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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:569,515 / 5,734
Last Reply:6 Hours Ago (01:01 AM) Attachments:642

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Selling Options on Futures?

Old August 22nd, 2016, 11:48 AM   #5551 (permalink)
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ron99 View Post
I don't understand your Current Premium. For your first position you have 1.95. The settlement for that one on Friday 8/19/16 was 2.65. 4.85 for the 1775 and 1.10 for each of the longs.

You have to use the prices off of your Daily Statement from your broker. You can't use the Last prices on Zaner360. When the markets open for the next day you can then use Prior Settle in the Quotes pane on Zaner360.

Ya..sorry about that, it was a typo. I manually enter the settlement prices into my spreadsheet at the end of the night based on the statement that's emailed to me and mis-typed the 1500.

/rsm005/

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Old August 23rd, 2016, 02:36 AM   #5552 (permalink)
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ron99 View Post
A naked option could have rode out the crash on 8/24/15 if the margin factor was 6X-7X IM. But if there was a larger crash you would have been forced out at a large loss. That is why I added longs to cover larger crashes.

My new strategy is sell one at about 90+ DTE and 20% OTM (largest drop since 2008 in 90 days was 19%) and pick 2 longs that make the net delta around 2.00. Close when premium drops by 50% no matter how long it takes. Use 6 times the initial margin to cover margin and excess and hold that the entire time you have that position. So if initial margin (IM) is $300 then you hold $1,800 for each of those positions until exit.

I have been thinking about the fact that the original strategy using naked shorts with IMx3 only had 1 losing trade (49/50 positive) over a 4-year period. The premise of this strategy seemed to be that because of the margin buffer and FOTM approach, we would be able to ride out any "paper losses" once the market rebounded and/or volatility diminished. How about if one used a slightly higher IM of 4-5X to the original strategy and just added a simple stop-loss of say 20% of the account balance? The idea being that the average winning month would bring in approximately 4-5% gains and the rare losing month would give up the 4 previous months of gains (4x5=20). For many years the stop loss would probably not ever be hit, but even if 1 or 2 of these large stops happened in any one year, the total strategy would still be break-even or slightly profitable for that year. Is this viable or do 20% account drawdowns happen multiple times a year with the naked put selling strategy?

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Old August 23rd, 2016, 08:21 AM   #5553 (permalink)
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Using 20% drawdown as stop



thomasthomsen View Post
I have been thinking about the fact that the original strategy using naked shorts with IMx3 only had 1 losing trade (49/50 positive) over a 4-year period. The premise of this strategy seemed to be that because of the margin buffer and FOTM approach, we would be able to ride out any "paper losses" once the market rebounded and/or volatility diminished. How about if one used a slightly higher IM of 4-5X to the original strategy and just added a simple stop-loss of say 20% of the account balance? The idea being that the average winning month would bring in approximately 4-5% gains and the rare losing month would give up the 4 previous months of gains (4x5=20). For many years the stop loss would probably not ever be hit, but even if 1 or 2 of these large stops happened in any one year, the total strategy would still be break-even or slightly profitable for that year. Is this viable or do 20% account drawdowns happen multiple times a year with the naked put selling strategy?

I had done similar analysis of Ron's 2 longs+one short strategy ywhich you can see in my post few months ago. I found out the following:
% Drawdown No of trades
8%- 4
10%- 8
12%- 3
13%- 1
15%- 5
17%- 1
25%- 1
40 %- 1 -> This could have exited with profit at 55% of initial premium earlier. All other above-listed
drawdowns hit 50% premium later

They are not mutually exclusive eg one with 40% drawdown also has some of the other lower drawdowns.

From the above, I can conclude that it is safe to have drawdown limit of 25% as you would have hit it only twice for exiting at 50% premium. For 55% premium, you would hit it only once.

But Ron commented that there could be more stops. So PnL will not be attractive.
Dilip


Last edited by dvbattul; August 23rd, 2016 at 08:23 AM. Reason: Reformat
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Old August 23rd, 2016, 01:57 PM   #5554 (permalink)
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I enjoyed reading this thread, one of the best out there. I would like to know what other advantages the ES options futures has over SPX. SPX options also has the 1256 taxing.

"Tax Treatment under section 1256 of the Tax Code, profit and loss on transactions in certain exchange-traded options, including SPX and SPXpm, are entitled to be taxed at a rate equal to 60% long-term and 40% short-term capital gain or loss, provided that the investor involved and the strategy employed satisfy the criteria of the Tax Code*"

(source: S&P 500 Index Options Introduction - SPX - CBOE)

thanks

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Old August 23rd, 2016, 08:05 PM   #5555 (permalink)
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uuu1965 View Post
My post isn`t direct to your strategy but however to the same topic: how to find the best strategy for options selling (in this case ES options).
After many studies I didn`t find any universal strategy for ES options selling (either too large cushion or too long days held ending with a loss) therefore I decide to focus to simple risk management (Money Management).

I just finish a big research for ES options selling from 20130102 till 20160810:
* Basic: put spread 1:2
* DTE: >90
* Enter: random and mechanically
* Short strike: 20% from ES price (thanks @ron99)
* Long strike: apr. 0.5 deltas x 2, just for IM reduction not for covering
* Exit: 50% premium drop
* Stop: 1/2 from profit, like @myrrdin (f.e., if a profit is calculated 100$, stop is 50$)

The last sheet of Excel is summary for 3,5 years trading.
The biggest surprise are the result of 2015: you can ending the year with profit having win/loss rate 16:18!
This research just show simple MM advantage. May be you need additional signal for enter: IV spike, ES % 1-2 days price drop etc.

good work, have u done a comparison using SPX options?

Also, shouldn't stop be 2x profit collected and not 1/2? e.g. if you collected $100 in premium, stop is if spread goes to $200? Would you mind clarifying your stop reasoning again?

thanks again

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Old August 23rd, 2016, 10:06 PM   #5556 (permalink)
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dvbattul View Post
I had done similar analysis of Ron's 2 longs+one short strategy ywhich you can see in my post few months ago. I found out the following:
% Drawdown No of trades
8%- 4
10%- 8
12%- 3
13%- 1
15%- 5
17%- 1
25%- 1
40 %- 1 -> This could have exited with profit at 55% of initial premium earlier. All other above-listed
drawdowns hit 50% premium later

They are not mutually exclusive eg one with 40% drawdown also has some of the other lower drawdowns.

From the above, I can conclude that it is safe to have drawdown limit of 25% as you would have hit it only twice for exiting at 50% premium. For 55% premium, you would hit it only once.

But Ron commented that there could be more stops. So PnL will not be attractive.
Dilip


Thanks for the response! I understand that your results are using the newer 2 Long + 1 Short strategy, but I was referring to Ron's original strategy of selling naked ES options with a low delta but using a slightly higher IM of x4 or x5 and adding a stop loss based on overall account value of 20%. Even using your dataset above, the 20% drawdown seems to have only been hit on 2 occasions if I'm reading it correctly. How long of a time period was this study for ??? It would seem the naked options would have larger drawdowns overall than the spread, but I'm not sure if these type of larger drawdowns (>20%) are also more frequent? Off the top of my head I can think of Aug 2015 and threatened Govt shutdown in 2013 as the events where big increases in volatility happened...

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Old August 24th, 2016, 12:23 AM   #5557 (permalink)
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Quick question to everyone here. Does anyone know of a thread that deals with selling cash secured puts? I wanted to get some advice on a particular trade?

/rsm005/

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Old August 24th, 2016, 03:03 AM   #5558 (permalink)
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wxsim1 View Post
good work, have u done a comparison using SPX options?

Also, shouldn't stop be 2x profit collected and not 1/2? e.g. if you collected $100 in premium, stop is if spread goes to $200? Would you mind clarifying your stop reasoning again?

thanks again

1. I dont trade SPX options
2. My researh was based on some articles about MM:
Simple money management wins over time | Futures Magazine
How much trading capital is enough? | Futures Magazine

and my "homework" according to author

Attached Files
Register to download File Type: xlsx MM calculation.xlsx (111.1 KB, 5 views)
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Old August 24th, 2016, 11:26 AM   #5559 (permalink)
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Stops and max drawdowns


thomasthomsen View Post
Thanks for the response! I understand that your results are using the newer 2 Long + 1 Short strategy, but I was referring to Ron's original strategy of selling naked ES options with a low delta but using a slightly higher IM of x4 or x5 and adding a stop loss based on overall account value of 20%. Even using your dataset above, the 20% drawdown seems to have only been hit on 2 occasions if I'm reading it correctly. How long of a time period was this study for ??? It would seem the naked options would have larger drawdowns overall than the spread, but I'm not sure if these type of larger drawdowns (>20%) are also more frequent? Off the top of my head I can think of Aug 2015 and threatened Govt shutdown in 2013 as the events where big increases in volatility happened...

My analysis is based on Ron's 35 trades of 1x5 delta short+ 2x 1.5 delta longs strategy of post #5154. Ron feels that we have only 2 trades of 20% drawdown because market was uptrending. In downdrending market, we may have more trades and account may blow. I agree with him.
Hence, he started researching on another strategy.


Last edited by dvbattul; August 24th, 2016 at 11:27 AM. Reason: Correction
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Old August 24th, 2016, 02:49 PM   #5560 (permalink)
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thomasthomsen View Post
I have been thinking about the fact that the original strategy using naked shorts with IMx3 only had 1 losing trade (49/50 positive) over a 4-year period. The premise of this strategy seemed to be that because of the margin buffer and FOTM approach, we would be able to ride out any "paper losses" once the market rebounded and/or volatility diminished. How about if one used a slightly higher IM of 4-5X to the original strategy and just added a simple stop-loss of say 20% of the account balance? The idea being that the average winning month would bring in approximately 4-5% gains and the rare losing month would give up the 4 previous months of gains (4x5=20). For many years the stop loss would probably not ever be hit, but even if 1 or 2 of these large stops happened in any one year, the total strategy would still be break-even or slightly profitable for that year. Is this viable or do 20% account drawdowns happen multiple times a year with the naked put selling strategy?

Using 3x my research of 1/1/2013 to current shows 3 times a drawdown >20%. Oct 2014, Aug 2015 & Jan 2016.

If you use 4x the only time it was >20% was 8/24/15. 62.4%. The Friday before it was 9.3%. So you would have had to exit Sunday night if you could at 20%. I don't know. Anybody have intraday pricing for Sunday night 8/23/15?

The problem with a stop loss is shown by what happened on May 6, 2010 flash crash. Your stop loss would have been hit but then the market rebounded and you didn't need to exit.

I do like the idea of buying an extra put if things look like they might crash. A long put bought on 8/20/15 or 8/21/15 would have prevented all losses on 8/24/15. But that doesn't cover the unexpected crash so that is why I went with 2 longs.

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