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Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,049 since Dec 2013
Thanks Given: 4,386
Thanks Received: 10,207
Google Black Scholes or take a look at Wikipedia's page. Their assumption that returns are log normally distributed is definitely a weakness of the model, but given your knowledge (and that your not an options market maker) I think this would be a good place to start.
I would like to know more about these differences. The ones I can think of are :
- options with different expiries can be based on a different futures contracts for commodities but have the same underlying for a security (eg. an option for CL can be based on the May month, or the June, July.... etc but an option on AMZN will be based just on AMZN, regardless of the expiry)
- margin requirement may be different on futures options, as the underlying is a leveraged product the ownership of which (through option assignment) would carry a margin obligation.
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,049 since Dec 2013
Thanks Given: 4,386
Thanks Received: 10,207
Another one is Term Structure of Volatility - Volatility of futures contracts tend to be dependent upon time to expiry - the closer to expiry the more volatile the contracts become* - this is not the case for stocks. This is another flaw with using Black Scholes when applied to futures as it assumes that volatility is constant.
* this is also not the case with Fixed Income Futures, specifically Eurodollars.
My broker (the first one I listed) is proposing options on platinum (it is on palladium that he is not offering or oats, lumber USD ICE index and others).
To answer you ron99 on why my objectives are to go to the expiration. Difficult to list everything and I will miss some. First one is (as I saw in a book today) KISS: keep it simple stupid. So I would say that for selling options, the simplest thing is to keep it to expiry. Then I still have some weaknesses (at least I am aware of them) like being happy to be right and to collect everything that needs to be collected including if possible saving the last broker transaction to close the option. Then it is a way to work on my psychology and to stay calm in any circumstances and to work on my patience (as it is also one of my weakness (therefore I do not have so much opportunities to be stressed out and going to expiry is one of them). However I think that the main reason is whether at one point of time you are almost sure to win (e.g. my current naked put on the brent at 52.5 expiring end of April and with a current price at 0.02) and therefore what is the point to close it earlier. Or I simply do not get to this 50% and it is always a close call (e.g soybeans around 900).
I effectively experienced with NG in January that on Friday I was winning (3% above the strike) and the day of expiration a Monday it lost 10% and the day after I was checking and rechecking my account to realised that I had a long futures and I got rid of it...At least I learnt my lesson.
Sure myrrdin I am glad to see an European as well...By the way is there a topic to discuss the coffee. Coffee is my nightmare, I lost a huge amount with the futures, I waited some time to be confident with the options and now that I am in position with Coffee C and Robusta, with put options naked and vertical spread, it is an adventure...
I currently hold the KCU P1. Coffee has very bullish COT data, and although COT data never is an entry signal, the options shoild expire worthless in my opinion. I intend to buy them back somewhere between 25 to 10 % - depending on when they reach these targets.
It is more stressful to ride an option to expiration than exiting at 50% profit. You are holding the option for much longer time.
You should have learned your lesson on the NG option why not to ride to expiration. You will have more of those losses until you quit being stubborn and take your profit when you can.
Assuming normal circumstances, a person can make 50% three times on short options while you are waiting for your one option to expire. They will make more net profit.
If I sell ES options at 90 DTE, under normal circumstances, I will exit 30 days later. The first 50% drop happens in about 30 days and the other 50% takes 60 days.
So in 90 days I will have sold and then exited 3 options while someone waiting for expiration only does one option.
I fully agree with Ron. Additionally there are futures that make large moves during the days before expiration. That is why I exit earlier - usually between 50 % and 25 %. You simply sleep better.
You have of course, both of you (ron99 and myrrdin), undisputed long experience in selling options on futures and I understand that from time to time (or more often than one thinks) you can get burn by holding them to the expiration or a couple of days before expiration. I have experienced that myself. However did you carefully and extensively review for a long period and I would like to talk here only on commodities (not forex or indexes) on what would have been your results should you have kept your options versus selling them/buying them back at 50% of value?
I would be very interested in your results in that matter. So please share them with us.
Without that, I appreciate your recommendation and advise very much, and I can adapt it one part directly (buying back before the expiry when the residual value is less than 3% or buying back a couple of days before, which I was doing already) but I will wait to have my own experience before shifting to this extreme to me which is selling at 50% of value.
The second point to raise is about the vertical spread. Is your advice still the same? If it is the case let me remind you (according to Cordier recommendation) that instead of potentially gaining 350 -400 dollars/contract you will be satisfied with 175-200 dollars. Then of course to get the remaining money you are targeting you have to find new contracts to invest which means you are far from guaranteeing to get back the potential 175 to 200 dollars you are potentially giving up (I can even say the result could be much worse specially on the same commodities: one example if I was selling my brent option expiring in July with a strike price of 58, then to get the rest of my money I would have to target the strike price of 63 with the same expiry date and sorry this is not the same story at all....
The last point is about the short option strangle. It looks to me that in this case selling at 50% does not make a lot of sense but I would like to hear from you.
My broker is not proposing options on futures with very low volume but HG Copper is available therefore it is ok. Concerning HG Copper, the volume is not so high but it is doable I had orders waiting to be filled in for 5 to 8 days but it happened. This is also a good point to mention that targeting 50% on a commodity with low volume you simply face difficulty to buy it back and exasperated to have to wait several days, you give up and go to expiration anyway...
I am a discretionary trader, and, thus, I decide on each order on its own. I do not have a systematic approach, as Ron has developped it.
Sorry - I do not do systematic backtesting or following my closed trades in a systematic way. My knowledge is based on a long list of trades including comments, eg. "later exit would have been better" or "glad I exited" or other lessons learnt.
My average procedure to exit is the following: The trade is entered with 90 to 120 DTE. I place an order to take profit at 50 %. In case the order is filled within 20 or 30 days, I take the profit, and consider to enter another order with an adapted strike price / DTE. But: Often if the underlying moves in my direction very quickly, it moves back quickly as well.
In case of a slow move of the underlying, and in case I do not want to "roll" the options, I move the stop to 25 % or 10 %.
Sometimes it does make sense to enter the other side after some weeks, and enter into a strangle.
The time I hold my short options also depends on the availability of other interesting potential trades. In case there are no such trades, and thus, there is enough margin available I tend to let older trades which are very far OTM expire at a lower percentage or even worthless.
Regarding strangles I usually proceed in the same way as for other option trades. There are rare cases when I exit one side before the other.
Regarding vertical spreads, there are two reasons why I use them from time to time: There are commodities well known for a potential of large moves, also during the weekend. In case of an event critical for the production / transportation of oil, prices might move up extremely quickly. Thus, when selling CL calls I usually use vertical spreads. Another reason is margin. Some brokers have fair margin for naked options, whereas Interactive Brokers has fair margin only for option spreads. Thus, in this account I usually use option spreads.
The most importand thing about trading is not profit, but to preserve ones capital. You are probably aware that James Cordier was not in a position to preserve the capital of his customers.
The problem with options with low volume is not selling them, but buying them back in case of troubles. I remember one case when a HEN call had no reasonable bid / ask when my (mental) stop was hit. HE (Hogs) usually has excellent volume, but I overlooked that this is not true for the May and July contracts ... Finally I managed to exit with the help of my broker, but it was expensive.
