Selling Options on Futures?

January 15th, 2019, 08:35 AM

andby

Hi Myrrdin,

Why is 90-120 typical from your point of view, and why not 10-30 or 30-60 or 120-160?

thanks

Ron has done a lot of back tests in this thread to demonstrate that 90 - 120 DTE are best suited for selling ES puts.

This correlates with my experience of approx. 15 years of selling various commodity options. Occasionally I also sell options with more or less DTE, but these are exceptions and not typical.

Selling with only 10 - 30 DTE you have to accept a significant gamma risk.

Selling with more than 120 DTE, time decay of the options is limited. Sometimes I sell options with a very long time until expiry when I want to take profit of an extremely high volatility. Also in the meat markets, where the contract months trade more or less independent of each other, I sell options with more or less DTE, if I consider a specific contract month to be over- or undervalued.

Best regards, Myrrdin

January 20th, 2019, 05:43 AM

So,

The material on this thread is very elating to the point one can rush to open an options account and start selling puts like Greggs sells pastries ... please excuse my figures of speach, no pun intended.

But I feel nobody portrayed properly how an execution looks like, in the light of what happened end of last year.
While there's two sides of how risk is perceived - one extreme being the pastries seller above, or Johnny Bravo who picks up flowers for his misses from the MagLev track knowing there might be a 400 mph train heading his way from either direction, relying only on his hearing aid for heads up. And on the other extreme, being Nicholas Nassim Taleb - the guy who got rich buying options, and now preaches the black swan all over the place ...

So, please fill in the blancs of a put seller execution - I believe there are some here that went through this.

Setup:

1) Crude is 70 ticking higher and you feel selling puts at 50 is as smart as it gets
2) You sell 20 puts 90 days to expiration at 50 for 100 bucks a piece - nobody will give more as everyone thinks the same. Sky is the limit. What's that, $2k premium? it looks good.

3) Suddenly 60 days later crude ticks to 55 and your puts are valued now at 1000 a piece. Your size has now a value of 20K, and you're looking at a weeping 18K loss should you want to buy your puts back.
You still think your ears aid batteries are brand new and you're still in perfect shape, perfectly save to pick another flower.

3.5) Let's assume you've got the margin to hold on to your puts during all this time ... and your broker doesn't liquidate your position.

4) Crude goes to 49 just 10 days before expiration. Now, you're in the money but on the wrong side ... and you're facing a put long holder that has the choise to sell you 20 crude contracts at the strike price. He might be greedy and wait, he might sell immediately.

5) ... please fill in the blanks, especially on the below points:

a) Can the moment you end up with 20 crude longs in a falling market be forseen - I mean the day / time / minute when the longs end up in your account?
b) One might argue if you're fast enough you just sell them immediately ... is that even possible? What risks such as overnight / weekend session closed / or others do you face?

c) Anything else we're missing here?

thanks

January 20th, 2019, 01:10 PM

andby

So,

The material on this thread is very elating to the point one can rush to open an options account and start selling puts like Greggs sells pastries ... please excuse my figures of speach, no pun intended.

But I feel nobody portrayed properly how an execution looks like, in the light of what happened end of last year.
While there's two sides of how risk is perceived - one extreme being the pastries seller above, or Johnny Bravo who picks up flowers for his misses from the MagLev track knowing there might be a 400 mph train heading his way from either direction, relying only on his hearing aid for heads up. And on the other extreme, being Nicholas Nassim Taleb - the guy who got rich buying options, and now preaches the black swan all over the place ...

So, please fill in the blancs of a put seller execution - I believe there are some here that went through this.

Setup:

1) Crude is 70 ticking higher and you feel selling puts at 50 is as smart as it gets
2) You sell 20 puts 90 days to expiration at 50 for 100 bucks a piece - nobody will give more as everyone thinks the same. Sky is the limit. What's that, $2k premium? it looks good.

3) Suddenly 60 days later crude ticks to 55 and your puts are valued now at 1000 a piece. Your size has now a value of 20K, and you're looking at a weeping 18K loss should you want to buy your puts back.
You still think your ears aid batteries are brand new and you're still in perfect shape, perfectly save to pick another flower.

3.5) Let's assume you've got the margin to hold on to your puts during all this time ... and your broker doesn't liquidate your position.

4) Crude goes to 49 just 10 days before expiration. Now, you're in the money but on the wrong side ... and you're facing a put long holder that has the choise to sell you 20 crude contracts at the strike price. He might be greedy and wait, he might sell immediately.

5) ... please fill in the blanks, especially on the below points:

a) Can the moment you end up with 20 crude longs in a falling market be forseen - I mean the day / time / minute when the longs end up in your account?
b) One might argue if you're fast enough you just sell them immediately ... is that even possible? What risks such as overnight / weekend session closed / or others do you face?

c) Anything else we're missing here?

thanks

There definitely is a risk of a large price movement of an underlying overnight or after the weekend. Thus, it is absolutely mandatory to keep the lot size small enough that even a significant move of the underlying does not hurt you.

Furthermore it is important to avoid clump risk. Holding short puts in Gold, Silver, and Copper at the same time is dangerous, as a strong move of the US-Dollar influences all three commodities in the same direction.

There is no problem, if your options are exercised, and you end up with the futures in your account, as long as your account is large enough. And it should be very large to allow for selling 20 CL puts. There is no need to foresee when the options are exercised.

I do not kow anybody hear who allows for making a loss of more than 2000 % when selling options. Usually options are bought back at a much lower loss.

Best regards, Myrrdin

January 30th, 2019, 11:17 PM

I started reading this thread for the first time and after several pages noticed that this turned into a very active thread.

I'm a successful futures options trader. I usually sell strangles in /6E, /CL, /GC, /ZW, /ZC, /ZS, /NG
Typically they are 30-60 DTE with short strikes around the 20 delta
Profit target is usually around 50% of credit or more especially if I'm sitting at net 0 delta in the last few weeks. Most of the time, I close the position with 21 DTE or less.

#1 risk management strategy is if one side gets tested, then I'll roll that out from maybe a 50 delta to a 30 delta, and then sell an additional contract on the untested side to cover some of all of that cost. Sometimes instead of adding an additional short on the untested side, I'll roll in that strike. If it's getting close to expiration, I may just close the position and open a new one.

Another risk management step I'll take is if the position delta gets too far either positive or negative, I'll sell additional contracts on the safest side to neutralize the position and reduce delta risk while adding positive theta.

When my strangle in /CL was being crushed during this big move down in the last quarter of 2018, I sold a /CL contract to give me enough negative delta. The profits on /CL offset the losses on the short puts and I made money on the shot calls I was selling on the way down. I did it this way versus buying back my short puts because there was so much extrinsic value on my existing short puts, I just wanted to buy time so the extrinsic value would come in.

I'd be interested if anyone has comments or wants to ping me on skype @ rick.cromer

January 31st, 2019, 05:06 AM

"Sometimes instead of adding an additional short on the untested side, I'll roll in that strike."

Kindly help me understand what you mean by this

Thanks

January 31st, 2019, 09:54 AM

Kruger

"Sometimes instead of adding an additional short on the untested side, I'll roll in that strike."

Kindly help me understand what you mean by this

Thanks

What I mean by that is let's say price is moving lower and reaches my short put, in that case, my short call will be further OTM. If when I opened the short call it was at a 20 delta, since time had gone on and price moved lower that short call may now be at a delta of 5. To "roll that in" I'll buy to close the 5 delta strike and sell to open a 25 or 30 delta option picking up additional credit on the trade.

January 31st, 2019, 10:52 AM

Thanks for sharing! It sounds like when positions start going against you, you increase the overall size of your trade by taking even larger positions which goes against traditional trading wisdom (martingale like money management doesn't work unless you have unlimited capital). My question is, by doing this, do you find you sometimes end up with positions that are way too big for the size of your account? At which point do you stop adding contacts and actually take the loss?

dynoweb

I started reading this thread for the first time and after several pages noticed that this turned into a very active thread.

I'm a successful futures options trader. I usually sell strangles in /6E, /CL, /GC, /ZW, /ZC, /ZS, /NG
Typically they are 30-60 DTE with short strikes around the 20 delta
Profit target is usually around 50% of credit or more especially if I'm sitting at net 0 delta in the last few weeks. Most of the time, I close the position with 21 DTE or less.

#1 risk management strategy is if one side gets tested, then I'll roll that out from maybe a 50 delta to a 30 delta, and then sell an additional contract on the untested side to cover some of all of that cost. Sometimes instead of adding an additional short on the untested side, I'll roll in that strike. If it's getting close to expiration, I may just close the position and open a new one.

Another risk management step I'll take is if the position delta gets too far either positive or negative, I'll sell additional contracts on the safest side to neutralize the position and reduce delta risk while adding positive theta.

When my strangle in /CL was being crushed during this big move down in the last quarter of 2018, I sold a /CL contract to give me enough negative delta. The profits on /CL offset the losses on the short puts and I made money on the shot calls I was selling on the way down. I did it this way versus buying back my short puts because there was so much extrinsic value on my existing short puts, I just wanted to buy time so the extrinsic value would come in.

I'd be interested if anyone has comments or wants to ping me on skype @ rick.cromer

Sent using the NexusFi mobile app

January 31st, 2019, 01:13 PM

dynoweb

I started reading this thread for the first time and after several pages noticed that this turned into a very active thread.

I'm a successful futures options trader. I usually sell strangles in /6E, /CL, /GC, /ZW, /ZC, /ZS, /NG
Typically they are 30-60 DTE with short strikes around the 20 delta
Profit target is usually around 50% of credit or more especially if I'm sitting at net 0 delta in the last few weeks. Most of the time, I close the position with 21 DTE or less.

#1 risk management strategy is if one side gets tested, then I'll roll that out from maybe a 50 delta to a 30 delta, and then sell an additional contract on the untested side to cover some of all of that cost. Sometimes instead of adding an additional short on the untested side, I'll roll in that strike. If it's getting close to expiration, I may just close the position and open a new one.

Another risk management step I'll take is if the position delta gets too far either positive or negative, I'll sell additional contracts on the safest side to neutralize the position and reduce delta risk while adding positive theta.

When my strangle in /CL was being crushed during this big move down in the last quarter of 2018, I sold a /CL contract to give me enough negative delta. The profits on /CL offset the losses on the short puts and I made money on the shot calls I was selling on the way down. I did it this way versus buying back my short puts because there was so much extrinsic value on my existing short puts, I just wanted to buy time so the extrinsic value would come in.

I'd be interested if anyone has comments or wants to ping me on skype @ rick.cromer

Selling strangles is one of my preferred ways of option selling. But for me, a diversified account is of most importance. This includes diversity regarding the commodities, but also diversity regarding the set-up of the trade (eg. outright futures, future spreads, option strangles, naked options, option spreads). Holding only strangles hurts you in case of an abrupt general rise of volatility.

I do not like to enlarge a losing position. In case of a strangle moving to one side, I would prefer to reduce the losing side instead of enlarging the winning side.

I enter strangles usually with 90 to 120 DTE, and also take profit at 50 %.

You will find more information about my way of selling option in the thread "Diversified Option Selling Portfolio".

Best regards, Myrrdin

February 4th, 2019, 06:13 PM

Captain135

Thanks for sharing! It sounds like when positions start going against you, you increase the overall size of your trade by taking even larger positions which goes against traditional trading wisdom (martingale like money management doesn't work unless you have unlimited capital). My question is, by doing this, do you find you sometimes end up with positions that are way too big for the size of your account? At which point do you stop adding contacts and actually take the loss?

Sent using the NexusFi mobile app

Before taking a single contract trade, I consider my account size and make sure that I can have 4 or 5 strangles without testing my account limits. Also, if I sell a 20 delta contract, I know that I have plenty of margin to handle it if that position were to get to a 70 delta, which requires more margin.

I also like to start with an initial trade size and if it moves one way or the other early in the trade add a second trade. which widen's my break evens for the entire position. I like that better than starting the trade at the double size because I've given the market time to move before adding the rest of the trade.

If you sell calls against your stock you are reducing your cost basis of that stock by the credit you receive of the short call. If that stock goes down in price, selling another call, just reduces your cost bases more. I don't consider it directly adding to position. If margin or trade size is of concern to you, then just roll the call down closer to ATM when the put is being tested.

February 21st, 2019, 08:57 AM

Hello,
Just got done watching James Cordier's painful YouTube apology to his clients for blowing up his "hedge" fund.
Can anyone here explain to me why anyone in their right mind would be selling naked options on NatGas when NatGas volatility was near all-time lows?!?!
Also, was he loading up on far out of the money calls? Because due to the volatility skew, that makes it even worse for margin calls!
Looking at a historical chart of NatGas volatility, no one should even be thinking of selling naked NatGas options at a volatility of any less than 70%.
What was his deal?

Selling Options on Futures?

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Selling Options on Futures?