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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:569,171 / 5,728
Last Reply:December 6th, 2016 (05:26 PM) Attachments:642

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Selling Options on Futures?

Old July 2nd, 2015, 05:34 PM   #4441 (permalink)
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ron99 View Post
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.

The 1650 strike put (3 delta) that I used in my example (taken from today's pricing) is 20% out of the money. The options you show above are 33% and 37% out of the money. Not even close to apples to apples. Why the difference? Vix is at 17 today vs. 32 on 8/5/2011. Are you aware what happens to delta/vega at higher levels of IV?


ron99 View Post
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.

Serious question, do you not have an options pricing calculator? Your broker must have one embedded in their platform. Model up the Sep 1650 put with 43% IV and ES at 1900.


ron99 View Post
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.

Your obsession with the recent past is clouding your judgment. Go ahead and check my numbers using an options pricer. I'm not trying to scare anyone but rather making people aware of what can happen when trading this size in cheap options. Since 2008, it has been arguably the best time in the history of options trading to sell cheap puts. That doesn't mean it will work forever. I'm honestly coming in here with good intentions trying to create awareness that losing everything is very possible with this strategy. No doubt people have gotten away with it in the past and made enough to quit the game...but the Wall Street graveyard is full of people who weren't so lucky with the timing.

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Old July 2nd, 2015, 05:43 PM   #4442 (permalink)
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eudamonia View Post
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.

No doubt, that is true. I'm not against selling vol and if sized appropriately I do believe it will be positive expectancy long term (although the ride could be bumpy). However, some of the sizing recommendations here are crazy in my view and almost guarantee a complete wipe out in many not-so-far-fetched scenarios (the IV blow out is being wildly underestimated).

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Old July 2nd, 2015, 05:46 PM   #4443 (permalink)
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ron99 View Post
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.

Ron, It's relative depending on account size but in IMO opinion selling 2000 1650 puts has much more risk of a substantial drawdown or getting wiped out than 10 1900 puts.

From TOS analyze tab:
10 1900 Aug Put 6% drop -14,870

2000 1650 Sept Put 6% drop -730,844

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Old July 2nd, 2015, 05:53 PM   #4444 (permalink)
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blb014 View Post
Ron, It's relative depending on account size but in IMO opinion selling 2000 1650 puts has much more risk of a substantial drawdown or getting wiped out than 10 1900 puts.

From TOS analyze tab:
10 1900 Aug Put 6% drop -14,870

2000 1650 Sept Put 6% drop -730,844

You are not accounting for account size. What is your account size?

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Old July 2nd, 2015, 06:02 PM   #4445 (permalink)
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ron99 View Post
You are not accounting for account size. What is your account size?

Probably not anywhere close to yours

I would probably advocate being more conservative for new traders with smaller accounts. One of the trader mention on here having 20k, said he could sleep well at night using IMx3. Unless there is more in other accounts to cover margin calls, this is risky for new traders with smaller accounts. Two margin calls close together, (hasn't happened in last 2 years but would have happen multiple times between 2008-2011) and the account is down 50%


Last edited by blb014; July 2nd, 2015 at 06:15 PM.
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Old July 2nd, 2015, 06:04 PM   #4446 (permalink)
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Btrader11 View Post
The 1650 strike put (3 delta) that I used in my example (taken from today's pricing) is 20% out of the money. The options you show above are 33% and 37% out of the money. Not even close to apples to apples. Why the difference?

I used options with the same premium as we sell now. The Sep 1650 now is at 3.40.

A ESx11p950 is about 20% OTM but the premium on 8/5/11 was 13.00 (34.25 next day). I never sell options that high.

So why would I compare a 3.40 option to a 13.00 option?

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Old July 2nd, 2015, 06:10 PM   #4447 (permalink)
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Btrader11 View Post
The 1650 strike put (3 delta) that I used in my example (taken from today's pricing) is 20% out of the money. The options you show above are 33% and 37% out of the money. Not even close to apples to apples. Why the difference? Vix is at 17 today vs. 32 on 8/5/2011. Are you aware what happens to delta/vega at higher levels of IV?

Serious question, do you not have an options pricing calculator? Your broker must have one embedded in their platform. Model up the Sep 1650 put with 43% IV and ES at 1900.

Your modeling is inaccurate for an actual Flash Crash scenario. See my modeling results with actual historical volatility surface data:

https://futures.io/options-cfd-trading/12309-selling-options-futures-417.html#post494726

Also, your scenario is not realistic to a mere 8.2% drop. Current IV at the .03 delta is 24.5%. You are talking about a 18.5% IV increase in a single day (which would take a much larger move). The VIX is for a delta of 1 and is not the same as the volatility surface.

Also, the rate of increase of the IV not only correlates to the drop in price of the underlying but also the starting value of IV. Therefore, you would need much less of a price drop to increase IV by 20% if starting IV is 60% vs. starting at 25%.

For some extreme examples see modeling of 2008: https://futures.io/options-cfd-trading/12309-selling-options-futures-419.html#post494817

Obviously, extreme IV tail risk can and will occur. Typically, higher volatility follows high volatility and lower volatility follows low volatility. This is a non triviality - selling options in September 2008 (clear bear market with IV at 60%) is a far riskier proposition than selling them now (clear bull market with IV at 25%).

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Old July 2nd, 2015, 06:26 PM   #4448 (permalink)
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ron99 View Post
I used options with the same premium as we sell now. The Sep 1650 now is at 3.40.

A ESx11p950 is about 20% OTM but the premium on 8/5/11 was 13.00 (34.25 next day). I never sell options that high.

So why would I compare a 3.40 option to a 13.00 option?

You shouldn't be comparing the Sep 2015 1650 put to any option in August 2011. It's nonsensical. We live in 2015 in a much different environment (vix is now half of what it was). As we sit here today, you are still selling puts. The Sep 1650 is a 3 delta put that is representative of what you sell. If the market opens up down 8.2% and at 43.2% vol, what will the Sep 1650 put be worth? This is perfectly easy to answer without using tortured logic to find some historical analog.

In reality, that's just one arbitrary scenario - why not build a grid of % gaps and %IV and look at the resulting put valuations?

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Old July 2nd, 2015, 06:29 PM   #4449 (permalink)
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blb014 View Post
Probably not anywhere close to yours

I would probably advocate being more conservative for new traders with smaller accounts. One of the trader mention on here having 20k, said he could sleep well at night using IMx3. Unless there is more in other accounts to cover margin calls, this is risky for new traders with smaller accounts. Two margin calls close together, (hasn't happened in last 2 years but would have happen multiple times between 2008-2011) and the account is down 50%

Also, I just want to say that I actually totally agree. There is no shame in starting (or even staying) small on size. Ron has been doing this successfully for years and knows far more than I do and I'm not a beginner. 2008 was a beast - and most people forget there were two big dips before the fall of 2008 (by that time I remember clearly that even most retail folks were getting the hell out of dodge).

I think what Ron is illustrating with his own results is what is possible. I hope to think that I might achieve that level at some point. Until them I'm very happy even making half what he does.

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Old July 2nd, 2015, 06:34 PM   #4450 (permalink)
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blb014 View Post
Probably not anywhere close to yours

I would probably advocate being more conservative for new traders with smaller accounts. One of the trader mention on here having 20k, said he could sleep well at night using IMx3. Unless there is more in other accounts to cover margin calls, this is risky for new traders with smaller accounts. Two margin calls close together, (hasn't happened in last 2 years but would have happen multiple times between 2008-2011) and the account is down 50%

So what if it is down 50%? Everybody is supposed to be trading money they can lose.

The worry would be if someone were to lose 100+%. And based on 99.9% of times they wouldn't. If you are selling puts in 2008 you shouldn't be trading at all.

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