Selling Options on Futures? - Options on Futures | futures io social day trading
futures io futures trading


Selling Options on Futures?
Updated: Views / Replies:717,978 / 6,377
Created: by ron99 Attachments:737

Welcome to futures io.

(If you already have an account, login at the top of the page)

futures io is the largest futures trading community on the planet, with over 90,000 members. At futures io, our goal has always been and always will be to create a friendly, positive, forward-thinking community where members can openly share and discuss everything the world of trading has to offer. The community is one of the friendliest you will find on any subject, with members going out of their way to help others. Some of the primary differences between futures io and other trading sites revolve around the standards of our community. Those standards include a code of conduct for our members, as well as extremely high standards that govern which partners we do business with, and which products or services we recommend to our members.

At futures io, our focus is on quality education. No hype, gimmicks, or secret sauce. The truth is: trading is hard. To succeed, you need to surround yourself with the right support system, educational content, and trading mentors Ė all of which you can find on futures io, utilizing our social trading environment.

With futures io, you can find honest trading reviews on brokers, trading rooms, indicator packages, trading strategies, and much more. Our trading review process is highly moderated to ensure that only genuine users are allowed, so you donít need to worry about fake reviews.

We are fundamentally different than most other trading sites:
  • We are here to help. Just let us know what you need.
  • We work extremely hard to keep things positive in our community.
  • We do not tolerate rude behavior, trolling, or vendors advertising in posts.
  • We firmly believe in and encourage sharing. The holy grail is within you, we can help you find it.
  • We expect our members to participate and become a part of the community. Help yourself by helping others.

You'll need to register in order to view the content of the threads and start contributing to our community.  It's free and simple.

-- Big Mike, Site Administrator

Reply
 737  
 
Thread Tools Search this Thread
 

Selling Options on Futures?

  #6001 (permalink)
Market Wizard
Cleveland, OH
 
Futures Experience: Advanced
Platform: QST
Broker/Data: QST, DeCarley Trading, Gain
Favorite Futures: Options on Futures
 
Posts: 2,717 since Jul 2011
Thanks: 792 given, 4,759 received
Forum Reputation: Legendary

Wow we hit page 600 for this thread. Thanks to all that have contributed.

Reply With Quote
The following 2 users say Thank You to ron99 for this post:
 
  #6002 (permalink)
Trading for Fun
Los Angeles, CA
 
Futures Experience: Beginner
Platform: Zaner360
Broker/Data: DeCarley
Favorite Futures: Options on Futures
 
Posts: 64 since May 2017
Thanks: 48 given, 116 received

ROI Methodology

The calculation proposed for ROI in this thread is atypical. I reproduce it here as a reference:
mROI = 365/DTE/12*(Premium - fees)/(Margin * 3)

An ROI implies an initial investment and future return(s). In the case of selling options, the initial investment is the capital that is set aside to cover margin less the collected premium.
Initial investment = 3 * IM - (Premium - Fees)

If we have only one future payout, as we do most of the time selling options, then the return is simply the payout divided by the initial investment and time adjusted.
mROI = {[MM* IM - (Premium(tout) + Fees(tout))] / [MM* IM - (Premium(0) - Fees(0))]} ^(365/12/tout) - 1
where,
  • MM = Margin Multiple (how much of the IM margin you are setting aside for this trade)
  • IM = Initial Margin
  • t = days elapsed since the transaction was initiated. So t = 0 is when the initial investment was made and tout is the day the transaction was closed

Simplifications:
If you hold to maturity and there are no exit fees; the formula simplifies to:
mROI = {(MM * IM) / [MM* IM - (Premium(0) - Fees(0))]} ^(365/12/DTE) - 1

Example:
Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).


If you assume you can get 50% of your premium back after 30 days and there are no exit fees; the formula simplifies to:
mROI = {(MM * IM - Premium(0)/2) / [MM* IM - (Premium(0) - Fees(0))]} ^(365/12/30) - 1

Example:
Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).


It doesn't make a huge difference in the mROI result; but it should be a bit more accurate.

Reply With Quote
The following 3 users say Thank You to TFOpts for this post:
 
  #6003 (permalink)
Market Wizard
Cleveland, OH
 
Futures Experience: Advanced
Platform: QST
Broker/Data: QST, DeCarley Trading, Gain
Favorite Futures: Options on Futures
 
Posts: 2,717 since Jul 2011
Thanks: 792 given, 4,759 received
Forum Reputation: Legendary


TFOpts, I am holding the full IM * 6 for each spread until exit. I don't reduce that by premium collected.

Reply With Quote
The following user says Thank You to ron99 for this post:
 
  #6004 (permalink)
Trading for Fun
Los Angeles, CA
 
Futures Experience: Beginner
Platform: Zaner360
Broker/Data: DeCarley
Favorite Futures: Options on Futures
 
Posts: 64 since May 2017
Thanks: 48 given, 116 received


ron99 View Post
TFOpts, I am holding the full IM * 6 for each spread until exit. I don't reduce that by premium collected.

Ron, that's right; but what happens to the premium you collected? Doesn't that get used to pay for some of the IM * 6 that you have to put up? If you need to put up $1,500 as collateral but you collect $100, isn't your out of pocket cost $1,400?


Last edited by TFOpts; May 17th, 2017 at 04:51 PM. Reason: typo
Reply With Quote
 
  #6005 (permalink)
Market Wizard
Cleveland, OH
 
Futures Experience: Advanced
Platform: QST
Broker/Data: QST, DeCarley Trading, Gain
Favorite Futures: Options on Futures
 
Posts: 2,717 since Jul 2011
Thanks: 792 given, 4,759 received
Forum Reputation: Legendary


TFOpts View Post
Ron, that's right; but what happens to the premium you collected? Doesn't that get used to pay for some of the IM * 6 that you have to put up? If you need to put up $1,500 as collateral but you collect $100, isn't your out of pocket cost $1,400?

If my account has $30,000 in it I acquire 20 spreads not 21. And I hold the $30,000 until exiting. I don't use premium collected until the position is closed.

If I reduced from $1,500 to $1,400 then I would have to increase the MM to cover the risk because of less cash excess.

Reply With Quote
The following 2 users say Thank You to ron99 for this post:
 
  #6006 (permalink)
Trading for Fun
Los Angeles, CA
 
Futures Experience: Beginner
Platform: Zaner360
Broker/Data: DeCarley
Favorite Futures: Options on Futures
 
Posts: 64 since May 2017
Thanks: 48 given, 116 received


ron99 View Post
If my account has $30,000 in it I acquire 20 spreads not 21. And I hold the $30,000 until exiting. I don't use premium collected until the position is closed.

If I reduced from $1,500 to $1,400 then I would have to increase the MM to cover the risk because of less cash excess.

Thanks for the clarification. So in your example with a $30,000 account, you acquire 20 spreads with a margin requirement of $30k and receive premium of $2,000. Your account balance is $32,000 at the time you put on the position; but $2,000 of that (the premium) is not available for any purpose until the position is closed.

If that's the case then the original mROI formula is pretty much correct. The only revision might be to convert it to a compound rate.
mROI = {1 + [(Premium(0) - Fees(0)) - (Premium(tout) + Fees(tout))] / (MM * IM)} ^ (365/12/tout) - 1

For my education (I'm new to this), can you explain why the premium is not available immediately? Is the premium accounted for in the actual margin requirement? I.e. a margin call happens when your account balance less premium exceeds the margin requirement?


Last edited by TFOpts; May 17th, 2017 at 09:02 PM.
Reply With Quote
The following 2 users say Thank You to TFOpts for this post:
 
  #6007 (permalink)
Market Wizard
Cleveland, OH
 
Futures Experience: Advanced
Platform: QST
Broker/Data: QST, DeCarley Trading, Gain
Favorite Futures: Options on Futures
 
Posts: 2,717 since Jul 2011
Thanks: 792 given, 4,759 received
Forum Reputation: Legendary

All of the premium collected when you sell an option is not available to you. Yes you collect the premium but they subtract from your account the current value. So the only thing available is net profit on premium minus fees.

In this example the account was empty then I sold ES spreads. The net premium collected was 1,700 credit. At the end of the day they were at 2,100 debit or losing 400. The 400 comes off of the Net Liquidating Value. The Net Liquidating Value is the amount you have to cover margin.

Net Liquidating Value minus Risk Maintenance needs to be positive. If it goes negative then you are on margin call.

The Margin Default/Excess is money you have to acquire new positions. But you want to keep plenty there to cover adverse moves against you.

Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).

Reply With Quote
The following 5 users say Thank You to ron99 for this post:
 
  #6008 (permalink)
Trading for Fun
Los Angeles, CA
 
Futures Experience: Beginner
Platform: Zaner360
Broker/Data: DeCarley
Favorite Futures: Options on Futures
 
Posts: 64 since May 2017
Thanks: 48 given, 116 received


ron99 View Post
Net Liquidating Value minus Risk Maintenance needs to be positive. If it goes negative then you are on margin call.

Ron, thanks for taking the time to explain all of this to a beginner. Based on this information, I believe the mROI formula should be:
mROI = {[MM * IM(Start) + Premium(Start) - Premium(End) - Fees(End)] / [MM * IM(Start) + Fees(Start)]} ^ [365/12/(End-Start)] - 1
Where,
Start = date the position was acquired
End = date the position was liquidated
MM = margin multiple
IM = initial margin
Would you agree?

Note also that you can use the XIRR function in Excel to get the same result (see attached for example). Hopefully the cash flows are correct now.

Attached Files
Register to download File Type: xlsx IRRExample2.xlsx (10.8 KB, 10 views)
Reply With Quote
The following 3 users say Thank You to TFOpts for this post:
 
  #6009 (permalink)
Trading for Fun
Los Angeles, CA
 
Futures Experience: Beginner
Platform: Zaner360
Broker/Data: DeCarley
Favorite Futures: Options on Futures
 
Posts: 64 since May 2017
Thanks: 48 given, 116 received

A general question if that's okay: does the margin have to be in cash? Or can I invest it in relatively safe securities (money market funds, etc.).

Reply With Quote
 
  #6010 (permalink)
Market Wizard
Cleveland, OH
 
Futures Experience: Advanced
Platform: QST
Broker/Data: QST, DeCarley Trading, Gain
Favorite Futures: Options on Futures
 
Posts: 2,717 since Jul 2011
Thanks: 792 given, 4,759 received
Forum Reputation: Legendary



TFOpts View Post
A general question if that's okay: does the margin have to be in cash? Or can I invest it in relatively safe securities (money market funds, etc.).

Depends on broker. But most want cash.

Reply With Quote
The following user says Thank You to ron99 for this post:

Reply



futures io > > > > Selling Options on Futures?

Thread Tools Search this Thread
Search this Thread:

Advanced Search



Upcoming Webinars and Events (4:30PM ET unless noted)

Adam Grimes: TBA

Elite only

NinjaTrader: TBA

Dec 7

Linda Bradford Raschke: TBA

Elite only

Ran Aroussi: TBA

Elite only
     

Similar Threads
Thread Thread Starter Forum Replies Last Post
Trading Futures with options as protection Gooffy2010 Commodities Futures Trading 7 November 7th, 2017 12:06 PM
Crude Oil (CL) futures inverse pairing options Big Mike Commodities Futures Trading 8 December 12th, 2013 12:00 PM
Recommend futures, options Broker? sam1197 Reviews of Brokers and Data Feeds 17 March 27th, 2013 01:42 AM
Selling Njniatrader sam1197 NinjaTrader 22 June 28th, 2012 01:40 PM
Zen-Fire Futures options tici88 Reviews of Brokers and Data Feeds 1 July 30th, 2011 10:16 AM


All times are GMT -4. The time now is 07:25 PM.

Copyright © 2017 by futures io, s.a., Av Ricardo J. Alfaro, Century Tower, Panama, +507 833-9432, info@futures.io
All information is for educational use only and is not investment advice.
There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
no new posts
Page generated 2017-11-18 in 0.08 seconds with 19 queries on phoenix via your IP 54.198.108.19