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Selling Options on Futures?
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Selling Options on Futures?

  #5591 (permalink)
Market Wizard
Cleveland, OH
 
Futures Experience: Advanced
Platform: QST
Broker/Data: QST, DeCarley Trading, Gain
Favorite Futures: Options on Futures
 
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rajab View Post
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

You don't know the trend will be up in next 30 days. And since you are very close to ATM, you will have many losers.

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  #5592 (permalink)
Trading Apprentice
Los Angeles California
 
Futures Experience: Advanced
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rajab View Post
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

The key thing is you don't know for sure the market will go up? It could work out OK assuming you are in a bull market and you don't over leverage yourself. However, this is essentially just like making a directional play by buying long a future contract and hoping the market goes up. You are selling right ATM which can be very profitable if you're right on the direction because of the relatively high delta. However, if the market goes down, how much of a loss are you willing to take? Are you interested in selling time decay or in making a directional market call? These are different goals and you need to decide what fits your trading style. That's why most of this thread is dedicated to selling OTM put options -- the emphasis is not on making directional plays, but on expressing a belief that the market won't make a large sustained down move and tends to have a mean reverting tendency...

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  #5593 (permalink)
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ron99 View Post
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%.

I agree that it would be a good idea to set up alerts with your broker based on the price of your sold option breaching a certain threshold. I've now been doing this whenever I sell options and they come directly to my mobile phone (like a text message). The ES contracts seem to be especially liquid and rarely give bad tick values (i.e. false alerts), but it could also be useful to consider setting an additional alert based on the VIX futures breaching a certain threshold. I think the key is to set a stop-loss that you're willing to deal with and rigorously adhere to it. It would be prudent to pay especially close attention when you notice the market breaking down and/or IV exploding because this is the risk scenario that hurts us the most. Losses of 20-25% are manageable and you can recover; however, if you take a loss of 60%, 70%, or even higher it becomes nearly impossible to recover...

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  #5594 (permalink)
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thomasthomsen View Post
I agree that it would be a good idea to set up alerts with your broker based on the price of your sold option breaching a certain threshold. I've now been doing this whenever I sell options and they come directly to my mobile phone (like a text message). The ES contracts seem to be especially liquid and rarely give bad tick values (i.e. false alerts), but it could also be useful to consider setting an additional alert based on the VIX futures breaching a certain threshold. I think the key is to set a stop-loss that you're willing to deal with and rigorously adhere to it. It would be prudent to pay especially close attention when you notice the market breaking down and/or IV exploding because this is the risk scenario that hurts us the most. Losses of 20-25% are manageable and you can recover; however, if you take a loss of 60%, 70%, or even higher it becomes nearly impossible to recover...

So how about combining our preferred naked far OTM puts with some kind/ratio of a vix derivative to neutralize volatility?

Thanks

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  #5595 (permalink)
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Setting OCO order


ron99 View Post
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%.

Thanks, Ron.
1. Assuming "Short 5 delta+ 2 longs at 1.5 delta each 3x IM strategy" works with 20% drawdown stop-loss, one can set up OCO order on TOS to exit on profit at 50% original premium or on stop loss calculated with 20% loss on 3xIM.
2. I guess one needs to exit after 30 days because longs may not be effective.

What is your opinion?
Regards,
Dilip

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  #5596 (permalink)
Market Wizard
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dvbattul View Post
Thanks, Ron.
1. Assuming "Short 5 delta+ 2 longs at 1.5 delta each 3x IM strategy" works with 20% drawdown stop-loss, one can set up OCO order on TOS to exit on profit at 50% original premium or on stop loss calculated with 20% loss on 3xIM.
2. I guess one needs to exit after 30 days because longs may not be effective.

What is your opinion?
Regards,
Dilip

I do not think it is a good idea to exit the trade via a stop order. Stop orders become market orders, when the stop price is hit. And market orders are filled, no matter how large the bid / ask spread is. During the night and during strong moves this spead for options can get quite large. I suggest strongly to always use limit orders for options.

Best regards, Myrrdin

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  #5597 (permalink)
Market Wizard
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dvbattul View Post
Thanks, Ron.
1. Assuming "Short 5 delta+ 2 longs at 1.5 delta each 3x IM strategy" works with 20% drawdown stop-loss, one can set up OCO order on TOS to exit on profit at 50% original premium or on stop loss calculated with 20% loss on 3xIM.
2. I guess one needs to exit after 30 days because longs may not be effective.

What is your opinion?
Regards,
Dilip

Does the place you trade at allow stop orders on options? Carley Garner told me that Gain does not.

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  #5598 (permalink)
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Stop orders


ron99 View Post
Does the place you trade at allow stop orders on options? Carley Garner told me that Gain does not.

Yes, Ron. Thinkorswim allows stop order and also OCO consisting of profit/loss together on stock/option/spreads.

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  #5599 (permalink)
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Debit Put Spreads When Vix is Less Than 12

I looked at call selling SPY first and see that the 5 delta is hit quite easily so that it is a bad strategy for the premium one gets. At some point then it makes sense to buy the cheap premium and to turn to something like a debit put strategy. Put spreads are easier on time decay than buying puts outright.

I did a study on the SPY from 2014 to present and bought debit put spreads 5 strikes wide beginning when the VIX (or the SPY's implied volatility [either one]) went to 12. If the debit put spread halved in value I bought two more and if those halved in value I bought four more, etc. The results are below. I used a DTE of never below 40 but the closest thereto.

Let us assume that we will eventually have to go to the 8 level and buy 8 debit spreads, which at average is $150 x 4 = 1200. This plus the other levels gives us $2276 in necessary working capital for which we can now base our returns off of. Our total dollar gain is $1430 for the three years out of $2276 = 62%/3 years = 20.6% ARR (non-compounded). This is with taking profit at 35% of the basket’s initial cost.

I’m not sure how thinkorswim does its data (on the open or close price of the day), but it actually is a better closing out method since one sees in the “% gain of basket column” that most cases were a lot higher than 35% gain. Also one may aim for a higher profit percent as the max gain % is above 50% in all cases.

I inverted the implied volatility of the SPY and VIX and superimposed them in the study on the chart, I can read it better than the normal inverse way the VIX reads. I used the 12 level just because it looked ok. This method of trading only works in up markets obviously, but I am trying to build various strategies to implement in the correct market conditions, as I do not see myself selling puts in very low volatility. This method should complement a put selling strategy offering some protection, although I would have exited out with profit before anything got hairy.

Following this method we would be at the 4 level right now so that it might be a good time to start in with some debit put spreads. In fact this one seems the worst of all since the 2 debits bought on 7/18 will be expiring this month to potentially make a -447 loss on 1039 margin. This means the four 9/2 debits will have to make 810 total to attain a 35% gain on 1039 margin, which hopefully implies a 73% gain on them at some point.

I would love to have more studies done on puts and debit put spreads in low volatility conditions. This simple preliminary study would suggest there is something to it.

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Last edited by Fx93; September 8th, 2016 at 11:32 PM.
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  #5600 (permalink)
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Didn't expect the move to happen the next day. The basket I was concerned with closed today. Here is the filled in stats:

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The total dollar gain is now $2003 for the three years out of our $2276 working capital, which is a much better 88% gain to make a 29% ARR and we have not had to buy 8 debit spreads yet (so actually near a 200% gain for margin used).

One thing I noticed is that the 6 times just 1 debit spread worked right away total to a $515 gain, whereas the 3 times it didn't there was a $466 loss. So a trick may be to take note of a debit spread when the VIX hits 12, don't buy it but wait for it to halve in value and then go heavier in. This does reduce the strategy to 3 trades in 3 years. I'm looking for a study based trigger that trades more working times for more profit.

P.S. I also wanted to relate that the 7/18/16 216/211 debits that cost $157 each had a $127 profit from open today even though they expire in 7 days. Compare this to a 216 put bought on 7/18 that cost $429 which only had a $25 profit. That is 81% vs 5.8% and demonstrates how well put debit spreads protect one from time decay over buying a straight put, which only outshines them when the move happens suddenly.


Last edited by Fx93; September 9th, 2016 at 04:55 PM.
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