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Bought back 30 contracts of ESX5 P1700 at $27.00, I was within inches of a margin call and this step doubled my excess. This should buy me enough time to see what happens on Monday. If Monday is flat then I'll hold tight, if not then I'll begin to buy back and reduce risk as the day goes on.

/rsm005/

Last edited by rsm005; August 23rd, 2015 at 07:42 PM.

Margin calls don't hit until your maintenance margin, which is 10% less than IM, is greater than your account balance.

I'm not sure how FCMs figure balance for options. I'm assuming it is last trade which can be off sometimes to true value. I sum the bid and ask and divide by 2 to get current value in my spreadsheets.

The following user says Thank You to ron99 for this post:

That's the same thing I do and honestly I had about 45k left before margin call but I just felt it would be better to unload a small portion of my more expensive puts to add a bit more breathing room. Right no my total margin reserve is approx. 90k with a realized loss of 40k. Nothing terrifying and something that I can work to make back but the added margin reserve lets me sleep a bit easier tonight.

Full Disclaimer:- The idea behind this analysis is 100% @ron99's I'm just trying to put some Math behind an idea. I am not in anyway trying to claim any credit for @ron99's method. While I have discussed this analysis with @ron99 any mathematical or computational errors are 100% my fault and do not reflect on his methodology in anyway.

Quick introduction
Okay quick intro for those who don't know me. I'm a 20+ year professional energy trader who has been following this thread since Winter 13/14 when there was a slight tangent in the discussion to selling Natural Gas Call Options. I don't currently actively trade any options but have done previously including at least one position as an option portfolio manager. I'm also a bit of a geek in that I enjoy sitting with a laptop on my lap and building models / running simulations / performing analysis & writing code rather than watching TV.

Ron99's ES Option Selling Methodology
If you reading this thread then I assume that you know what @ron99's ES Option Selling Methodology is. Unlike many trader's that focus purely on premium @ron99 correctly focus's on ROI where 'investment' is viewed as the margin required to support the position. (Well actually 3x IM as @ron99 builds in a 2x cushion). Several month's back @ron99 detailed a change in his methodology where he no longer lets his options expire, but closes them out after a 50% gain and re-enters new positions. His results imply this enhances his returns. This makes logical sense to me as theta is not linear and if you can catch 50% of the decay in <50% of the time then obviously results will be better. Around this time I was just learning to program in R and was looking for some good challenges to practice my skills on. I decided to program an analysis that would calculate what the best option, and best holding time would be, in order to maximize ROI. Several hours and several weekends later I had a working prototype and shared the results with @ron99. The results fully supported his analysis in both picking the option and in closing the position early. It was always my intention to further refine and make the results look prettier but other projects grabbed my attention and I never got to it. With last weeks plunge in the S&P500 I decided to rerun the analysis to see whether the increased implied Volatilizes made any difference. The following shows that analysis.

The Concept
There are many option pricing models but the first and most famous was the "Black Scholes" Stock Option Pricing Model. This (relatively simple) model will calculate a stock option price (and the rest of the greeks) given the inputs of (Strike, Underlying Price, Implied Volatility, Dividend Rate, Risk Free Interest Rate & Time to Expiry of the Option). The model can be expanded to calculate futures option prices by setting the dividend rate to 0. (Often called the Black or Black-76 model). This model is relatively easy to program and can quickly converted to an excel function. For anybody relatively new to options I would strongly advise you google and plagiarize an Excel Black Scholes Function and build some spread sheets to model prices, delta, gamma, theta etc of different options and option structures in different scenario's. You will probably learn a lot. Back on subject if we have an option model, and all the required inputs we can change any of those inputs and see how the price changes (aka the greeks). The simple concept of this analysis was to reduce the time to expiry by daily steps, recalculate the option price, and then calculate what the ROI of that option would on that day. To help in the selection of which option to sell, we perform this analysis on dozens/hundreds of different options across different expiries and different strikes simultaneously.

R Code for a Function to Calculate a Put Option Price using Black Scholes

Version 1 - Calculation Example
Consider the Oct 1800 Put.
On Friday 21st August the
- Dec ES contract settled at 1963.1 (aka our Underlying Price)
- Oct 1800 Put settled at 25.5 (aka our Premium)
- Time to expiry of the option was 0.1507 years
- I used a Risk Free Interest Rate of 2% (probably too high but not significant)
- Initial Margin Requirement was $2154.90
The one thing we are missing is the Implied Volatility but since we already know the option value, it's easy to calculate what implied volatility gives that option price.
- Implied Volatility is 0.29

Price at T=0 is 25.5
If price, volatility and interest rates stay the same, we can calculate what the option will be worth in a weeks time by reducing the time to expiry by 7/365.
Expected Price at T+7 is 21.7
Gross Profit at T+7 is 3.8
Assume that we experiences 0.25 points slippage during the trade
Profit after Slippage at T+7 is 3.55
Convert to $ by multiplying by 50 and deduct round turn commissions of $6
Net Profit T+7 is $171.5
Since we invested or 'reserved' 3x Initial Margin, or Investment in this position was 3x 2154.9 = $6464.7 and our Return on Investment is 171.5/6464.7 or 2.65%
Return / 3x IM is 2.65%
But this is our return for 7 days. To calculate our Annulaized rate we need to multiply this by 365/7
Annualized ROI is 138.3% !!!!

Version 1 Results
The following Heat Map/Contour Chart shows the expected ROI if prices, volatility and interest rates stay unchanged. The Y axis shows the Expiry Month & Strike Price. The X axis shows the number of days forward. The heat map/contour chart shows the Annualized ROI. Assumed Slippage is 0.25 points and RT Commissions of $6. The top third is Dec options the middle third Nov and the bottom third V.

This analysis shows that the if the market were to stay unchanged that the highest ROI could be achieved by selling the October 1400 Put at 3.45 and buying it back in 13 days time at 1.47 a 57.3% decline.

NOTE This is different from earlier analysis which showed that a longer term option had higher ROIs. I assume that this is due to the difference in implied volatilities by expiration.

NOTE2 I started the chart at Day 9 because including days 1-8 distorts the heat map due to losses incurred on the deep oout of the money options purely due to our slippage factor.

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Hmm strange futures.io (formerly BMT) didn't resize this graphic. @Big Mike ?

Version 2
Assuming price and volatility stays unchanged is an interesting experiment but in reality markets and volayility move. ES has a long term uptrend. Implied Volatility tends to increase as we approach expiry. Version 2 of the model adds the ability to add any one or all of the following...
- A daily price drift (ie +0.1 point/day)
- A one time price shock (ie -10 points on day 5)
- A daily volatility drift (ie +0.1 point/day)

This is the same (style) chart, but includes a 1% price drop (19.63 points) on day 3, ie Monday 23rd (think weekends).

NOTE This chart starts at Day 5 rather than Day 9 and the scale is from -550% to +250% instead of -40% to +250%

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Zooming In and rescaling we can see that under this scenario the option with the highest ROI is the V1400/1375/1350P with a repurchase at approximately day 18.

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Another Example
Back to normal, typical ES market that always goes up.
Price increases 1% per month or 0.9 points/day
Volatility increases 0.01 points/day

Time to sell the Oct 1400 Put....

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I'm sure this analysis isn't perfect and if anybody has any further idea's, question's or comments feel free to ask and I will try my best to answer.

All credit to @ron99 for the trading concept and also thanks to @Dudetooth for his PCSPAN application which we used to generate the input file for the analysis.

The following 25 users say Thank You to SMCJB for this post:

Ok so that's it. That last move down below 1920 pretty much ended me and I'm out. All exit points have been reached and I pulled the "oh shit" handle. I'll update everyone with the totals but it's ugly and my account has pretty much been obliterated. I'm a bit down and out right now and quite frankly numb but will recover. Have a great weekend everyone and good luck tomorrow.

Thanks,
/rsm005/

The following 10 users say Thank You to rsm005 for this post:

I'm out of my small OESX5 P1650 for 27.00. Initial premium was 4.00. It has exceeded my plan, and I don't know if it's going to bounce, but I have to stick to my plan and not rely on hope. Pretty heavy loss but living to fight another day. Hope everyone else is weathering the storm well.

Nothing worth having comes easy.

The following 5 users say Thank You to fminus for this post: