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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:568,288 / 5,727
Last Reply:December 2nd, 2016 (12:40 PM) Attachments:642

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Selling Options on Futures?

Old August 24th, 2015, 09:53 PM   #4851 (permalink)
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rmejia View Post
I've been wondering about the same again after this event. I wish I had the data to test different exit percentages. I remember seeing some tastytrade market measures talk about mechanical exits. I don't know where tastytrade gets their data from; Sosnoff has mentioned releasing it for free to everyone in the future to crowd test strategies. Found this market measure on "Exiting Losing Trades" which is for a 1SD daily strangle on the SPY from 2009-2014 which might produce similar results, but no way of knowing without testing the different parameters. The results from this study showed a 2x loss from the credit received as the optimal exit point.

https://www.tastytrade.com/tt/shows/market-measures/episodes/exiting-losing-trades-12-16-2014#

Exiting at 2x loss is what I have been doing. The only problem is that the market doesn't always cooperate.

I had my stops at 2x Max credit in place this morning with 10 delta Nov SPX IronCondors (25 points wide) and I was actually in decent shape at Fri close (was actually still in the green and I felt I could survive another drop). Then when the Vix dropped suddenly this morning and spreads widened and my stop limit orders got hit when price pulled back. Actually what look like what happened was it jumped past my stop limit orders and they were not triggered which made me pretty nervous/scared for a bit when it was running down to it's lows. Then VIX pulled back and price shot up then my stop limit orders activated and were triggered. So overall I took a 7% drawdown.

If that final spike didn't happen I would still have my positions open. I know because I have a single Nov ES IronCondor with the same strikes which didn't get stopped out only because Bids disappeared in ES (and are still missing for my IC so I am stuck in it for now, I may try to roll the tested side).
So I am a bit mad at that spike taking me out, then again, there was no way to be sure of a rebound. It could have kept going straight down so I will live with it

I do plan on staying with mechanical strict exits as a spike like today happens every few years.

If you do use a 2x max credit you have to be aware of the other 2 parts of the equation, the take profit % and the win/loss rate. If you know those you can apply the Kelly Criterion and see if you will be successful.
If you take a 2x loss rate and take profit at 50% but have a 66% win rate you will lose money. You need a win rate closer to 75-80% (*Also need to factor in slippage and commissions fees into your win ratio*)

There are a few online calculators on the net but here are 2 that work well

http://www.automated-trading-system.com/resources/risk-of-ruin-and-drawdown-calculation-tool/
http://www.albionresearch.com/kelly/default.php


Last edited by Chubbly; August 25th, 2015 at 01:33 AM.
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Old August 24th, 2015, 10:15 PM   #4852 (permalink)
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grausch View Post
I believe the appropriate quote is "The market can stay irrational for longer than you can stay solvent."

Brutal month so far - I wonder how much the Chinese stock market was driven by Chinese housewives buying stocks on insane margin? Seems very similar to the GBP/JPY carry-trade unwind with the prior crisis. Lots of people lost their shirts during that move.

Yes, you are right, many were not educated traders. Further, besides the brokerage lending, there was a grey market for that as well known as "umbrella trusts", which to the best of my understanding was lending higher than what traditional brokerages provide.

But, the worst thing that the Chinese government did is to restrict short selling, blame hedge funds and alt trading. This is just an artificial way to hide risk that resurfaces and over extends later on. When the Chinese government decided to buy securities to support the market which was their way of quantitative easing, it was too late.
We are paying the price now over here because of their market policies.
Other would call it "correction inline with the world economies", but that in nonsense in my opinion.

Matt
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Old August 25th, 2015, 05:31 AM   #4853 (permalink)
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mattz View Post
Yes, you are right, many were not educated traders. Further, besides the brokerage lending, there was a grey market for that as well known as "umbrella trusts", which to the best of my understanding was lending higher than what traditional brokerages provide.

But, the worst thing that the Chinese government did is to restrict short selling, blame hedge funds and alt trading. This is just an artificial way to hide risk that resurfaces and over extends later on. When the Chinese government decided to buy securities to support the market which was their way of quantitative easing, it was too late.
We are paying the price now over here because of their market policies.
Other would call it "correction inline with the world economies", but that in nonsense in my opinion.

Matt
Optimus Futures

There is a substantial risk of loss in futures and options trading. Past performance is not indicative of future results.

I don't really know where to place blame, but a common theme always seems to be retail investors using a ton of leverage, thinking it safe to add on pull-backs and then losing it all when pull-backs become sell-offs. Reading about 1929, 1987, 1994 and experiencing 2007/2008 I find the similarities to be striking. Of course trying to predict when the actual sell-offs will occur is probably impossible - or at least to me it is. Government policies in cases like these always seem to be ineffective or create the potential for further downside - I am including QE in this assessment.

I don't know where all of this will end, but right now I am sitting on the sidelines and may consider small trades once things shape up a little better. No point in throwing away capital when normal volatility can easily take out my stops.

Appreciate your view on the matter and hope you don't take offence if I don't post on this anymore, but I don't wish to derail ron's excellent thread anymore so will go back to lurking...

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Old August 25th, 2015, 10:29 AM   #4854 (permalink)
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ron99 View Post
My IMx3 spreads have hit exit point. I will exit when I see market start to drop again.

My IMx4 spreads are not at exit point at 10:15 am (ignoring craziness from 9:10 am to 9:40 am). But drawdown is 47%. I will probably exit these today too.

I suspect margin calls tomorrow will send another wave of selling.

After this is over we need to research ways to limit losses better. Selling futures? Just getting out at any sign of trouble? Find another way to invest money

I am seriously troubled by what the markets have become because of algo trading.

I have followed this thread a good while and think its most interesting and thought provoking. I do wonder if somehow the VIX should be added into the exit criteria as a strategy for measuring the volatilty and in certain upswings that when the VIX does XYZ then XYZ put is bought or a position is closed.

I assume everyone has read taleb / niederhoffer on the thread (im of the opinion both can coexist) and id rather niederhoffer than the taleb strategy....

Blowing Up

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Old August 25th, 2015, 12:00 PM   #4855 (permalink)
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A quick question, does spy decay in the same way as es?

/rsm005/

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Old August 25th, 2015, 01:34 PM   #4856 (permalink)
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rsm005 View Post
A quick question, does spy decay in the same way as es?

/rsm005/

The decay is represented in the Theta value. But yes I would say a 10 delta put in /ES, SPY and SPX all decay at the same rate

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Old August 25th, 2015, 01:48 PM   #4857 (permalink)
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Chubbly View Post
The decay is represented in the Theta value. But yes I would say a 10 delta put in /ES, SPY and SPX all decay at the same rate

@ron99 so your trading method would apply to SPY? I'm going to go back into this without leverage. It's not as good a return but something I can live with on a day like yesterday without feeling like walking off a ledge .

/rsm005/

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Old August 25th, 2015, 01:52 PM   #4858 (permalink)
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rsm005 View Post
@ron99 so your trading method would apply to SPY? I'm going to go back into this without leverage. It's not as good a return but something I can live with on a day like yesterday without feeling like walking off a ledge .

/rsm005/

Are the margin requirements the same? Since the margin requirements between ES Futures and SPY are so different I'm guessing the Options are different as well but could be wrong.

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Old August 25th, 2015, 02:17 PM   #4859 (permalink)
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rsm005 View Post
@ron99 so your trading method would apply to SPY? I'm going to go back into this without leverage. It's not as good a return but something I can live with on a day like yesterday without feeling like walking off a ledge .

/rsm005/

I have no clue. I have never traded an option on a stock or ETF.

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Old August 25th, 2015, 02:32 PM   #4860 (permalink)
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ron99 View Post
I have no clue. I have never traded an option on a stock or ETF.

There is (was?) an unresolved issue regarding whether SPY and QQQ are eligible for Section 1256 tax treatment. I have no idea why the debate exists or existed for so long, and it probably doesn't make any difference to a Canadian, but US citizens should look into the issue if they're considering a change from Futures (ES) to ETFs.

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