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Selling Options on Futures?


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Selling Options on Futures?

  #6201 (permalink)
TFOpts
Los Angeles, CA
 
Posts: 64 since May 2017
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ron99 View Post
TFOpts, would it be possible to do easily, what percent the short option is of futures the day entered and see the max and average for the study? For example, EW3v792020 is -5.07 delta and 83.2% of ES futures 2426. The Dec 2011 ES futures dropped 19.3% in 88 day time frame.

Ron,
Here's the distribution for a few deltas:

Only the -3 delta would have a high chance of being safe for the 2011 drop. Note that these are strongly correlated with volatility. The higher the volatility, the further out you can purchase, and the higher the anticipated returns. This chart compares ROI over the period held (not converted to a monthly rate) and the ITM margin, there's a very strong positive correlation (75%).

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  #6202 (permalink)
 ron99 
Cleveland, OH
 
Experience: Advanced
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Broker: QST, DeCarley Trading, Gain
Trading: Options on Futures
Posts: 3,081 since Jul 2011
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TFOpts, thank you for doing that study. Appreciate what you can do.

Does that chart include all 3 deltas? Would it look any different if you charted each delta separately?

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  #6203 (permalink)
TFOpts
Los Angeles, CA
 
Posts: 64 since May 2017
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ron99 View Post
TFOpts, thank you for doing that study. Appreciate what you can do.

Does that chart include all 3 deltas? Would it look any different if you charted each delta separately?

That chart is for a sell one (-5 delta) buy one (-3 delta) structure with 6 x IM as margin held.

The results are similar for the other runs as well. The reason is that, when the ITM margin is high, volatility is high and the price of options is high. In other words, when you exit at 50% of the original price, your return is higher under these high vol scenarios because the original price was higher.

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  #6204 (permalink)
rajab
westhills california US
 
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TFOpts View Post
Ron,
Here's the distribution for a few deltas:

Only the -3 delta would have a high chance of being safe for the 2011 drop. Note that these are strongly correlated with volatility. The higher the volatility, the further out you can purchase, and the higher the anticipated returns. This chart compares ROI over the period held (not converted to a monthly rate) and the ITM margin, there's a very strong positive correlation (75%).

TFOpts

Can you please explaing what the y and x axis represent.
ITM % of what?
Also period ROI%?

Thanks for all your hard work.
Bob

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  #6205 (permalink)
TFOpts
Los Angeles, CA
 
Posts: 64 since May 2017
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rajab View Post
TFOpts

Can you please explaing what the y and x axis represent.
ITM % of what?
Also period ROI%?

Thanks for all your hard work.
Bob

Bob,

ITM margin (there's probably a better name for this) is the percent change in the underlying future that would bring the short option in the money. The formula is K/S - 1, where K is the strike price of the short option and S is the price of the underlying. For example, if you sell a put with a strike of 800 on a future that is priced at 1000, the ITM margin is 800/1000 - 1 = -20%. I used the absolute values in the chart.

The period ROI is the return on investment ignoring the time elapsed. The formulas is Ret/Inv - 1, where Ret is the return and Inv is the initial investment. For example, if you invested 1,000 to put on a position (initial margin + entrance fees) and exit when the position has a value of 1,025 (margin release + gain/loss on options - exit fees); then your ROI over the period is 1,025/1,000 - 1 = 2.5%.

Hope that helps.

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  #6206 (permalink)
TFOpts
Los Angeles, CA
 
Posts: 64 since May 2017
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@ron99,

Your question prompted the idea of keeping the ITM margin constant (e.g. at 20%) and letting the short delta float. Here are some results: run 1 is short 1 at -5 delta and long 1 at -3 delta; run 2 is short 1 at whatever delta has a strike 20% less than the future price and long 1 to get to a net delta of 2 (or as close to 2 as possible).


Results are very close, with a bit less return at the median and a bit safer (max margin held is lower by about 2.5%). Delta's can go to -11 even though you're 20% below the futures price (August 2015). See chart below with the relationship between deltas and period ROI.


There are different ways to use this information; for the conservative, you might decide to take the lower strike of the two, i.e. chose the option with the lowest strike between -5 delta or 20% ITM margin. For the aggressive, you might go with the maximum strike instead. Makes a bit of a difference, though not huge:

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  #6207 (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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ron99 View Post
Here are the results from 2 studies





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

@TFOpts, in the 2nd table you have E, Median and Avg mROI.

Just to be clear, is E average actual ROI? Is Median average actual ROI? Or are they monthly ROI?

For us who haven't taken statistics classes, which of those three should be given highest priority when choosing strategy?

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  #6208 (permalink)
TFOpts
Los Angeles, CA
 
Posts: 64 since May 2017
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ron99 View Post
@TFOpts, in the 2nd table you have E, Median and Avg mROI.

Just to be clear, is E average actual ROI? Is Median average actual ROI? Or are they monthly ROI?

For us who haven't taken statistics classes, which of those three should be given highest priority when choosing strategy?

Sorry, I should've clarified the labels. E is the expectation,or average, of the daily mROI. Median is the middle value of the daily mROI. Avg mROI is the average monthly return you would've received if you invested 100% of your account starting in 2013 and ending in 2016. It accounts for lost opportunities while you're already invested, sometimes in low mROI trades that take a long time to pay-out.

I would suggest focusing on median over the expectation since there are some large outliers in mROI (for example when you exit after 1 day, you can end up with a very large mROI) and "E" is therefore overstated. Avg mROI gives an idea of actual performance if 100% invested, so it's pretty good too.

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  #6209 (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
Thanks Received: 5,785

Here are the results from TFOpts in one table of different strategies



TFOpts, if you decrease the Excess Factor for runs 3 & 4 does that put you over 100% Max MM%? If not what are the results?

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  #6210 (permalink)
TFOpts
Los Angeles, CA
 
Posts: 64 since May 2017
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ron99 View Post
Here are the results from TFOpts in one table of different strategies



TFOpts, if you decrease the Excess Factor for runs 3 & 4 does that put you over 100% Max MM%? If not what are the results?

Here you go, added one more:


Here's a visual of these methods mapping risk and reward. Ideally you'd want to be in the top left of the chart.

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