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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:567,999 / 5,727
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Selling Options on Futures?

Old July 2nd, 2015, 06:41 PM   #4451 (permalink)
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eudamonia View Post
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%).

Your flash crash model is built on a sample size of 1. Further, there was no actual underlying news event in that scenario. Surely, the vix would behave very differently if markets sold off 8.2% on fear of WWIII.

Incidentally, I wasn't trying to model anything. The best we can do is layout a number of scenarios and see how our positions might perform. Using historical data on market crashes (which by their nature are very rare events) is largely folly. Each crisis is unique and gaining a sense of comfort based on the handful of market shocks we've seen is ill advised in my opinion.

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Old July 2nd, 2015, 06:54 PM   #4452 (permalink)
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Btrader11 View Post
Your flash crash model is built on a sample size of 1. Further, there was no actual underlying news event in that scenario. Surely, the vix would behave very differently if markets sold off 8.2% on fear of WWIII.

Incidentally, I wasn't trying to model anything. The best we can do is layout a number of scenarios and see how our positions might perform. Using historical data on market crashes (which by their nature are very rare events) is largely folly. Each crisis is unique and gaining a sense of comfort based on the handful of market shocks we've seen is ill advised in my opinion.

I also provided scenarios from 2010 and 2008.

No, actually they wouldn't sell off any differently. If markets sold off 8.2% (your words not mine) IV would behave exactly the same (go up by approximately 8-10% assuming today's IV as background). Just because you do not understand the volatility curve and smile does not mean it is convoluted or ineffable. It just means you don't understand how it functions. If you would like to know more about how it functions I can point you to some resources.

The problem is you are laying out hypothetical scenarios the way that primitive man must have imagined how the world was flat. Your inputs are fallacious and therefore so is the output. You are blindly punching numbers into the Black & Scholes model without even understanding the model - let alone it's inherent limitations.

I agree that each crisis is unique in some regards. And yet history's largest crashes repeat themselves in ways that would startle you should you take the time to study them. Obviously, the future will never be a perfect analog of the past. Stating that we can learn nothing from the past dooms us to repeat it.

If you believe what you've stated there is no evidence that would allow you to trade at all. The risks of wipe out are unknowable and therefore no edge can be derived. Many efficient market theorists believe this to be the case. However, I think you'll find few here who agree with that view point.

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Old July 2nd, 2015, 07:23 PM   #4453 (permalink)
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eudamonia View Post
I also provided scenarios from 2010 and 2008.

No, actually they wouldn't sell off any differently. If markets sold off 8.2% (your words not mine) IV would behave exactly the same (go up by approximately 8-10% assuming today's IV as background). Just because you do not understand the volatility curve and smile does not mean it is convoluted or ineffable. It just means you don't understand how it functions. If you would like to know more about how it functions I can point you to some resources.

The problem is you are laying out hypothetical scenarios the way that primitive man must have imagined how the world was flat. Your inputs are fallacious and therefore so is the output. You are blindly punching numbers into the Black & Scholes model without even understanding the model - let alone it's inherent limitations.

I agree that each crisis is unique in some regards. And yet history's largest crashes repeat themselves in ways that would startle you should you take the time to study them. Obviously, the future will never be a perfect analog of the past. Stating that we can learn nothing from the past dooms us to repeat it.

If you believe what you've stated there is no evidence that would allow you to trade at all. The risks of wipe out are unknowable and therefore no edge can be derived. Many efficient market theorists believe this to be the case. However, I think you'll find few here who agree with that view point.

Blind confidence in your time series modeling. That's never gotten anyone into trouble in finance before. Look, I've modeled vol surfaces for a long time. Of course, there's value in historical data - I never said there wasn't. However, you are sticking your head in the sand without any common sense risk overlays. You speak with the bravado of a young kid and I hope you make a killing, but you may want to reinforce your risk management with some things that aren't in the data. Many, many derivs blow ups would have been prevented this way.

I'll make this my last post as I can tell I'm an irritant. Good luck to everyone.

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Old July 2nd, 2015, 08:25 PM   #4454 (permalink)
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eudamonia View Post
I also provided scenarios from 2010 and 2008.

No, actually they wouldn't sell off any differently. If markets sold off 8.2% (your words not mine) IV would behave exactly the same (go up by approximately 8-10% assuming today's IV as background). Just because you do not understand the volatility curve and smile does not mean it is convoluted or ineffable. It just means you don't understand how it functions. If you would like to know more about how it functions I can point you to some resources.

The problem is you are laying out hypothetical scenarios the way that primitive man must have imagined how the world was flat. Your inputs are fallacious and therefore so is the output. You are blindly punching numbers into the Black & Scholes model without even understanding the model - let alone it's inherent limitations.

I agree that each crisis is unique in some regards. And yet history's largest crashes repeat themselves in ways that would startle you should you take the time to study them. Obviously, the future will never be a perfect analog of the past. Stating that we can learn nothing from the past dooms us to repeat it.

If you believe what you've stated there is no evidence that would allow you to trade at all. The risks of wipe out are unknowable and therefore no edge can be derived. Many efficient market theorists believe this to be the case. However, I think you'll find few here who agree with that view point.

What course of action would you recommend?

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Old July 2nd, 2015, 08:26 PM   #4455 (permalink)
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Someone asked a similar question in the main SP500 thread aimed at me, so I just wanted to quickly share my 2 cents. I hedge against a Black Swan by very simply not having all my assets in my brokerage account. Simple as that. What is in my brokerage account is there in order to facilitate trade.

If it goes away, then that would be bad, but certainly not devastating in any sense of the word.

For those that are overly worried about Black Swan events, I would suggest you are way too leveraged.

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Old July 2nd, 2015, 08:33 PM   #4456 (permalink)
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Btrader11 View Post
Blind confidence in your time series modeling. That's never gotten anyone into trouble in finance before. Look, I've modeled vol surfaces for a long time. Of course, there's value in historical data - I never said there wasn't. However, you are sticking your head in the sand without any common sense risk overlays. You speak with the bravado of a young kid and I hope you make a killing, but you may want to reinforce your risk management with some things that aren't in the data. Many, many derivs blow ups would have been prevented this way.

I'll make this my last post as I can tell I'm an irritant. Good luck to everyone.

I can only deal with the facts and models we have - as imperfect and incomplete as they may be. Although I might sound young and brash I'm not - and I agree that many fools have relied too heavily on their past data. But what would you have me rely upon then - conjecture?


datahogg View Post
What course of action would you recommend?

Study the history that I provided in earlier links. Know what has happened so you at least have a reference point.


Big Mike View Post
Someone asked a similar question in the main SP500 thread aimed at me, so I just wanted to quickly share my 2 cents. I hedge against a Black Swan by very simply not having all my assets in my brokerage account. Simple as that. What is in my brokerage account is there in order to facilitate trade.

If it goes away, then that would be bad, but certainly not devastating in any sense of the word.

For those that are overly worried about Black Swan events, I would suggest you are way too leveraged.

Mike

Perfectly stated. Deleverage and I would add diversify (your strategies and your markets).

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Old July 2nd, 2015, 09:34 PM   #4457 (permalink)
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@Btrader11 have you ever sold options on futures? Your profile says you have no trading experience.

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Old July 2nd, 2015, 11:51 PM   #4458 (permalink)
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Hey guys. I am a new trader and have employed Ron's strategy a month back. Not sure if you guys were referring to me and my 20k account but let me chip in.

For me since we have a rule in place for exiting the trade: Current IM + (Current P - Opening P) > 3 IM, I feel that we are well aware of the risks this strategy involves. Ron has also shown that draw downs are possible, and this is merely a numbers game (with the deltas and pITM).

True enough, one may wish to sell nearer OTM (say 10-20% OTM puts), collect a higher credit, and have a lower win trade. This trade would be ready for a choppy ride and does not mind swings in terms of realised profits/losses.

Ron trades in a safe way in that his returns are more consistent since he goes far far OTM. This way his equity curve might be more gentle as compared to a trader who goes nearer OTM.

Who is to say what's right and what's wrong. Know your risks, plan your trade, and trade your plan.

I sold some puts a week ago in clips, and they're down money as of writing (albeit unrealised). For me, I am not worried about it going ITM since I am so far away.

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Of course, I am still new and hope that we can learn from one another.

Cheers guys and happy 4th of Jul to yall

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Old July 3rd, 2015, 12:53 AM   #4459 (permalink)
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FYI.

ES futures options, 60 day constant volatility. ATM, 5 (.05) delta and 1 (.01) delta.

Not a perfect comparison to what's being discussed above, but gives an idea of what may happen to a 90-day 3-delta option which was sold a month ago, and now it's a a 60-day 1-delta option. The IV can soar. Unfortunately, this only goes back to mid June 2009.

If your software set up doesn't include VAR or stress test calculations, a simple option calculator will suffice to manually stress test an individual option under different underlying, IV and DTE scenarios.

Attached Thumbnails
Selling Options on Futures?-capture.png  

Last edited by CafeGrande; July 3rd, 2015 at 01:01 AM.
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Old July 3rd, 2015, 08:35 AM   #4460 (permalink)
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Big Mike View Post
Someone asked a similar question in the main SP500 thread aimed at me, so I just wanted to quickly share my 2 cents. I hedge against a Black Swan by very simply not having all my assets in my brokerage account. Simple as that. What is in my brokerage account is there in order to facilitate trade.

If it goes away, then that would be bad, but certainly not devastating in any sense of the word.

For those that are overly worried about Black Swan events, I would suggest you are way too leveraged.

Mike

If you are not confident enough to know that you will not lose money, you don't need to be trading.

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