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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:569,330 / 5,728
Last Reply:December 6th, 2016 (05:26 PM) Attachments:642

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Selling Options on Futures?

Old July 3rd, 2015, 09:37 AM   #4461 (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%).

Thanks for modeling the option prices in 07-08 and just looking at your examples regarding IV:

ex. 1 Jan 2008 - 197.25 point drop in ES
.03 delta put price increase 3.83->21.15

ex. 2 July 2008 - 194 point drop in ES
.03 delta put price increase 3.83->18.67

ex.3 Sept 2008 - 83 point drop in ES
.03 delta put price increase 3.4 -> 38.08

IV and the put price soar after the failure of Lehman Brothers, and even though there was only a 83 point drop in ES.
This could be example of what Btrader11 was referring to "many not-so-far-fetched scenarios (the IV blow out is being wildly underestimated)"

No one knew about the how bad the banks were until mid September and the failure of Lehman Brothers over the weekend and Morgan Stanley on the brink later that week. Then the subsequent financial crisis began, the government bailout with TARP, the great recession and the real spike in volatility happen.

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Old July 3rd, 2015, 11:58 AM   #4462 (permalink)
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datahogg View Post
If you are not confident enough to know that you will not lose money, you don't need to be trading.


We all would be rich!


I know what you meant to say, and I agree completely. With any investment business, real estate and especially options, there is risk involved and it is best to know the extent of the risk involved

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Old July 3rd, 2015, 12:15 PM   #4463 (permalink)
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datahogg View Post
If you are not confident enough to know that you will not lose money, you don't need to be trading.

I don't want to derail this thread as I don't trade options. But I don't understand your post. Loss is part of life as a trader, I lose money all the time. But it's just temporary, as my expectancy is positive. Avoiding loss or avoiding risk is not the solution. The solution is knowing the risk and then trading accordingly.

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Old July 3rd, 2015, 12:22 PM   #4464 (permalink)
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blb014 View Post
Thanks for modeling the option prices in 07-08 and just looking at your examples regarding IV:

IV and the put price soar after the failure of Lehman Brothers, and even though there was only a 83 point drop in ES.
This could be example of what Btrader11 was referring to "many not-so-far-fetched scenarios (the IV blow out is being wildly underestimated)"

Natural gas winter of 13/14 and crude oil Fall 2014 to Spring 2015 are more recent examples of volatility blow outs, especially NG,. All the data can be found in Dudetooth's SPAN tool for those who want to test their strategies or just to learn how quickly things can turn.

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Old July 4th, 2015, 02:49 AM   #4465 (permalink)
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rsm005 View Post
First trade made using my actual trading account. I'll try to keep posting on here to give you guys an idea of how its playing out.

Commodity: ES
Option: OESU5 P1700
Expiration: Sept. 18th 2015
Premium: $5.25
Quantity: 50
Initial Margin: $45,450
Current S&P: 2111.25
Date Position Opened: 6/3/2015
Days to Expiration: 107


Thanks,
/rsm005/



All,

Thought I'd give everyone a quick update on how things have been going with this trade. It's certainly not been as smooth a ride down to 50% as I would have hoped. In the first few weeks the decay was nice and orderly. Even as the market started to grind down my position still held up well, didn't lose too much value, and was positive. However, on the 28th Greece announced a referendum and the markets went to hell. My position when from almost $6,000 up to $5,000 down in one day. It came back a bit but since then I've been down a few thousand and it looks like next week is going to be just as volatile. My position is still in the red and I'm not sure what's going to happen with the markets going into the next 2 weeks. I thought of exiting and just eating a small loss given the impact a Greece exit and the Chinese market plunge would have but didn't want to make panicked decisions.

/rsm005/


CURRENT STATUS:
Commodity: ES
Option: OESU5 P1700
Expiration: Sept. 18th 2015

Opening Premium: $5.25
Current settlement price: $5.50

Quantity: 50
Opening Initial Margin: $45,450
Current Initial Margin: $38,600

S&P when the trade was opened: 2111.25
Current S&P: 2067

Date Position Opened: 6/3/2015
Days left before Expiration: 77
Days position open: 30

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Old July 4th, 2015, 04:25 AM   #4466 (permalink)
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rsm005 View Post
All,

Thought I'd give everyone a quick update on how things have been going with this trade. It's certainly not been as smooth a ride down to 50% as I would have hoped. In the first few weeks the decay was nice and orderly. Even as the market started to grind down my position still held up well, didn't lose too much value, and was positive. However, on the 28th Greece announced a referendum and the markets went to hell. My position when from almost $6,000 up to $5,000 down in one day. It came back a bit but since then I've been down a few thousand and it looks like next week is going to be just as volatile. My position is still in the red and I'm not sure what's going to happen with the markets going into the next 2 weeks. I thought of exiting and just eating a small loss given the impact a Greece exit and the Chinese market plunge would have but didn't want to make panicked decisions.

/rsm005/


CURRENT STATUS:
Commodity: ES
Option: OESU5 P1700
Expiration: Sept. 18th 2015

Opening Premium: $5.25
Current settlement price: $5.50

Quantity: 50
Opening Initial Margin: $45,450
Current Initial Margin: $38,600

S&P when the trade was opened: 2111.25
Current S&P: 2067

Date Position Opened: 6/3/2015
Days left before Expiration: 77
Days position open: 30

why should you close your positions? Everything is going as expected. The 2050 in ES is a good point to open new positions. Big players are buying there

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Old July 4th, 2015, 10:27 AM   #4467 (permalink)
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rsm005 View Post
All,

Thought I'd give everyone a quick update on how things have been going with this trade. It's certainly not been as smooth a ride down to 50% as I would have hoped. In the first few weeks the decay was nice and orderly. Even as the market started to grind down my position still held up well, didn't lose too much value, and was positive. However, on the 28th Greece announced a referendum and the markets went to hell. My position when from almost $6,000 up to $5,000 down in one day. It came back a bit but since then I've been down a few thousand and it looks like next week is going to be just as volatile. My position is still in the red and I'm not sure what's going to happen with the markets going into the next 2 weeks. I thought of exiting and just eating a small loss given the impact a Greece exit and the Chinese market plunge would have but didn't want to make panicked decisions.

/rsm005/

When I did my long term 2 1/2 year study there were 6 trades that were held over 40 days out of 33 trades. Two over 50. So it happens.

Your IM is lower now than when you entered trade so that gives you more room until you possibly hit the exit point.

I entered Sep 1650s on 6/11 at 3.20. They are now 4.05. So I am a little underwater.

Beginning IMx3 was 623 * 3 = 1,869
Premium change 3.20 - 4.05 = -0.85 * 50 = -42.50
Change in IM = 595 (Cur IM) - 623 (Beginning IM) = -28

So it has only used 14.50 of the 1,869 held for each contract.

In 7/1 I entered Oct 1550s at 3.40. They are also 4.05 now.

Yes this strategy is boring some of the time. Patience is the key.

I have tried many, many times to time entries and exits. I have had no luck because you just never know what is around the corner. The only thing I am doing now is not having my accounts full because of the Greek situation.

NOTE: FYI SPAN margins were recalculated for Friday July 3rd. Mine dropped 6% from Thu. It's interesting that premiums are higher but IM is lower than about a month ago.


Last edited by ron99; July 4th, 2015 at 01:20 PM. Reason: Margin changes for 7/3
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Old July 4th, 2015, 02:38 PM   #4468 (permalink)
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Hills View Post
why should you close your positions? Everything is going as expected. The 2050 in ES is a good point to open new positions. Big players are buying there

The big reason I was looking at an exit was because of the number of unknowns coming into the weekend. If Greece voted no we can all expect a big dip in the market. My thought was to buy back the position at a small profit or even a small loss, and sell again the following week. I reconsidered the idea and decided to just sit and wait. Ron said it best some time ago in this thread, the more boring this method of trading is the better it is. In the end, doing nothing is probably better than doing something.


ron99 View Post

NOTE: FYI SPAN margins were recalculated for Friday July 3rd. Mine dropped 6% from Thu. It's interesting that premiums are higher but IM is lower than about a month ago.

Agreed, that is very interesting. This tell me the markets aren't really too worried about the uphevel. I'm pretty deep in to my position right now and thought of reducing my exposure last week but would have just taken a loss. I'm just holding on for the ride.

/rsm005/

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Old July 4th, 2015, 07:31 PM   #4469 (permalink)
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@eudamonia modeled what would happen to options if there was a 200 point drop in ES futures in one day. 9.5% drop (Only one drop larger than this in history. 1987. None in 2008.). He did this on 6/24.

I applied those numbers to naked options and spreads. Here is what I got.

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For naked options, the lower the delta the higher the draw down. Same for spreads. But the drawdown on spreads was far less than naked options. But remember this table from earlier.

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The spreads had a little less staying power for normal circumstances.

Here was the monthly ROI for one study I did.

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Slightly less ROI for spreads.

Here is a more recent study.

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Spreads will prevent a disaster from wiping you out. They will also perform slightly worse under normal circumstances. Use the strategy that fits your needs.

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Old July 6th, 2015, 03:03 PM   #4470 (permalink)
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High/Low limit


I think there is a limit of how much the market can drop in one day (5% or 6%?), for EMINI it is 1923 for today, check this:

http://www.cmegroup.com/trading/equity-index/us-index/e-mini-sandp500.html

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