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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:568,987 / 5,728
Last Reply:20 Hours Ago (05:26 PM) Attachments:642

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Selling Options on Futures?

Old August 27th, 2015, 05:30 AM   #4881 (permalink)
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Hi, I have a few Q's regarding your points:


PeakGrowth View Post
Buying an option for black swans is an asymmetric trade where the reward far outstrips the risk. This is the mark of a smart trader.

Wouldn't you lose a lot of money over the last 6/7 years prior to the recent events though? It seems to me that as we have risen out from the 08 crash there have been many traders/professionals making money selling C/P's, or are you suggesting you wouldn't only buy options during low vol but wait for other environmental factors that signal a possible rise in vol to give you an edge?


PeakGrowth View Post
fully cash covered on stocks

How do you go about covering an index with stocks? Do you choose a basket that is closely weighted or do you use an ETF or index futs?

Cheers

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Old August 27th, 2015, 05:48 AM   #4882 (permalink)
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CobblersAwls View Post
Hi, I have a few Q's regarding your points:



Wouldn't you lose a lot of money over the last 6/7 years prior to the recent events though? It seems to me that as we have risen out from the 08 crash there have been many traders/professionals making money selling C/P's, or are you suggesting you wouldn't only buy options during low vol but wait for other environmental factors that signal a possible rise in vol to give you an edge?



How do you go about covering an index with stocks? Do you choose a basket that is closely weighted or do you use an ETF or index futs?

Cheers

That's right, buying puts all the way up whilst the QE taps were on is not smart. If you buy an option, you are still market timing so you still need factors to be in place to do it. If you have a view that QE would cause the market to move up in a predictable fashion then you would buy calls. OTM puts and sometimes calls are only useful when you have a view the market will move explosively due to an exogenous event.

Low volatility breeds complacency, until it all comes apart and those who sold way too many options get blown out. A new breed of sellers come along after that thinking it's easy money until the next crash and they get blown out too, and so on and so forth. The problem with selling vol is that as vol comes out of the market, the sellers sell more for the same (or more) return, they get bolder and bolder until next thing you know - bang - it's all over. The QE programs have made vol too low.

For Index I use spreads, so bull puts and bear calls. My risk is well defined in this situation regardless of whether the market makers are willing to play ball or if the market goes haywire.

I'm not sure about professionals who sell naked. I see/know a lot of retails who do it (doctors, business owners) and a few of them blew up this week as well. Whenever pro's sell, they lay off the risk by hedging it or it's cash covered because they want to own the stock.

p.s. these retails will sell 50k at a time worth of premium, but when they blow out it's mil+. I've never seen a long term OTM seller that have managed to stay in the game without topping up their accounts, they always give it back when markets blow out.

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Old August 27th, 2015, 10:19 AM   #4883 (permalink)
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Corporate profits after taxes, $1.824 trillion, were the highest in history for 2Q 2015. +7.3% YoY.

S&P 500 was 2000 one year ago. Right now the S&P 500 is down 2.4% vs 1 year ago while corporate profits are up 7.3%.

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Old August 27th, 2015, 10:53 AM   #4884 (permalink)
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I wonder how Karen the Supertrader made out during the recent few days. Anyone heard? In the past, she sold 5 delta puts and risked 50% of her capital (aka IMx2). I know that they have been working on risk protection methods over the past year or 2. It would be interesting to hear if they managed to avoid a big loss.

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Old August 27th, 2015, 10:58 AM   #4885 (permalink)
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mu2pilot View Post
I wonder how Karen the Supertrader made out during the recent few days. Anyone heard? In the past, she sold 5 delta puts and risked 50% of her capital (aka IMx2). I know that they have been working on risk protection methods over the past year or 2. It would be interesting to hear if they managed to avoid a big loss.

I know they also like to wait for big drops and vix pops before putting on massive positions. My guess is they threw on a lot of short puts last week and suffered some on Monday.

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Old August 27th, 2015, 01:44 PM   #4886 (permalink)
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mu2pilot View Post
I wonder how Karen the Supertrader made out during the recent few days. Anyone heard? In the past, she sold 5 delta puts and risked 50% of her capital (aka IMx2). I know that they have been working on risk protection methods over the past year or 2. It would be interesting to hear if they managed to avoid a big loss.

I know she has said they only go out a max of 52 days from expiry. I had 10 delta IC's on expiring Sept, Oct, Nov and Dec in my paper accounts and I was watching them during the crash. The Sept, Oct positions went extreme red. The further out in time did much better.

Also should here results be public at year end if she runs a fund that is registered with the SEC?

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Old August 27th, 2015, 01:52 PM   #4887 (permalink)
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Chubbly View Post
I know she has said they only go out a max of 52 days from expiry. I had 10 delta IC's on expiring Sept, Oct, Nov and Dec in my paper accounts and I was watching them during the crash. The Sept, Oct positions went extreme red. The further out in time did much better.

Also should here results be public at year end if she runs a fund that is registered with the SEC?

As far as I know there isn't a rule that requires results to be made public.

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Old August 27th, 2015, 01:54 PM   #4888 (permalink)
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Chubbly View Post
I know she has said they only go out a max of 52 days from expiry. I had 10 delta IC's on expiring Sept, Oct, Nov and Dec in my paper accounts and I was watching them during the crash. The Sept, Oct positions went extreme red. The further out in time did much better.

Also should here results be public at year end if she runs a fund that is registered with the SEC?

There is no rule for private equity and hedge funds to state their returns publicly. They aren't allowed to hide it from their investors however.

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Old August 27th, 2015, 02:32 PM   #4889 (permalink)
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Can one of you pretend to be an investor and ask for her track record

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Old August 27th, 2015, 02:37 PM   #4890 (permalink)
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I thought I'd share my analysis and opinion here regarding which /es put options behaves in what way.

Below is a screen shot of the current price which I took by the mid between big and ask price of each options with the days to expiration below each expiring month. (I have a DDE running in my excel quoting them real-time).

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After that, I took the price difference of each strike from one month (and weekly/EOM) to the next to see how much premium decayed between these dates. You can see below for results between each day.

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And then I calculated the following premium decay in percentage terms from the beginning for each option in the same period.

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What I have found and hypothesized is as follows.

In pure percentages terms of premium being decayed, it appears 50-60 DTE options that are FOTM decay the fastest. However, it also appears that these options hit their margin calls and bigger draw downs during times of turbulence.

Please note the above research did not include margin being utilized and I do not have direct access to span margin I can link to my excel to make further analysis at the moment. However, in my humble opinion, the 50-60 DTE options are at a sweet spot for bigger vega risk (per margin utilized) when things get worse quickly while it should offer the fastest decay the other way around.

The reason for this hypothesis is because this morning, I was able to sell a put 50 dte at approximately 3 delta for 3.40 at around 500 initial margin, which would give us a monthly ROI (to expiration) of 6.69% (with $5 round trip cost) according to IM x 3 rule. While a similar delta at 95 DTE gave me the same ROI number of 3-4%. (the DTE is almost 2x while premium received was around 4.2 which is only a 25% increase).

So my conclusion is, 50-60 DTE options carry more risk while the margin increase isn't big enough to reflect this. In order to make up for this difference, we should utilize less margin and vice-versa. However, if you are selling cash secured puts for theta decay, 50-60 dte options should be much more advantageous.

Thanks for reading.

J

Edit - Someone mentioned further out months have bigger vega risk. This is true in the model, but it doesn't take into account that volatility spikes are higher in the front month compared to the back months.


Last edited by Opstar; August 27th, 2015 at 07:14 PM.
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