history is going to repeat itself? No one saw Black Monday coming back in 1986. Same goes for 9/11 and I would think that the world we live in today makes unprecedented events more likely than ever. After all, why would anyone be bidding for these cheap puts if such risks weren't real? The next major gap we see may be 50% down on open...we just don't know.

2. Even if we don't see bigger gaps in our lifetime, the marks on these puts in scenarios that have already occurred will still be an extraordinary loss large enough to wipe out the account. Take 9/11 as an example (which didn't even make your list):

Market opened down 8.2%
Vix opened at 43.2

Using those inputs to price 90 DTE 1650 puts would value them at 64.77. That's a mark-to-market of -6,476,961 on your 2,000 contracts. In reality, the mark would likely be much worse given that the downside skew would likely have the IV of those puts well above 43.2%.

53% IV -> -9,545,393
63% IV -> -12,824,054

Just for fun, the VIX was said to reach 150 in the '87 crash. At a 21% drop in ES and 150% vol, these 90 DTE 3 delta puts would mark at -50,898,281.

With this many contracts, would a 5% gap down and ensuing vix pop be enough to clean out the account? Maybe...and that's certainly not a far fetched scenario.


Anyhow, the point is that there is no exiting ahead of time for a number of unknown market shock scenarios and this is the risk that is being sold in these puts. I'm not judging the strategy and it can work if you make your money and get out before the account destroying market shock comes, but let's be honest about what can happen here. Limiting the risk discussion to what's happened in the past is far too simplistic in my opinion.

Not to take anything from Ron, but this is a differing opinion that I think is essential for a healthy discussion to let new traders (last two years) know the risk involved. Ron strategy works great in low IV markets in the last two years as his data has proved. But you are hitting on some key points about IV pop that would send option premiums through the roof, I've seen it happen in 08-09 and during the S&P downgrade in 2012, (not referring to gvt shutdown).

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Old July 2nd, 2015, 04:29 PM   #4434 (permalink)
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It seems highly unlikely that a 21% drop (1987) will occur in a modern electronic market. These types of gaps were possible back when there was no overnight trading.

Also, ES options are open nearly 24 hours so this whole discussion is moot since you can always get out (admittedly with some slippage in the overnight hours) unless the exchange is shut down such as 9/11. Unless you think a 21% drop is possible between when the markets close 4:15pm and open 6pm EST.

Alternatively, long before we experience a 444 point drop in the market (a 21% drop) I would be buying VXX calls to offset the IV skew and you could simply purchase the equivalent underlying ES futures to offset the delta (once you start approaching ATM). These are both strong offsets to the short options with low (and stable) margin requirements.

Of course there are always wipe out risks even considering these options. I could be hit by a bus tomorrow, WWIII could erupt from Iran or N Korea and nuke us all, zombie apocalypse. Nothing is 100% safe. The question is are the probabilities of wipe out sufficiently low enough to justify the risk?

The way I gear my account, the only no win scenario is a market shut down such as 9/11 where there is a >15% drop and a VIX increase of >12% (upon market re-open). This has never occurred in my lifetime but it certainly could. That being said this lower gearing ratio would allow for an average of a 20% APR (much less than Ron's returns) even including losing years (such as 2008). Therefore, as long as this wipe-out event does not occur more than 1 time out of every 5 years (and I set aside sufficient funds to refund a wiped out account) this is a winning expectancy system.

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Old July 2nd, 2015, 04:50 PM   #4435 (permalink)
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eudamonia View Post
It seems highly unlikely that a 21% drop (1987) will occur in a modern electronic market. These types of gaps were possible back when there was no overnight trading.

Also, ES options are open nearly 24 hours so this whole discussion is moot since you can always get out (admittedly with some slippage in the overnight hours) unless the exchange is shut down such as 9/11. Unless you think a 21% drop is possible between when the markets close 4:15pm and open 6pm EST.

Alternatively, long before we experience a 444 point drop in the market (a 21% drop) I would be buying VXX calls to offset the IV skew and you could simply purchase the equivalent underlying ES futures to offset the delta (once you start approaching ATM). These are both strong offsets to the short options with low (and stable) margin requirements.

Of course there are always wipe out risks even considering these options. I could be hit by a bus tomorrow, WWIII could erupt from Iran or N Korea and nuke us all, zombie apocalypse. Nothing is 100% safe. The question is are the probabilities of wipe out sufficiently low enough to justify the risk?

The way I gear my account, the only no win scenario is a market shut down such as 9/11 where there is a >15% drop and a VIX increase of >12% (upon market re-open). This has never occurred in my lifetime but it certainly could. That being said this lower gearing ratio would allow for an average of a 20% APR (much less than Ron's returns) even including losing years (such as 2008). Therefore, as long as this wipe-out event does not occur more than 1 time out of every 5 years (and I set aside sufficient funds to refund a wiped out account) this is a winning expectancy system.

Good post. Would you happen to have the VIX increase on Sunday September 14,2008? The day before Lehman Brothers filed for bankruptcy.

Tasty trade had segment on a beta weighted delta portfolio:
http://ontt.tv/1GN24xp

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Old July 2nd, 2015, 04:51 PM   #4436 (permalink)
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eudamonia View Post
It seems highly unlikely that a 21% drop (1987) will occur in a modern electronic market. These types of gaps were possible back when there was no overnight trading.

Also, ES options are open nearly 24 hours so this whole discussion is moot since you can always get out (admittedly with some slippage in the overnight hours) unless the exchange is shut down such as 9/11. Unless you think a 21% drop is possible between when the markets close 4:15pm and open 6pm EST.

Alternatively, long before we experience a 444 point drop in the market (a 21% drop) I would be buying VXX calls to offset the IV skew and you could simply purchase the equivalent underlying ES futures to offset the delta (once you start approaching ATM). These are both strong offsets to the short options with low (and stable) margin requirements.

Of course there are always wipe out risks even considering these options. I could be hit by a bus tomorrow, WWIII could erupt from Iran or N Korea and nuke us all, zombie apocalypse. Nothing is 100% safe. The question is are the probabilities of wipe out sufficiently low enough to justify the risk?

The way I gear my account, the only no win scenario is a market shut down such as 9/11 where there is a >15% drop and a VIX increase of >12% (upon market re-open). This has never occurred in my lifetime but it certainly could. That being said this lower gearing ratio would allow for an average of a 20% APR (much less than Ron's returns) even including losing years (such as 2008). Therefore, as long as this wipe-out event does not occur more than 1 time out of every 5 years (and I set aside sufficient funds to refund a wiped out account) this is a winning expectancy system.

If there's a major terror attack, natural disaster, etc. that occurs while the market is open, do you really think there is going to be someone there to willingly sell you puts (or vix calls)? That's if the market doesn't close immediately (most likely). During the flash crash (on no news) some stocks went .01 bid. You're kidding yourself if you think any kind of orderly market will be there for you to cover your risk.

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Old July 2nd, 2015, 04:54 PM   #4437 (permalink)
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blb014 View Post
Good post. Would you happen to have the VIX increase on Sunday September 14,2008? The day before Lehman Brothers filed for bankruptcy.

Tasty trade had segment on a beta weighted delta portfolio:

Some info here on Vix spikes: A Brief History of Fear?VIX Over the Last 25 Years - Six Figure Investing

Check out the spike to 150 in '87...impressive.

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Old July 2nd, 2015, 05:00 PM   #4438 (permalink)
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Btrader11 View Post
The second point was that it doesn't take anywhere close to an unprecedented scenario to wipe you out. As mentioned in the previous post, there's a decent chance a 5% gap could take you out and 10% almost certainly will.

Your math is wrong.

Here is table for ESx11p800 put, 105 DTE.

Date Premium
8/5/2011 4.05 (Friday)
8/8/2011 12.75 (Monday) ES futures down 7.2% in one trading day. From 1197.75 to 1111.25.

The one day loss from 8/5 to 8/8 was 8.70. For 2,000 contracts that would be 870,000. That's not even one fourth of the account.

Here is table for ESx11p750 put, 105 DTE.

Date Premium
8/5/2011 2.65 (Friday)
8/8/2011 9.00 (Monday) ES futures down 7.2% in one trading day. From 1197.75 to 1111.25.

The one day loss from 8/5 to 8/8 was 6.35. For 2,000 contracts that would be 635,000.


Btrader11 View Post
2. Even if we don't see bigger gaps in our lifetime, the marks on these puts in scenarios that have already occurred will still be an extraordinary loss large enough to wipe out the account. Take 9/11 as an example (which didn't even make your list):

Market opened down 8.2%
Vix opened at 43.2

Using those inputs to price 90 DTE 1650 puts would value them at 64.77.

An ATM Oct ES 2070 put right now is 68.00. There is no way an option that far OTM (1650 put vs 2070 future) would move from 6.00 to 64.77 on an 8.2% move.

Btrader11, you come in here with your incorrectly estimated numbers scaring everybody, when in fact realty of what happened in the recent past doesn't match your estimations.

I may be wrong, but I suspect you are trying to apply ETF option estimations to options on futures. It looks like that doesn't work.

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Old July 2nd, 2015, 05:03 PM   #4439 (permalink)
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blb014 View Post
Not to take anything from Ron, but this is a differing opinion that I think is essential for a healthy discussion to let new traders (last two years) know the risk involved. Ron strategy works great in low IV markets in the last two years as his data has proved. But you are hitting on some key points about IV pop that would send option premiums through the roof, I've seen it happen in 08-09 and during the S&P downgrade in 2012, (not referring to gvt shutdown).

Only if the person is using accurate estimations. He isn't.

The biggest one day drop in 2012 was 2.5%.

Interesting that you are wanting to talk about risk when you are selling 1900 puts. That is far more risk than I would ever take on.


Last edited by ron99; July 2nd, 2015 at 05:26 PM.
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Old July 2nd, 2015, 05:06 PM   #4440 (permalink)
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Btrader11 View Post
If there's a major terror attack, natural disaster, etc. that occurs while the market is open, do you really think there is going to be someone there to willingly sell you puts (or vix calls)? That's if the market doesn't close immediately (most likely). During the flash crash (on no news) some stocks went .01 bid. You're kidding yourself if you think any kind of orderly market will be there for you to cover your risk.

In most cases, yes. I traded around 9/11, during Katrina, all during 2008, and the day of the flash crash. Prices were wild but you could get filled (maybe not at great prices but still). You could cover your risk.

Indexes and futures are not nearly the same thing as individual stocks in terms of liquidity.

You also didn't say anything about my last point. If you have returns that fund an account within a few years you only need to avoid wiping out every few years. Anything over that is positive expectancy. The scenarios you are discussing might happen once a lifetime if they happen at all.

In general, I agree with you that we should manage wipe-out risk (even the unknowns) and always be cognizant of it. On the other hand, being afraid to go to work tomorrow morning because a meteor might strike me down seems like a prohibitive way to live.

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