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Selling Options on Futures?
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Selling Options on Futures?

  #6011 (permalink)
Market Wizard
Cleveland, OH
 
Futures Experience: Advanced
Platform: QST
Broker/Data: QST, DeCarley Trading, Gain
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TFOpts View Post
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.

On your example Excel formulas you used two different days held. One used 30 days the other 1/12 or 30.4 days.

I have used XIRR for years to compute my account's monthly and yearly ROI. I haven't used it for trades but you are correct it would be more accurate.

Here is what I use. B44 is End Date. B14 is Start Date

=(1+XIRR(G14:G44,B14:B44))^((B44-B14)/365)-1

This gives a result of 2.381% for your example on the Excel sheet.

My old formula =365/(B2-B1)/12*(B6-B8-B7-B9)/(B5*B4) result is 2.416%

Your new formula =+((B4*B5+B6-B8-B9)/(B4*B5+B7))^(365/12/B3)-1 result is 2.414%

It depends if you want to say that the day you acquire the option or the day you exit the option is a day held. I have been subtracting the start date from the end date so that only counts one of those. For example, March 31st minus March 1st is 30.

There are fees when you exit a position. NFA fees and maybe clearing fees. Broker Commission is either half in half out or all in. At Gain my entry and exit fees for ES are 0.56 per contract each way.

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  #6012 (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,

So I back-tested your strategy. I'm assuming you developed it by looking for a method that had a very high win rate over the back-testing period and that still produces good returns.

Here are the parameters I used:
# Short: -1
DTE Short: 100
Delta Short: -5
# Long: -2
DTE Long: 100
Delta Long: -1.5
MM: 6
Exit Point: 50%
Where MM is the margin multiple of the initial SPAN margin and exit point is what the premium needs to be as a percent of the original premium to close the position.

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


Where,
Win Rate = % of scenarios that have a positive return
E(mROI) = average mROI
Med(mROI) = median of mROI
E | Loss = average mROI for losses
E(DTS) = average days from acquisition to liquidation
Med(DTS) = average days from acquisition to liquidation
Max(%M) = Maximum margin requirement as % of margin held
The scenario that failed is shown below:
Date: 12/1/2015
Short(-1): ESH6,ESH6,1660
Long(2): ESH6,ESH6,1420
Total Margin: 1,597.20
mROI for this trade is -13.4%
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Does this look right to you? Do you get the same results?

Thanks.

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  #6013 (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
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TFOpts, that is impressive work. Thank you.

I agree with all of your numbers for that trade except that trade didn't fail. You don't go on margin call until your maintenance margin is at 100+%. Initial margin is 110% of Maintenance Margin. So a margin call wouldn't happen until % of Margin was 110% or higher.

I have lots of questions if you don't mind.

Did you backtest for the years 2013 through 2017?
Starting a trade on each trading day of all those years?
How long did it take?
How many lines in your database?
You downloaded each ES and EW3 option for each trading day for all of those years?
What parameters to pick which options to download?
Which database are you using?
Where have you been all of these years?

Your work could be a huge help in finding strategies. Thank you again.

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  #6014 (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
On your example Excel formulas you used two different days held. One used 30 days the other 1/12 or 30.4 days.

I have used XIRR for years to compute my account's monthly and yearly ROI. I haven't used it for trades but you are correct it would be more accurate.

Here is what I use. B44 is End Date. B14 is Start Date

=(1+XIRR(G14:G44,B14:B44))^((B44-B14)/365)-1

This gives a result of 2.381% for your example on the Excel sheet.

My old formula =365/(B2-B1)/12*(B6-B8-B7-B9)/(B5*B4) result is 2.416%

Your new formula =+((B4*B5+B6-B8-B9)/(B4*B5+B7))^(365/12/B3)-1 result is 2.414%

It depends if you want to say that the day you acquire the option or the day you exit the option is a day held. I have been subtracting the start date from the end date so that only counts one of those. For example, March 31st minus March 1st is 30.

There are fees when you exit a position. NFA fees and maybe clearing fees. Broker Commission is either half in half out or all in. At Gain my entry and exit fees for ES are 0.56 per contract each way.

Ron, The 1/12 in the XIRR formula is to convert it to a monthly rate not to a rate over the period of time the transaction was open. XIRR always returns an annual ROI, so raising the XIRR to the power of 1/12 is equivalent to the 365/12 adjustment made in the formulas.

Your adjustment to XIRR --> =(1+XIRR(G14:G44,B14:B44))^((B44-B14)/365)-1 is correct if you want to know what the ROI was from the start date to the end date; but if you want the equivalent monthly ROI, you would always use: (1+XIRR(G14:G44,B14:B44))^(1/12)-1

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  #6015 (permalink)
Elite Member
vancouver BC/Canada
 
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Broker/Data: DeCaley
Favorite Futures: options
 
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Thanks: 13 given, 192 received


TFOpts View Post
@ron99,

So I back-tested your strategy. I'm assuming you developed it by looking for a method that had a very high win rate over the back-testing period and that still produces good returns.

Here are the parameters I used:
# Short: -1
DTE Short: 100
Delta Short: -5
# Long: -2
DTE Long: 100
Delta Long: -1.5
MM: 6
Exit Point: 50%
Where MM is the margin multiple of the initial SPAN margin and exit point is what the premium needs to be as a percent of the original premium to close the position.

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


Where,
Win Rate = % of scenarios that have a positive return
E(mROI) = average mROI
Med(mROI) = median of mROI
E | Loss = average mROI for losses
E(DTS) = average days from acquisition to liquidation
Med(DTS) = average days from acquisition to liquidation
Max(%M) = Maximum margin requirement as % of margin held
The scenario that failed is shown below:
Date: 12/1/2015
Short(-1): ESH6,ESH6,1660
Long(2): ESH6,ESH6,1420
Total Margin: 1,597.20
mROI for this trade is -13.4%
Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).


Does this look right to you? Do you get the same results?

Thanks.

As others have mentioned this is incredible work. I do have one question, rather than writing out the trade to margin call is you could run this test and find out what the percentage of winners and losers are if you have a 200% and a 300% of premium exit point? I'm looking forward to seeing the results.

/rsm005/

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  #6016 (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, that is impressive work. Thank you.

I agree with all of your numbers for that trade except that trade didn't fail. You don't go on margin call until your maintenance margin is at 100+%. Initial margin is 110% of Maintenance Margin. So a margin call wouldn't happen until % of Margin was 110% or higher.

I have lots of questions if you don't mind.

Did you backtest for the years 2013 through 2017?
Yes
Starting a trade on each trading day of all those years?
Yes
How long did it take?
<5 min
How many lines in your database?
About 650k entries.
You downloaded each ES and EW3 option for each trading day for all of those years?
Does XLS-SPAN include EW3? I just took what came out of XLS-SPAN for an ES entry
What parameters to pick which options to download?
I limited my data to ES puts with DTE < 200 and Delta between -0.25 and -10 at least once in the life of an option.
Which database are you using?
Based on XLS-SPAN output
Where have you been all of these years?
I missed out on a lot of fun. It was very educational to read through this thread, thanks again for starting it and sharing!

Your work could be a huge help in finding strategies. Thank you again.
I've already found something that I'll share in a separate post.

@ron99 Thanks for pointing out the difference between the initial and maintenance margin.

I have a question for you. Your exit point is documented as:
(CURRENT IM + (CURRENT PREMIUM$ - OPENING PREMIUM$)) > (MM * OPENING IM)
Does that mean you actually use the maintenance margin to exit instead?
(CURRENT MM + (CURRENT PREMIUM$ - OPENING PREMIUM$)) > (MM * OPENING IM)
In the example on post 6012 the exit point based on the original formula is reached on 02/11/2016 (see calcs below).
(1,216.6 + (575 - 130)) > (6 * 266.2) = 1,661.6 > 1,597.2
Have you revised your exit strategy to only exit when there's a margin call?

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  #6017 (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


rsm005 View Post
As others have mentioned this is incredible work. I do have one question, rather than writing out the trade to margin call is you could run this test and find out what the percentage of winners and losers are if you have a 200% and a 300% of premium exit point? I'm looking forward to seeing the results.

/rsm005/

As a clarification, in the original post the trades were not run out to margin call but instead, they exit when Ron's threshold is reached:
(CURRENT IM + (CURRENT PREMIUM$ - OPENING PREMIUM$)) > (MM * OPENING IM)
I ran 2x and 3x initial premium exit points, more losers and less overall ROI. The size of the losers is not necessarily lower either (on a monthly compounded basis). For example, the 2x premium exit has #NUM because it loses over 12% in 1 day; compound that for 30 days in a month and you have almost no money left.

Note that I assume you get out at the settlement price for a day and not at exactly 2x the initial premium. This makes sense to me; expecting to get out at a specific price when markets tank is unrealistic.

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The first run is Ron's methodology. The second is 2x and the third is 3x.

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  #6018 (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
@ron99 Thanks for pointing out the difference between the initial and maintenance margin.

I have a question for you. Your exit point is documented as:
(CURRENT IM + (CURRENT PREMIUM$ - OPENING PREMIUM$)) > (MM * OPENING IM)
Does that mean you actually use the maintenance margin to exit instead?
(CURRENT MM + (CURRENT PREMIUM$ - OPENING PREMIUM$)) > (MM * OPENING IM)
In the example on post 6012 the exit point based on the original formula is reached on 02/11/2016 (see calcs below).
(1,216.6 + (575 - 130)) > (6 * 266.2) = 1,661.6 > 1,597.2
Have you revised your exit strategy to only exit when there's a margin call?

Yes

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  #6019 (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
You downloaded each ES and EW3 option for each trading day for all of those years?
Does XLS-SPAN include EW3? I just took what came out of XLS-SPAN for an ES entry

EW3 starts appearing Feb 22, 2016.

You'll need those contracts to do a backtest for 2016 & 2017 for all months instead of just the quarterlies.

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  #6020 (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
@ron99 Thanks for pointing out the difference between the initial and maintenance margin.

I have a question for you. Your exit point is documented as:
(CURRENT IM + (CURRENT PREMIUM$ - OPENING PREMIUM$)) > (MM * OPENING IM)
Does that mean you actually use the maintenance margin to exit instead?
(CURRENT MM + (CURRENT PREMIUM$ - OPENING PREMIUM$)) > (MM * OPENING IM)
In the example on post 6012 the exit point based on the original formula is reached on 02/11/2016 (see calcs below).
(1,216.6 + (575 - 130)) > (6 * 266.2) = 1,661.6 > 1,597.2
Have you revised your exit strategy to only exit when there's a margin call?

Using CME's PC-SPAN for the above spread, it says 266.00 for IM and 242.00 for MM on 12/01/2015. It rounds to nearest dollar.

On 02/11/2016 IM is 1,217.00 and MM is 1,106.00.

Applying MM to the formula shows that the position isn't on margin call because MM of 1,551 is less than 6xIM of 1,597.20. It's at 97.1%.
(1,106.00 + (575 - 130)) > (6 * 266.2) = 1,551.00 > 1,597.2

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