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Selling Options on Futures?


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Selling Options on Futures?

  #5911 (permalink)
 manuel999 
Germany
 
Experience: Intermediate
Platform: TWS
Trading: Options on futures
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myrrdin View Post
When talking about the low volatility of the ES we should be aware of the fact that the actual volatility indeed is very low. The VIX closed at 10.76 yesterday. But the volatility for the July or August options is significantly higher - July closed at 14.00 yesterday.

It is also interesting that during the uncertainties around the French elections the VIX moved up from 10.90 to 16.28 (lowest to highest value in early April), and the July future only from 14.65 to 15.90 .

In my opinion these are key reasons why Ron's concept of selling 100 DTE and buying back at 50 % works so well. Volatility of the options Ron suggests to sell is significantly higher than short-term volatility, and it rises less in case of a problem.

Best regards, Myrrdin

this is a great point.

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  #5912 (permalink)
Eric B
Fort Worth, Texas
 
Posts: 49 since Jun 2013
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ron, myrrdin & others, thanks for all the insight and posts.

As an update, the previous trade I shared is now up almost the full amount of premium, bid .35 (my short entry was at 13.25). The post french election round 1 ES up pop has certainly helped.

I suppose I had a misconception about how time decay works - in that it was a rather linear process until the last two weeks, when it rots away quite quickly approaching expiry. As an experiment I've entered another position on the simulated acct: short July 17 ES EOM puts, strike 2150. Entry yesterday at 10.00. Will monitor the rate of decay as time passes.

I've noticed in the last few trades you are shorting puts that have low prices, in the 2-3 range. Do you pick these prices due to the low-risk aspect of the trade? Seeing some of your shorts have strikes in the 1900 range, 450+ points away... seemingly inconceivable the underlying market would trade there, right? Is the idea to pick the low-hanging, low risk, easy money type of shorts that are very safe but pay little, and further removing risk by offsetting at the halfway mark? The idea is doing it over and over as the bull market continues...

Thanks for sharing your trades, I look forward to learning more.

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  #5913 (permalink)
 ron99 
Cleveland, OH
 
Experience: Advanced
Platform: QST
Broker: QST, DeCarley Trading, Gain
Trading: Options on Futures
Posts: 3,081 since Jul 2011
Thanks Given: 980
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Eric B View Post
ron, myrrdin & others, thanks for all the insight and posts.

As an update, the previous trade I shared is now up almost the full amount of premium, bid .35 (my short entry was at 13.25). The post french election round 1 ES up pop has certainly helped.

I suppose I had a misconception about how time decay works - in that it was a rather linear process until the last two weeks, when it rots away quite quickly approaching expiry.

It depends on how close to ITM your strike is. The closer to ITM or higher delta, the later the premium decay will happen. Higher DTE with further OTM strikes the decay will happen sooner.


Eric B View Post
As an experiment I've entered another position on the simulated acct: short July 17 ES EOM puts, strike 2150. Entry yesterday at 10.00. Will monitor the rate of decay as time passes.

I've noticed in the last few trades you are shorting puts that have low prices, in the 2-3 range. Do you pick these prices due to the low-risk aspect of the trade? Seeing some of your shorts have strikes in the 1900 range, 450+ points away... seemingly inconceivable the underlying market would trade there, right? Is the idea to pick the low-hanging, low risk, easy money type of shorts that are very safe but pay little, and further removing risk by offsetting at the halfway mark? The idea is doing it over and over as the bull market continues...

Thanks for sharing your trades, I look forward to learning more.

When selling options it is not whether your strikes go ITM, it is whether your account goes on margin call because of losses on premium and increased margin.

You are correct that a 450 drop is unlikely, even though a 551.50 drop in 90 days did happen in 2008, but you would probably be on margin call far before ES dropped 450 unless you had a large amount of excess cash in your account not used to cover margin.

My strategy is to be far enough OTM to not have short option be ITM. By going to 90+ DTE this allows me to be further OTM with the same margin requirement as lower DTE options. Also by going further OTM I get quicker premium drop than a lower DTE option at higher strikes (puts).

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  #5914 (permalink)
 manuel999 
Germany
 
Experience: Intermediate
Platform: TWS
Trading: Options on futures
Posts: 155 since Jul 2014
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ron99 View Post
It depends on how close to ITM your strike is. The closer to ITM or higher delta, the later the premium decay will happen. Higher DTE with further OTM strikes the decay will happen sooner.
.

I usually do very small deltas (3-5), and the decay starts to be noticeable at about 35-40 days before expiration, provided volatility does not change a lot. (But often it does).

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  #5915 (permalink)
Eric B
Fort Worth, Texas
 
Posts: 49 since Jun 2013
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ron99 View Post
When selling options it is not whether your strikes go ITM, it is whether your account goes on margin call because of losses on premium and increased margin.

You are correct that a 450 drop is unlikely, even though a 551.50 drop in 90 days did happen in 2008, but you would probably be on margin call far before ES dropped 450 unless you had a large amount of excess cash in your account not used to cover margin.

My strategy is to be far enough OTM to not have short option be ITM. By going to 90+ DTE this allows me to be further OTM with the same margin requirement as lower DTE options. Also by going further OTM I get quicker premium drop than a lower DTE option at higher strikes (puts).

Do you use 6x margin for this reason - to have staying power should the trade move against you temporarily? That way you can wait for it to decline again as time keeps moving toward expiry? Is 6x the ideal amount, or?

Also, how do you manage risk in your open positions - do you have a hard stop, another protective option, or?

Thanks for responding.

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  #5916 (permalink)
 ron99 
Cleveland, OH
 
Experience: Advanced
Platform: QST
Broker: QST, DeCarley Trading, Gain
Trading: Options on Futures
Posts: 3,081 since Jul 2011
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manuel999 View Post
I usually do very small deltas (3-5), and the decay starts to be noticeable at about 35-40 days before expiration, provided volatility does not change a lot. (But often it does).

I did a study using a ES 5 delta short put with two longs at 1.50 delta 90+ DTE. The results of my 4 year test, 2013-2016, show 50% drop in premium in 27.3 days average. In at an average of 101 DTE and out at an average of 74 DTE.

Selling a 3 delta naked at 90+ DTE (106 DTE average) showed 50% drop in premium in 28.6 days average over the years 2013-2016. So the study was in at an average of 106 DTE and out at 77 DTE.

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  #5917 (permalink)
 ron99 
Cleveland, OH
 
Experience: Advanced
Platform: QST
Broker: QST, DeCarley Trading, Gain
Trading: Options on Futures
Posts: 3,081 since Jul 2011
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Eric B View Post
Do you use 6x margin for this reason - to have staying power should the trade move against you temporarily? That way you can wait for it to decline again as time keeps moving toward expiry? Is 6x the ideal amount, or?

Also, how do you manage risk in your open positions - do you have a hard stop, another protective option, or?

Thanks for responding.

6x would allow you to ride out the Aug 24, 2015 crash, (quickest crash since 2012) without getting a margin call using my ES put 5 delta short with two 1.50 delta longs.

So 6X is the bare minimum to ride out a crash.

CME has only released SPAN files back to 2013. I would love to have those files to backtest 2008-2012 but can't.

I manage by exiting when my 6X is used up. For example when entering a position that requires $300 margin I hold $1,800 for that position until I exit it.

If the increase in margin and premium uses the $1,800 up, I exit.

Here is a study done on entering a position on Aug 17, 2015, the worst day to enter before the Aug 24th crash.



A naked 5 delta ES put could have rode out the crash using 6X but it was at 47% drawdown and 93.8% of account used to cover margin and increased premium on Aug 24th.

The 1675 short with two 1440 longs had a max 22.3% drawdown with a max of 57.6% of account used to cover margin and increased premium.

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  #5918 (permalink)
 bill20 
Santa Barbara, CA USA
 
Experience: Intermediate
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ron99 View Post
6x would allow you to ride out the Aug 24, 2015 crash, (quickest crash since 2012) without getting a margin call using my ES put 5 delta short with two 1.50 delta longs.



So 6X is the bare minimum to ride out a crash.



CME has only released SPAN files back to 2013. I would love to have those files to backtest 2008-2012 but can't.



I manage by exiting when my 6X is used up. For example when entering a position that requires $300 margin I hold $1,800 for that position until I exit it.



If the increase in margin and premium uses the $1,800 up, I exit.



Here is a study done on entering a position on Aug 17, 2015, the worst day to enter before the Aug 24th crash.







A naked 5 delta ES put could have rode out the crash using 6X but it was at 47% drawdown and 93.8% of account used to cover margin and increased premium on Aug 24th.



The 1675 short with two 1440 longs had a max 22.3% drawdown with a max of 57.6% of account used to cover margin and increased premium.



Would it make more sense to simply trade a smaller number of contracts (and hence more excess IM) without purchasing the two long puts?


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  #5919 (permalink)
 myrrdin 
Linz Austria
 
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Eric B View Post
Also, how do you manage risk in your open positions - do you have a hard stop, another protective option, or?

All of out concepts to sell puts change over time, as we learn based on experience. You can follow this process in this thread and in "Diversified Option Selling Portfolio".

My current concept is to be permanently fully invested, unless

there is a very important political event in the near future (currently I do not see such event),
the S&P moves below the 200 dma (this dma seems to me to be a critical line between bulls and bears),
the S&P moves below critical support (currently at 2320 and 2300),
or volatility of the front month is higher than volatility two months out (these events were quite often followed by a strong move downwards).

Only in these cases I think about getting out of the trade, buying back part of the position, or hedging via short futures or long ES puts. Usually I will take one of these measures.

As I am a discretionary trader I decide from case to case if I take measure and which action I take.

I do not think that this concept is more profitable than Ron's concept of riding out large moves downwards. (Eg. I exited my ES puts in early July of 2015, when the S&P closed below the 200 dma, and entered again soon, thus, reducing my profit. But I was happy to take the same action on August, 20th, of 2015.) But it is better for my sleep.

Best regards, Myrrdin

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  #5920 (permalink)
 manuel999 
Germany
 
Experience: Intermediate
Platform: TWS
Trading: Options on futures
Posts: 155 since Jul 2014
Thanks Given: 341
Thanks Received: 142



ron99 View Post
6x would allow you to ride out the Aug 24, 2015 crash, (quickest crash since 2012) without getting a margin call using my ES put 5 delta short with two 1.50 delta longs.

So 6X is the bare minimum to ride out a crash.

CME has only released SPAN files back to 2013. I would love to have those files to backtest 2008-2012 but can't.

I manage by exiting when my 6X is used up. For example when entering a position that requires $300 margin I hold $1,800 for that position until I exit it.

If the increase in margin and premium uses the $1,800 up, I exit.

Here is a study done on entering a position on Aug 17, 2015, the worst day to enter before the Aug 24th crash.



A naked 5 delta ES put could have rode out the crash using 6X but it was at 47% drawdown and 93.8% of account used to cover margin and increased premium on Aug 24th.

The 1675 short with two 1440 longs had a max 22.3% drawdown with a max of 57.6% of account used to cover margin and increased premium.

Do you think this is specific to ES?
Or could one use the same approach to other liquid markets, such as CL?

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