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Selling Options on Futures?
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Selling Options on Futures?

  #5971 (permalink)
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Captain135 View Post
Interesting, so you're Long more options than Short now?

Last Thursday's flash crash in crude oil had me question how I'm managing losses (as losses tend to do). My threshold is to get out at 300% of original premium received (for 2x loss). I try to be as mechanical as possible---but the plummet had IV so high that I really would have felt better being a seller at the time...not buying to close just because my alert went off. I obeyed my exit rule (for what ended up being a 490% loss instead of 300% because I hesitated several minutes), but the event makes me want to consider changing or improving the rule.

I had a put ratio spread with 3 short at $40, and one long at $41 in July Crude. In a period of about 10 minutes, /CL dropped from $46 to $44...then started chopping sideways.

It's something of a paradox.... The scenarios that hit your take-loss parameter for an exit (fast volatile spikes) are the ideal scenarios that you want to ENTER as a seller. Which is exactly what I did the next morning and recovered about 60% of that loss.

Which brings me to thinking this--- since take-loss-parameters are usually triggered in high IV situations, and high IV is good for sellers and bad for buyers---maybe an ideal take-loss parameter should be based more on the underlying. I know some people manage this, but I haven't figured out how yet. Any thoughts or wisdom for this greenhorn?

You rolled that Put (i assume to a lower strike), and this is what I usually do as well if there is enough time to expiration.
I had a CL strangle open last week as well, and just closed the Put, DTE was not that much anymore.
If there would have been more DTE, I would have rolled the Call down. Rolling the untested site has worked for me better so far.

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  #5972 (permalink)
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Captain135 View Post
Which brings me to thinking this--- since take-loss-parameters are usually triggered in high IV situations, and high IV is good for sellers and bad for buyers---maybe an ideal take-loss parameter should be based more on the underlying. I know some people manage this, but I haven't figured out how yet. Any thoughts or wisdom for this greenhorn?


From my post, dated 27th of April:

All of our 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 regarding selling ES puts 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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  #5973 (permalink)
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myrrdin View Post
From my post, dated 27th of April:

All of our 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 regarding selling ES puts 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

I think the question was also for other underlyings and strategies than Ron's ES spread.
Do you have for the other futures specific rules?

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  #5974 (permalink)
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manuel999 View Post
I think the question was also for other underlyings and strategies than Ron's ES spread.
Do you have for the other futures specific rules?

Yes, although this set of rules is not as specific as the rules for the ES puts. For commodities, eg. grains & beans, meats, softs, and energies (I rarely trade metals or currencies), I think about getting out of the trade, buying back part of the position, or hedging via short futures or long puts in the following situations:
  • Before each important report (eg. USDA reports on grains, beans, and cotton; cattle on feed reports),
  • in case of a major change in fundamentals (eg. unexpected OPEC decision for CL, cold blast in winter for NG),
  • when a chart technical signal - preferably in the area where the option will have doubled its value - chosen before entering the trade has been reached by the underlying (eg. new contract high in the case of selling calls).

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

Best regards, Myrrdin

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  #5975 (permalink)
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ES margin is dropping 8% on Monday

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  #5976 (permalink)
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Captain135 View Post
I
Last Thursday's flash crash in crude oil had me question how I'm managing losses (as losses tend to do). My threshold is to get out at 300% of original premium received (for 2x loss).

Which brings me to thinking this--- since take-loss-parameters are usually triggered in high IV situations, and high IV is good for sellers and bad for buyers---maybe an ideal take-loss parameter should be based more on the underlying.

Perhaps this is only relevant to VIX options, so take what you like and leave the rest.

I mentioned in my journal that I just took a course on trading VIX options taught by a vol specialist trader who manages risk for a hedge fund in the volatility space.

I was following a similar policy to yours as for losses, but the instructor told to me tighten it up to less than the credit received, saying, "I never let these trades blow up on me. Always Be Closing these things." This went against the way I learned to trade, but heck I am willing to try anything.

So that is what I have started doing, always be closing. A lot of times, if it's a short duration weekly trade, I will close it if it goes against me initially, even a little. It's still too early to tell, but I get the sense that it's having a positive effect on my PL. The worst loss I have had since starting the new regime was 100% of credit, and that was a failure on my part, could have been avoided.

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  #5977 (permalink)
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suko View Post
Perhaps this is only relevant to VIX options, so take what you like and leave the rest.

I mentioned in my journal that I just took a course on trading VIX options taught by a vol specialist trader who manages risk for a hedge fund in the volatility space.

I was following a similar policy to yours as for losses, but the instructor told to me tighten it up to less than the credit received, saying, "I never let these trades blow up on me. Always Be Closing these things." This went against the way I learned to trade, but heck I am willing to try anything.

So that is what I have started doing, always be closing. A lot of times, if it's a short duration weekly trade, I will close it if it goes against me initially, even a little. It's still too early to tell, but I get the sense that it's having a positive effect on my PL. The worst loss I have had since starting the new regime was 100% of credit, and that was a failure on my part, could have been avoided.

I am following a similar strategy, exiting at approximately double the original value when selling options. I choose the stop loss in the underlying in a way that it should be reached when the value of the option has doubled. Usually I only exit end of day.

Another issue to consider: Many option sellers roll a loosing trade out to more DTE in a way that the new position has the same size than the loosing position (eg. double the normal position). Thus, in case you roll out several times you get huge positions. I prefer to roll out at the original size of the trade. That means, that if I roll at 200 %, the best I can achieve is a break even for the complete trade.

This procedure definitely has improved my performance (and my sleep).

Best regards, Myrrdin

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  #5978 (permalink)
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myrrdin View Post
I am following a similar strategy, exiting at approximately double the original value when selling options. I choose the stop loss in the underlying in a way that it should be reached when the value of the option has doubled. Usually I only exit end of day.

Thanks Myrrdin, this is what I'm thinking of doing--that is-- set it based on an underlying price point, where the premium risk parameter (100%, 200%, 300% etc.) should be reached under average IV conditions. My issue was that I was getting out at my stop loss, but I really wanted to be the person on the other side of the trade because the premium they were getting from me was ridiculous, and still was a fair distance away from my strike--very conflicting.

Why end of day, and for futures are you referring to right before the 45 minute break? In this event, it was 11PM Central Time.

I was originally using double premium as the stop loss, but changed it to triple based on a couple tasty trade studies with data on where to take losses, and 300% premium (2x loss) looked the best to me. Their data was /ES specific though. I'm pretty experienced at backtesting underlyings, but haven't yet learned a good way to backtest options, so until I do I have to use someone else's data to convince me of best stop loss for short options.

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  #5979 (permalink)
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Captain135 View Post

Why end of day, and for futures are you referring to right before the 45 minute break? In this event, it was 11PM Central Time.

There is a lot of intraday moves, caused by computers, news with limited relevance etc. For most commodities volume is highest end of day.

For me end of day means the end of the former pit session. For the grains, it is at 1.15 pm (Chicago Time), for the meats at 1.00 pm (Chicago Time), and for the Indices at 4.00 pm (New York Time). Overall, my profits improved when I changed from intraday stops to end of day stops. But remember: I am a discretionary trader, and once in a while I exit intraday (eg. after a report which was not in my favour.).

Taking profits is another matter. I am happy with a fill at whatever time, even overnight.

Best regards, Myrrdin

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  #5980 (permalink)
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suko View Post
Perhaps this is only relevant to VIX options, so take what you like and leave the rest.

I mentioned in my journal that I just took a course on trading VIX options taught by a vol specialist trader who manages risk for a hedge fund in the volatility space.

I was following a similar policy to yours as for losses, but the instructor told to me tighten it up to less than the credit received, saying, "I never let these trades blow up on me. Always Be Closing these things." This went against the way I learned to trade, but heck I am willing to try anything.

So that is what I have started doing, always be closing. A lot of times, if it's a short duration weekly trade, I will close it if it goes against me initially, even a little. It's still too early to tell, but I get the sense that it's having a positive effect on my PL. The worst loss I have had since starting the new regime was 100% of credit, and that was a failure on my part, could have been avoided.

I would like to see a study on this rather than hearsay.

I did an ES study using getting out at 20% loss. It performed worse than other strategies.

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