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Selling Options on Futures?
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Selling Options on Futures?

  #6021 (permalink)
Trading for Fun
Los Angeles, CA
 
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2:3 The Golden Ratio?

This is a comparison of two strategies on ES.
  1. The best strategy proposed so far for relatively safe returns is 1 short ES put at -5 delta and 2 long ES puts at -1.5 delta with 6 x IM and DTE around 100 days, exiting when premium = 50% of initial premium. This would not have required a margin call from 2013-2016 with median mROI of 2.8%. Many thanks to Ron for sharing this with us.
  2. Based on recent back-testing I would like to propose another strategy that has a similar level of risk but has higher returns on average. 2 short ES puts at -3 delta and 3 long ES puts at -1 delta with 4 x IM and DTE around 100 days, exiting when premium = 50% of initial premium. This strategy also would not have required a margin call from 2013-2016 and the median mROI is 3.4%.

Here's a comparison of some stats between the two strategies.
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And here's the how close the margin gets to a margin call (100% means you get the call) by date for #1.
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And for #2.
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Note that #2 has more peaks but they aren't as high as #1. The protection of the 3 further OTM puts seems to balance out the risk of selling 2 puts nicely. I believe this balance is mainly from a volatility offset (the puts are closer together in strike) because there's more delta exposure on #2 (delta = 3) compared to #1 (delta = 2).

It would be great if someone could validate my work.

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  #6022 (permalink)
Elite Member
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Selling Options on Futures?

This is interesting so thank you for sharing.

I wonder if this strategy scales given the low deltas and relatively large number of contracts required? I am thinking slippage and commissions may substantially alter the risk/reward profile. Thoughts?


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  #6023 (permalink)
Trading for Fun
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Favorite Futures: Options on Futures
 
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bill20 View Post
This is interesting so thank you for sharing.

I wonder if this strategy scales given the low deltas and relatively large number of contracts required? I am thinking slippage and commissions may substantially alter the risk/reward profile. Thoughts?


Sent from my iPhone using futures.io mobile app

I assumed $7 RT per contract, with 5 contracts per position that's $35, paid when the spread is acquired. Slippage and volume may have an impact on this strategy, I don't have a means to test that. I would expect that these issues would exist on all far OTM option strategies.


Last edited by TFOpts; May 19th, 2017 at 11:12 AM.
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  #6024 (permalink)
Trading Apprentice
Chicago IL/USA
 
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@ron99

Does your broker have Deltas listed as 1.5?
TOS does not.

Thanks
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  #6025 (permalink)
Market Wizard
Cleveland, OH
 
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TFOpts, interesting. The peaks other than Aug 2015 & Dec 2016 were higher for #2. I'm estimating that is because the longs are further OTM.

I figured there might be higher ROI strategies than mine but I didn't know of a way to test many easily.

Do you have EW3 in these studies?

It will be interesting to see other strategy's results.

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  #6026 (permalink)
Market Wizard
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LordV View Post
@ron99

Does your broker have Deltas listed as 1.5?
TOS does not.

Thanks

Some data providers use decimal delta like TOS 0.01. Others use percent format like 1.50%.

Is it possible to format that column as a percent? Or add more digits after decimal point?

If not, send suggestion to TOS

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  #6027 (permalink)
Market Wizard
Cleveland, OH
 
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bill20 View Post
This is interesting so thank you for sharing.

I wonder if this strategy scales given the low deltas and relatively large number of contracts required? I am thinking slippage and commissions may substantially alter the risk/reward profile. Thoughts?


Sent from my iPhone using futures.io mobile app

I don't think slippage is an issue for the amount of contracts we trade. The bid and ask always have hundreds of contracts in them. At least for ES and EW3 options.

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  #6028 (permalink)
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ron99 View Post
Some data providers use decimal delta like TOS 0.01. Others use percent format like 1.50%.

Is it possible to format that column as a percent? Or add more digits after decimal point?

If not, send suggestion to TOS

Thanks again.

You can pick how far out you want decimals. (Up to 5)
Setup-Application Settings-Display-Decimal places for Greeks:

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  #6029 (permalink)
Trading for Fun
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Futures Experience: Beginner
Platform: Zaner360
Broker/Data: DeCarley
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Posts: 64 since May 2017
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ron99 View Post
TFOpts, interesting. The peaks other than Aug 2015 & Dec 2016 were higher for #2. I'm estimating that is because the longs are further OTM.

I figured there might be higher ROI strategies than mine but I didn't know of a way to test many easily.

Do you have EW3 in these studies?

It will be interesting to see other strategy's results.

I don't have a good explanation for the difference in behavior between the two strategies. Another approach for the more conservative investors (like me) is to do strategy #2 with 5 x IM. The median mROI is 2.7% (close to strategy #1), but there's a lot more room for things to go wrong (see graph).
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Another reason this strategy is safer is because it is less likely to go ITM if there's another recession. -5 delta strikes are roughly 20% OTM and -3 delta are closer to 25% OTM.

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  #6030 (permalink)
Market Wizard
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TFOpts View Post
I don't have a good explanation for the difference in behavior between the two strategies. Another approach for the more conservative investors (like me) is to do strategy #2 with 5 x IM. The median mROI is 2.7% (close to strategy #1), but there's a lot more room for things to go wrong (see graph).
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Another reason this strategy is safer is because it is less likely to go ITM if there's another recession. -5 delta strikes are roughly 20% OTM and -3 delta are closer to 25% OTM.

Good points on higher excess and also further OTM strikes.

The Dec 2008 ES futures contract had a max drop of 42.4% or 551.50 (1299.75 on 8/28/08 to 748.25 on 11/20/08) so it's impossible to prevent going ITM during recession. Just have to stay out of short ES puts when it looks like one is coming or add extra longs.

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