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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:569,132 / 5,728
Last Reply:December 6th, 2016 (05:26 PM) Attachments:642

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Selling Options on Futures?

Old September 2nd, 2016, 12:41 AM   #5581 (permalink)
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Here is another chart showing that ES is more likely to be up the first half of the month and down the second half. Look at the % Positive column.

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https://twitter.com/MktOutperform/status/771334242689163264

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Old September 6th, 2016, 12:17 AM   #5582 (permalink)
Trading Apprentice
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Thanks a lot for this thread, I've read the whole thing and keep up to date.

I have not found a solution to the problem of a steep selloff. One idea I had is to use the % decrease info (of /ES) in a certain amount of time historically to create standard deviation bands, and when price goes below this to buy a put to hedge and likely take a loss. This would eat into profits but is a tradeoff in the account getting blown with the intent being that most of the time this would be unnecessary and one would still come out ahead.

I would also like to play the devil's advocate somewhat and mention that normal call buying strategies work on the SPY and /ES since it goes up more than it goes down. I was thinking then how about a martingale call debit spread strategy and reserve the put selling for when the market has taken a noticeable plunge?

I did two short inputs of August 2015 and February 2016 with the following rules and attached two graphs of them.

When the market is down a little buy 1 call debit spread 5 strikes in width about 45 days out or so which was usually around $250 or so on the SPY in the examples. When one has a 50% loss on this (a $125 loss), buy 2 more going out in time if one has to. If these go to a 50% loss too then buy 4 more, and if those 4 go to a 50% loss buy 8 more.

I don't have a rigid exit strategy (perhaps a % gain of one's total debit?), I'm just throwing an idea out there. I am guessing a flat to slowly upward market would be hard on this method, but here is how the two hard selloffs played out.

The first shows the August, 2015 selloff which killed a lot of naked put sellers as their margins increased. The debit call spreads cost $1354 total and produced $386 profit if bought back on 8/27 for a 28% profit. The February debit call spreads cost $3864 and if bought back on 2/17 produced a $1228 or 32% profit.

Attached Thumbnails
Selling Options on Futures?-aug-15.png   Selling Options on Futures?-feb-16.png  
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Old September 6th, 2016, 01:06 AM   #5583 (permalink)
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Nice stats, is there any more than a one month sample? I apologize if it was already posted

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Old September 6th, 2016, 01:07 AM   #5584 (permalink)
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I saw someone ask earlier but I am very interested in put selling on stocks and wonder if there is any forum dedicated to this? Such a thing would allow us to really hone in on good put selling candidates.

I have been doing great this year put selling the oil stocks, namely WPX, and buying stock as well. A lot of the smaller stocks are only good for a put selling strategy and holding till expiration since the spreads suck in general. I missed all the gold stocks. Anyway this is a summary post of things I've learned.

The screener I use in thinkorswim is simple. I scan the Russell 3000 for stocks that have an implied volatility above .60 or .80. This will instantly give you all the stocks that have sold off, since IV increases as stocks go down in general. It does also give you some that had a big rise as this increases volatility sometimes too. I use a volume of >200,000 just to weed out the weird or really small stocks. This will give one about 100 or less depending how severe one is, which one can sort by volume then to see the big players. I think there is something wrong with TOS's screener though as CHK is not showing up today...

I would look into CHK and WPX puts to sell. Bankruptcy risk is the big factor. Once stocks get above $20 the premium drops a good deal so that one will be dealing with stocks less than this the majority of the time for the juicy premium. WTI is one with some risk, I sold the October $1 strike for a 20% ROI. But if it doesn't go bankrupt in the next 46 days or drop from $1.77 to $1 I make 20%. The riskier the stock the less one should go "all in" in general. If one can make 3% every 45 days that is 24% annualized.

Also one can get risky and go above one's cash secured put margin. For instance I have 50k and am trading now like I have 75k, which is pushing it. This is because I am currently using two tricks. When WPX was about $8 I bought a 160 DTE of the $7.50 strike to expire in January. This is wise to do if one thinks the stock is at a multi year low and will not be heading back there for a long time. The second is that I bought a lot of 22 DTE September options which a lot of people will scoff at but doing so allows one to time the market a lot more. For instance I sold the CHK $5 for only .06 when it was trading bullishly and above $6. That's still a 1% gain in 22 days and put to use money that was free. I was waiting for oil stocks to tank again in September and October but may just have to sell puts on them rather than buying stock.

If one gets assigned immediately sell covered calls if not bullish, as this does not take any margin and will pay one to wait for a recovery.

If one is extremely bullish one should just be buying stock to begin with (and not selling puts) as this will maximize gains.

That's my $0.02 on it.

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Old September 6th, 2016, 01:25 AM   #5585 (permalink)
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mdm6713 View Post
Nice stats, is there any more than a one month sample? I apologize if it was already posted

No, those are just the recent most steep selloffs. The premise is instead of using one's margin to sell puts all the time and have this unknown risk of margin inflation, use defined margin strategies to double down as price gets lower, since we know that a call buying based strategy is profitable on the SPY in general.

The real test is to devise this strategy (by creating a set of rules) to have worked from 2007 to 2009 when the SPY fell off a cliff, namely from 7/08 to 3/09, because just like in gambling martingale betting strategies will blow the account if price does not recover in time. One positive to this is say one has used up all of one's margin in one last double down, there is still a chance price recovers and one does well. There will never be a forced margin call by the broker doing this: one will have a month and a half to pray .

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Old September 7th, 2016, 01:40 AM   #5586 (permalink)
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ron99 View Post
Here are 3 ES put strategies using exit at 20% drawdown. Started trading 1/1/13.

Because of the amount of work it would require, I didn't start a new position on the day the 20+% drawdown occurred. I just used the next position that I had as if the exit didn't happen at 20%. So the account sat empty a few days. This might mean that ROI might be slightly higher if I didn't do this.

They all had three 20+% drawdown events. Oct 2014, Aug 2015 & Jan 2016

Short 3 delta no longs 3X excess factor
2013 64.4% ROI
2014 8.5%
2015 64.6%
2016 11.7% (through 8/5/16)
Overall +228.1% or 63.7% per year
4,969 positions in 49 trades with an avg of 26.8 days held

Short 5 delta 2 longs at 1.5 delta each 3x excess factor Avg delta was 2.12
2013 53.4% ROI
2014 9.8%
2015 35.8%
2016 27.8% (through 7/29/16)
Overall +192.4% or 53.7% per year
10,119 positions in 45 trades with an avg of 28.8 days held

Short option 80% of futures 1 long at 100 lower strike than short 3x excess factor Avg delta was 1.88
2013 47.2% ROI
2014 10.8%
2015 39%
2016 7.5% (through 7/28/16)
Overall +143.6% or 40.1% per year
7,784 positions in 44 trades with an avg of 29.6 days held

The short 5 deltas with 2 longs has a lower IM than short 1 with 1 long, average 267 vs 318, so you have more positions on and thus make more profit on each time you trade. The naked 3 delta had an average IM of 665.

So am I understanding the returns for the 2015 year correctly? They were at least 35% ROI even with the drawdown that occurred in August 2015? During these years there has been several spikes in IV that were all fairly short-lived, but overall it has actually been a fairly low IV climate historically. It seems that as long as one is not over-leveraged and uses a reasonable stop-loss, that it could still be viable to sell naked ES puts as a component of an overall trading strategy. The key thing is that the strategy actually has a positive expectancy in the long-term, but the risk has to respected and managed appropriately.

I actually like the idea of selling slightly higher deltas (.07 to .10) and using less of one's buying power with this strategy, say IM x6. You could also incorporate buying some further OTM puts (perhaps .03 delta) as protection, since it seems like the deep OTM puts are the ones that have the biggest percentage increase when IV spikes. I would probably select a ratio of something like buying 1 or 2 puts for each 3 puts sold and still use a stop loss of 20%. This effectively is like having a put credit spread combined with some naked puts and could give the best of both worlds.

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Old September 7th, 2016, 11:26 AM   #5587 (permalink)
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20% drawdown stop loos in downtrending market?


ron99 View Post
Here are 3 ES put strategies using exit at 20% drawdown. Started trading 1/1/13.

Because of the amount of work it would require, I didn't start a new position on the day the 20+% drawdown occurred. I just used the next position that I had as if the exit didn't happen at 20%. So the account sat empty a few days. This might mean that ROI might be slightly higher if I didn't do this.

They all had three 20+% drawdown events. Oct 2014, Aug 2015 & Jan 2016

Short 3 delta no longs 3X excess factor
2013 64.4% ROI
2014 8.5%
2015 64.6%
2016 11.7% (through 8/5/16)
Overall +228.1% or 63.7% per year
4,969 positions in 49 trades with an avg of 26.8 days held

Short 5 delta 2 longs at 1.5 delta each 3x excess factor Avg delta was 2.12
2013 53.4% ROI
2014 9.8%
2015 35.8%
2016 27.8% (through 7/29/16)
Overall +192.4% or 53.7% per year
10,119 positions in 45 trades with an avg of 28.8 days held

Short option 80% of futures 1 long at 100 lower strike than short 3x excess factor Avg delta was 1.88
2013 47.2% ROI
2014 10.8%
2015 39%
2016 7.5% (through 7/28/16)
Overall +143.6% or 40.1% per year
7,784 positions in 44 trades with an avg of 29.6 days held

The short 5 deltas with 2 longs has a lower IM than short 1 with 1 long, average 267 vs 318, so you have more positions on and thus make more profit on each time you trade. The naked 3 delta had an average IM of 665.

Hi Ron,
If you recall, few months ago,I had analysed drawdown of your trades and suggested in my post stop loss of 20-25%drawdown since there were only 3 instances of this. You then responded that this stop loss would have worked from 2013-2016 because the market was uptrending; and that in downtrending market we might have more 20%-drawdown trades which may blow up the account. I agree with this. But are you now saying that it is OK for downtrending market too? I am doubtful.
Regards,
Dilip

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Old September 7th, 2016, 12:24 PM   #5588 (permalink)
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thomasthomsen View Post
So am I understanding the returns for the 2015 year correctly? They were at least 35% ROI even with the drawdown that occurred in August 2015? During these years there has been several spikes in IV that were all fairly short-lived, but overall it has actually been a fairly low IV climate historically. It seems that as long as one is not over-leveraged and uses a reasonable stop-loss, that it could still be viable to sell naked ES puts as a component of an overall trading strategy. The key thing is that the strategy actually has a positive expectancy in the long-term, but the risk has to respected and managed appropriately.

I actually like the idea of selling slightly higher deltas (.07 to .10) and using less of one's buying power with this strategy, say IM x6. You could also incorporate buying some further OTM puts (perhaps .03 delta) as protection, since it seems like the deep OTM puts are the ones that have the biggest percentage increase when IV spikes. I would probably select a ratio of something like buying 1 or 2 puts for each 3 puts sold and still use a stop loss of 20%. This effectively is like having a put credit spread combined with some naked puts and could give the best of both worlds.

Yes that ROI is correct IF you were able to exit at 20% loss. That is a big if for Sunday night 8/23/15.

You should backtest your strategy to see how it would have performed.

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Old September 7th, 2016, 12:46 PM   #5589 (permalink)
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dvbattul View Post
Hi Ron,
If you recall, few months ago,I had analysed drawdown of your trades and suggested in my post stop loss of 20-25%drawdown since there were only 3 instances of this. You then responded that this stop loss would have worked from 2013-2016 because the market was uptrending; and that in downtrending market we might have more 20%-drawdown trades which may blow up the account. I agree with this. But are you now saying that it is OK for downtrending market too? I am doubtful.
Regards,
Dilip

After looking at the data, 20% drawdowns are very infrequent. Once per year for 2014, 2015 & 2016. IF you can exit at the 20% loss then this might work.

But you can't place stop trades for options. So you need to be able to place trades almost any time in the 23 hours it trades. You could set up alerts to be notified of when your position is in trouble.

But if you weren't available to trade on Sunday night 8/23/15 then you lost far more than 20%.

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Old September 7th, 2016, 03:07 PM   #5590 (permalink)
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Has anyone looked at the following:


Sell 1 put very close to the money. Buy one 1% out.
Greater than 90days out.
Profit taking at 50% of the premium.
Mental stop loss at what I can afford to lose.


I am trying to figure out the disadvantages of the above criteria?
From what I gather if you can ride out the margin fluctuations and the general trend is up I should be ok?
What am I missing?

Thanks

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