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Selling Options on Futures?
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Selling Options on Futures?

  #4781 (permalink)
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rsm005 View Post
I wanted to jot down some facts that and a few notes now that I've had a chance to digest what happened yesterday and let the hangover ease up...

FACTS:
1. The market reported the largest 2 day % drop in almost 5 years on Thursday and Friday
2. The Dow is in a correction
3. There was no new news that caused this even to happen. The situation in China was known, the currency devaluation was known, the interest rate wishy-washyness was known, and the overall performance of commodities, dollar, and participants in the market rally was known for quite some time. The market simply shrugged off those bits of news as they came up.
4. After a big drop on a Friday it's expected that the trend will continue into the following Monday as people fester and brood over the weekend. We can expect further selling starting on Sunday night and continuing into Monday. Realistically Tuesday will probably be the first day we see some stabilization. Who knows what happens after the fed meeting on Wed.
5. It's apparently rare for 2 day drops of this magnitude to continue into 3 or 4 days
6. When I read the news I look for a general consensus. What is the overall sentiment from a bulk of the outlets, analysts, and op-eds. Yesterday it was "This is the correction we're all looking for and look for this to continue for a while." Today it's "The market over reacted. We may see a few more slips down but the buyers will probably step in soon given the overall strength of the US."
7. The Fed will have another meeting on Wed.
8. Friday was a contract expiration day (not sure if that had anything to do with this selling pressure).

/rsm005/

You missed the biggest FACT : Nobody knows s**t.

You will be much better off in the future ignoring news / opinions and just keep playing the probabilities. Try to sell premium on VOL pops and stay mechanical and stick to your risk management plan.

Ignore opinions from everyone, as I said above no one knows ****. It's a numbers game. Don't go looking for answers as to why this big move happened, it's just the nature of markets. Long periods of low volatility with occasional violent spikes. Take advantage of the pops and don't get complacent in low vol environments.

edit: Before anyone comes in and tells you they 'knew' last week's sell-off was coming because of "XYZ", all I can say is that many people knew a big sell-off was likely - it's the nature of markets. But no one can accurately tell you when it will occur. Next day, next week , next month, six months from now, etc... Don't be tempted to listen to anyone's BS.


Last edited by gfmatt; August 22nd, 2015 at 08:59 PM. Reason: additional thought
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  #4782 (permalink)
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rsm005 View Post
I wanted to jot down some facts
If there is anyone that would like to add their thoughts or suggest changes to the "plan of action" then please feel free to let me know.
/rsm005/

I would focus more on the implied volatility, not a two-day drop and the likelihood of a third down day. A doubling of IV, not a 5% price drop is what's slamming the position. The market could be a little softer on Sunday pm/Monday and if volatility comes down a bit you might be surprised at how quickly the position begins to turn around. I think you only have two or three trades on so it's really easy to stress test them in an simple options calculator.

If you're going to sell options on physical commodities, make sure you understand what you're getting into. A doubling or even tripling of IV in a week or two is not unheard of, and over the course of three or four weeks I wouldn't even consider it rare. As for a 5% price decline in two or three days, that's actually pretty common in commodities.

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  #4783 (permalink)
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ron99 View Post
The ESx5p1650 IM is now 1360. It settled at 17.40.

For myself I didn't have any IMx3 positions hit exit point but some are real close. 58 away.

My IMx4 still have plenty of room. 754 away.

My ESx5p1500-1700 spreads are 286 to 366 away from exit point. (Added 4-7 days after 1650s.)

I added one set of spreads on the same day, 7/31, as the 1650s. It is 294 away from exit while 1650s are 58 away.

For your strategy when you say "exit point" do you close the position and wait until the market calms down to re open a new position or would you roll the position down closer to the current .03 delta within the same expiration or on the next expiration?

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  #4784 (permalink)
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CafeGrande View Post
I would focus more on the implied volatility, not a two-day drop and the likelihood of a third down day. A doubling of IV, not a 5% price drop is what's slamming the position.

The market could be a little softer on Sunday pm/Monday and if volatility comes down a bit you might be surprised at how quickly the position begins to turn around. I think you only have two or three trades on so it's really easy to stress test them in an simple options calculator.

If you're going to sell options on physical commodities, make sure you understand what you're getting into. A doubling or even tripling of IV in a week or two is not unheard of, and over the course of three or four weeks I wouldn't even consider it rare. As for a 5% price decline in two or three days, that's actually pretty common in commodities.

A 5% drop over two days is pretty rare in ES.

https://futures.io/options-cfd-trading/12309-selling-options-futures-477.html#post514616

Only 42 times in 4,500 trading days in the last 18 years. And 16 of those were in 2 month time frame in 2008.

Also since 1986 there have been 28 occurrences of consecutive 2% down days. That's only 28 in almost 30 years. We had some pretty rare stuff happen last week.

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  #4785 (permalink)
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rmejia View Post
For your strategy when you say "exit point" do you close the position and wait until the market calms down to re open a new position or would you roll the position down closer to the current .03 delta within the same expiration or on the next expiration?

If I hit exit point and close positions I would watch market and attempt to pick bottom and roll down. It may be soon after closing or it may be a few days after closing.

I would follow my same rules when rolling down. You can sell Nov 1400 or lower and be pretty sure those will be good. I may go IMx4 at first for a little bit then add more quickly as market rebounds.

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  #4786 (permalink)
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ron99 View Post
Be careful if you try to unload Sunday night because bid/ask spread will be wide. I doubt you will be filled at mid point.

@rsm005, no idea what Sunday night will bring, but if your worried about illiquidity in the options, but want to get out, you could always sell some ES futures to protect your delta, and then on Monday when you unwind your option positions do it with a delta hedge, which should offset your short futures.

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  #4787 (permalink)
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ron99 View Post
good post rsm005. It's good to put thoughts down for further reference later. You always want to learn when things go bad and why you reacted as you did. Then don't make same wrong moves in future.

We were all expecting crazy in Sep. It happened in Aug.

Be careful if you try to unload Sunday night because bid/ask spread will be wide. I doubt you will be filled at mid point.

Thanks Ron, I have enough headroom on my cash reserve to play it by ear on Sunday night.

/rsm005/

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  #4788 (permalink)
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Many of you saw my earlier post on how rare consecutive 2% down days is...


SMCJB View Post
Assuming I'm doing this correctly I count 104 consecutive 2% down days in the SPX (Index not ES) of which most/69 occurred before 1941!

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Since 1988 there have been 24 Occurrences.
  • First Day drop averaged 3.1% with standard deviation 1.0%
  • Second Day drop averaged 3.6% with SD 1.3%
  • Two Day drop averaged 6.5% with SD 2.0%
  • Next Day market is up on average 1.6% (75% up average 2.7%, 25% down average 1.9%)
  • 5 Day later market is up on average 3.3% (70.8% up average 6.0%, 29.2% down average 3.5%)
  • 20 Day later market is up on average 4.0% (70.8% up average 8.3%, 29.2% down average 6.5%)
For perspective the average 1, 5 & 20 day changes since 1987 have been 0.04%, 0.18% and 0.71%

So I decided to expand the analysis a little to see what the daily change is day by day rather than just 1 day, 5 days & 20 days later and this is what I got...

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I think this does a good job showing that on average we get a pretty good bounce the next day and how much the data is skewed by Black Monday. Black Monday was actually a 4th consecutive >2% down day.

But then this evening I was reading @rsm005's post in the ES Option Selling thread...

rsm005 View Post
lots cut out not the entire post...

FACTS:
4. After a big drop on a Friday it's expected that the trend will continue into the following Monday as people fester and brood over the weekend. We can expect further selling starting on Sunday night and continuing into Monday. Realistically Tuesday will probably be the first day we see some stabilization. Who knows what happens after the fed meeting on Wed.
5. It's apparently rare for 2 day drops of this magnitude to continue into 3 or 4 days

Which got me thinking, is that true, is Friday selling really that scary... which then had me generate this pretty scary chart...

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Post 1987 there have been 24 consecutive down days.
21 of these have occurred on Mon-Thur and the next day the market is up and average of 2.1%
Just 3 of these have occurred on a Friday. ALL All 3 OCCURENECES the market was DOWN the next day by an average of 2.2%. Even worse 2 of the 3 occurrences the market was down AGAIN on the following day.

Remember this is post 1987 and excludes Black Monday If you include 1987 these numbers will look much much worse.

The 3 Fridays in question were 7/19/2002, 8/2/2002 & 1/30/2009
Re Black Monday. On Wed 10/14/1987 -2.95%, Thu 15 -2.34%, Fri 16 -5.08%, Mon 19 -20.46%, Tue 20 +5.23% & Wed 21 +9.10%

Apologies for cross posting this but I'm posting it in the ES options Selling Thread, ES Analysis Thread, Big Mike's Thread & the Homework Thread.

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  #4789 (permalink)
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More...

Post 1987 excludes Black Monday obviously

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Apologies for cross posting again - obviously not doing it just to increase my post count!

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  #4790 (permalink)
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@SMCJB Thanks for sending this out, incredible post. So based on this it looks like the expected scenario starting Sunday night will be a 2.4% - 5% decline leading into Monday with another round of selling on Tuesday. My gut has been telling me the selling will probably bottom out around 1930....give or take. It also seems, from that pretty scary chart you posted that the overall trend is a down trend? Weird. It's strange how that trend differs from every other one.

/rsm005/


Last edited by rsm005; August 23rd, 2015 at 01:59 AM.
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