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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:568,597 / 5,727
Last Reply:December 2nd, 2016 (12:40 PM) Attachments:642

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Selling Options on Futures?

Old September 23rd, 2015, 05:05 PM   #5021 (permalink)
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Here are spreads using 2 longs for each short using the same contract month for both. These backtest runs were started on 8/17/15, the worst day to add ES short puts.

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There are a few that handled 8/24 quite well. The lower the delta the better but if you went too low on the net delta the ROI became too low.

I liked the covered spread that used a short with a delta of ~5.00 and 2 longs with a delta of ~1.50 each. Decent ROI and not much affected when holding it longer.

I then ran covered spreads using the same short delta ~5.00 and 2 longs with a delta ~1.50 for other time periods using 90+ DTE.

Here is using 9/19/14 start date.

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It was able to ride out the ES drop to 10/15 OK and then recover. It went profitable in early Nov.

Here is starting 10/08/14.

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Able to ride out 115 ES drop in 5 trading days.

Here is one when the markets were somewhat flat.

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Got to 52% in 21 days. I do notice that when the DTE is getting below 80 in this backtest that the premium erosion of the longs, which are a lower strike, is picking up speed faster than the short. So what I think I will do is just get out around 30 days held because the profit after that will be slow in coming. Also the protection by the longs will be decreasing and might not cover a huge ES drop.


Last edited by ron99; September 23rd, 2015 at 08:43 PM. Reason: 3rd table was wrong DTE
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Old September 23rd, 2015, 05:28 PM   #5022 (permalink)
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I then ran a backtest on CL using the same 5.00 delta short and two 1.50 delta longs starting 4/8/15. CL futures increased 11.6% in 6 trading days. The covered call spread was able to ride it out.

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But when I tried this strategy for the 25.9% increase in CL over 3 trading days from 8/26 to 8/31/15 it blew up the account.

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So it will cover 10-15% short term changes in futures but not a huge 25% change.

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Old September 23rd, 2015, 08:59 PM   #5023 (permalink)
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Here is a side by side comparison of on the left a covered ES spread started on 8/17/15 and on the right the same short option without the longs to cover it.

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On 8/24 the naked put had a draw down of 95% and lost $2,660. The spread had a profit of $145.

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Old September 24th, 2015, 08:07 AM   #5024 (permalink)
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ron99 View Post
Here is a side by side comparison of on the left a covered ES spread started on 8/17/15 and on the right the same short option without the longs to cover it.

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On 8/24 the naked put had a draw down of 95% and lost $2,660. The spread had a profit of $145.

Thanks you, Ron, for great job!
I have the similar research with similar results.
I use 3 leg vertical spread, DTE > 90 days, with short leg 100 point from current future price, IM x 2 from 1 short/1 long.
For example:
On 9/18/14
ESZ4 = 2004.6
DTE = 92
ESZ4 P1900 short/ESZ4 P1800 long/ESZ4 P1700 long = 4.7 (spread price)
IM2 from ESZ4 P1900 short/ESZ4 P1800 long (1132 x 2) = 2264

There are a lot of variants for spreads construction (for any leven of greed and fear)

Whats your conclusions from this research?

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Old September 24th, 2015, 05:12 PM   #5025 (permalink)
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For Ron99 apologize, first post of mine

Futures Edge on FIO
Ron,

I've been trading stocks for years with not much greater returns than the market, a couple of years ago I started getting into etf and stock options and have developed some pretty good systems risk/return wise versus my prior trading pursuits. So I'm hooked on options. I'm still amazed at your returns though. One question for you, to help me understand your trading style. What's the worst drawdown for your entire trading account during the last few years of your trading. For example, if you had $100,000 trading account and it went down $20,000 at any point for a 20% drawdown. I'd like to know your drawdowns to see if I'm capable of making returns like yours. I'm not comfortable with large drawdowns by the way. Large being 20%. My apologies if you've stated an answer at some other time. thanks so much for all you contribute to this forum. Bob

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Old September 24th, 2015, 06:55 PM   #5026 (permalink)
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@ron99, if you're going to essentially do a ratio vertical credit put spread, there is no reason not to do an iron condor which will give you the extra premium on the call side so you can increase your return and reduce your risk.

Try a delta 10 bear call and delta 5 bull put, then play with the ratios. Crashes go down not up so you might get a better result with 2S 1L on the call side and 1S 2L on the put side.

Since you're doing fotm and the curve is inverted, the front months are much cheaper than the back months. See what happens if you calendar spread the two long put legs and buy say 30 and 60 dte, let them expire and roll then sell the 90 dte and close at 30-60 dte. This should be the cheapest option with the best protection.

For the call side, buy the 30 or 60 and roll then sell the 90 close at 60

Since only one side can ever get in the money, it means you will get approximately double the premium for the same risk and you can half your IM risk for the same return. I.e. halve your draw down

Sent from my SM-N9005 using Tapatalk

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Old September 24th, 2015, 07:15 PM   #5027 (permalink)
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Btw you're doing back testing the hard way, options returns are very specific since intrinsic is a very specific number when they are ITM and very specific when their OTM using black Scholes. Go download IB and use their options strategy lab and you can construct the return bell curve by entering the legs you are testing.

Also don't forget that what you're doing is theory only, the broker or the clearer or the exchange can double or triple IM to protect their downside because they always have a big book of crazy naked put sellers that are blowing up and will suck up 10x their worth in margin, which means all your IM calcs will almost certainly be unrealistic for a market that's crashing.

Also as an options seller you should have two roles, a seller and a risk manager. The only way to win at this game is not to just build a combination that works and sit back and do the same thing over and over again. At this point in time you are doing a bit of curve fitting as well. You are an options seller at first, once you've sold, you become a risk manager. The best way to do this is to sell them across multiple strikes and multiple DTE's, then your next job should be keeping your books total delta close to 0 and if delta starts to move to your pain point (delta should be your pain point, not your IM) you actively hedge your portfolio to get it closer to 0 again. This is what options market makers do - they are still in business for a reason. You should never have margin issues if you are actively hedging and managing risk.

Also, I am not kidding about finding a good broker and why they have a much higher IM requirement. This is what happens when a broker collapses and you can't close your positions:

http://www.abc.net.au/news/2015-05-20/bby-clients-consider-legal-action-against-asx-asic/6485118
"BBY clients' money is in limbo after the company entered administration on Monday and the ASX ordered the closure of options positions, action that stripped investors of their ability to manage their positions and potentially exposed them to heavy losses."

Some fella lost 7 mil in his naked puts.
Good luck

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Last edited by PeakGrowth; September 24th, 2015 at 08:07 PM. Reason: added some stuff
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Old September 24th, 2015, 10:56 PM   #5028 (permalink)
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StocktraderBob View Post
Ron,

I've been trading stocks for years with not much greater returns than the market, a couple of years ago I started getting into etf and stock options and have developed some pretty good systems risk/return wise versus my prior trading pursuits. So I'm hooked on options. I'm still amazed at your returns though. One question for you, to help me understand your trading style. What's the worst drawdown for your entire trading account during the last few years of your trading. For example, if you had $100,000 trading account and it went down $20,000 at any point for a 20% drawdown. I'd like to know your drawdowns to see if I'm capable of making returns like yours. I'm not comfortable with large drawdowns by the way. Large being 20%. My apologies if you've stated an answer at some other time. thanks so much for all you contribute to this forum. Bob

I don't keep strict track of drawdown. I do keep track of month performance over all of my trading. But I don't have numbers of just option selling drawdowns because I am doing many types of trading in the same accounts.

Looking only at option selling I would guess I have had a drawdown of about 50%.

To make big returns you have to take on big risk. The strategy I just posted for ES puts should keep the losses small. But my small is not the same as your small. You will have a 20-25% loss for a long term bear market. If you try get get out before a 20-25% loss you will be doing that so many times that you will wipe out your account.

If you do that strategy and ES gradually drops 200 over 30 days you will lose money. No strategy will prevent that. But it will prevent getting wiped out by a flash crash. Might even make money on that day.

So much of trading is about timing. If you start trading and make 200% over 4 years and then have a 50% loss you are still up a good amount. But if you start trading and 6 months after starting you lose 20% you are probably in the hole.

You will have to judge for yourself if you can handle bigger drawdowns so that you can get bigger returns over the long term. Not everybody can.

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Old September 24th, 2015, 11:00 PM   #5029 (permalink)
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I am finding that the strategy I found that works for ES puts is not working well for other commodities. Especially on calls. I need to do more research.

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Old September 25th, 2015, 02:58 PM   #5030 (permalink)
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@Big Mike can you please delete the poll in this thread?

Thanks

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