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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:569,836 / 5,734
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Selling Options on Futures?

Old February 13th, 2013, 07:29 PM   #771 (permalink)
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Hello All,

I’ve been reading this thread for the past few months and really enjoying it. I’ve held off commenting because I didn’t really have much to add, but now I’ve come across a situation where asking a question on this forum seems to be the only place I might be able to get some unbiased advice (I apologize for the length up front).

I’ve been selling options on futures for the past 7 years with mixed results. I started out just selling options and it worked great. Then I tried some new types of trading and had a blow-out my second year. I was fortunate enough to be able to continue trading after that bad year. I focused on selling options, but I also toyed with futures, spreads, option spreads, day-trading and elaborate ways to cover bad options. It seemed like the only thing that was consistently making money was simply selling options. So two years ago and went back to just selling options, preferably far out-of-the-money strangles and keeping my margin at 50% or lower, and things have been going well.

After reading this thread I liked the idea of selling even further out-of-the money/ low delta options so much I started to shift my trading and liking the results. I’ve been enjoying the fact that my trading has become more and more boring. But perhaps I am in an ‘ignorance is bliss’ situation.

Recently, I’ve decided to hit up my broker for lower commissions and in his rebuttal he tells me that I am vastly overleveraged … a one standard deviation move in CL away from a blow account. He couldn’t go lower on his commissions because there would be no incentive left for him to have my account with that much risk on the books. My first reaction was that his remarks were a scare tactic to get me to stay. I know Black Swan events can happen (made it through one, thankfully), but the probabilities seem so remote that CL can move so far so fast that I would not be able exit my positions before losing it all.

I contacted OEC to talk with them about possibly switching one of my accounts to them. I was starting to second-guess my trading so I asked him to look at my account and give me his evaluation. I was kind of shocked to hear him say the same thing … in his opinion I was vastly over-trading, over-leveraged and in need of mentoring … fast. So now I’m thinking either he is trying to scare me to run to him or I have a problem with my trading.

The account in question is $28k with the following short positions: 2x ECH3 P126; 2x JYH3 C120, 1x JYJ3 C117; 2x GCH3 C1850, 2x GCH3 P1465, 3x GCJ3 C1900, 1x GCJ3 C2000, 2x GCJ3 P1400, 2x GCJ3 P1450, 1x GCM3 C1950; 2x CLH3 C115, 1x CLH3 P65, 1x CLH3 P70, 5x CLJ3 C115, 4x CLJ3 C120, 3x CLJ3 P70, 6x CLJ3 P75. I believe that the one JY C117 has a delta of 4, but the rest have deltas of 2 or less as of yesterday's close. Initial Margin $11k.

I know I’m heavy in CL and GC in this account, but as I was adding positions they seemed to have the best probabilities of the markets that I trade. I ‘m really hoping that I can get some unbiased opinions from some fellow traders … am I being far too risky? If so, what would you recommend I do to mitigate.

Thank you for your time.

Welcome! In many ways your trading experience and history are remarkably similar to mine. I too started selling options within a few months of placing my first trade. I too have day traded stocks and futures. I have also traded stock options. I have used credit/debit spreads, vertical spreads, and iron condors.

But just like you, I have also found that the simplicity of selling naked options and strangles have given me the best and most consistent results. You said that you started out just selling options and that worked great, so why not stay with what works while continuing to learn and adjust the way the you trade, mostly by going even farther out of the money when possible.

As for people and firms telling you that you are over-leveraged, consider the source and the reason why they are telling you this. Many have commented in this thread about how certain brokerages are not friendly with net option sellers. My guess is options sellers probably generates the least amount of commissions compared to day traders or even swing traders. There is a time and place to use certain types of spreads but many firms would prefer that you do an iron condor that contains FOUR commissions vs selling naked that only has one commission. I can not speak for everyone here but sometimes I go days, weeks, even a month without making a trade. I am sure my broker is not thrilled about that.

Secondly, the concept of option selling is misunderstood by most, even by so called professionals. People fear what they do not understand. Ever try looking for good option selling books at your local book store? I do not find that many. And until I found this thread, it was even hard finding other traders to discuss the topic. Many traders tell me that they are not interested in waiting 60-90 days for an ROI of 20% or higher. But yet these same traders will trade futures and put half or more of their account at risk every day. I once told a friend with 15K that by selling deep out of the money options that I would have a good chance of doubling his account in under a year, he laughed at me. And in a few weeks he blew out his account day trading MCP stock options. Try your best to ignore the naysayers. Or at the very least find out what their knowledge level is before taking what they say seriously. You say you are doing well selling options, don't second guess yourself. Continue to learn and improve on your results!

Wow. That's a lot of positions with 28K and only 11K in margin? I noticed you have quite a bit of CL calls. Many here, especially Ron99, have warned not to sell any CL calls between now and May. If you look at the seasonal charts you will see why also.

With SPAN margin, it is very tempting to strangle all the time. I use to be that way too thinking that I can double my ROI. But I have since learned, thanks to all the other traders here, to look at and respect the seasonal tendencies of many commodities. I am short CL puts and believe me, I am tempted to sell CL calls to establish a strangle but a quick glance at the 5-10-15 year seasonal chart tells me to not do it until maybe May.

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Old February 13th, 2013, 08:27 PM   #772 (permalink)
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Hello All,

Iíve been reading this thread for the past few months and really enjoying it. Iíve held off commenting because I didnít really have much to add, but now Iíve come across a situation where asking a question on this forum seems to be the only place I might be able to get some unbiased advice (I apologize for the length up front).

Iíve been selling options on futures for the past 7 years with mixed results. I started out just selling options and it worked great. Then I tried some new types of trading and had a blow-out my second year. I was fortunate enough to be able to continue trading after that bad year. I focused on selling options, but I also toyed with futures, spreads, option spreads, day-trading and elaborate ways to cover bad options. It seemed like the only thing that was consistently making money was simply selling options. So two years ago and went back to just selling options, preferably far out-of-the-money strangles and keeping my margin at 50% or lower, and things have been going well.

After reading this thread I liked the idea of selling even further out-of-the money/ low delta options so much I started to shift my trading and liking the results. Iíve been enjoying the fact that my trading has become more and more boring. But perhaps I am in an Ďignorance is blissí situation.

Recently, Iíve decided to hit up my broker for lower commissions and in his rebuttal he tells me that I am vastly overleveraged Ö a one standard deviation move in CL away from a blow account. He couldnít go lower on his commissions because there would be no incentive left for him to have my account with that much risk on the books. My first reaction was that his remarks were a scare tactic to get me to stay. I know Black Swan events can happen (made it through one, thankfully), but the probabilities seem so remote that CL can move so far so fast that I would not be able exit my positions before losing it all.

I contacted OEC to talk with them about possibly switching one of my accounts to them. I was starting to second-guess my trading so I asked him to look at my account and give me his evaluation. I was kind of shocked to hear him say the same thing Ö in his opinion I was vastly over-trading, over-leveraged and in need of mentoring Ö fast. So now Iím thinking either he is trying to scare me to run to him or I have a problem with my trading.

The account in question is $28k with the following short positions: 2x ECH3 P126; 2x JYH3 C120, 1x JYJ3 C117; 2x GCH3 C1850, 2x GCH3 P1465, 3x GCJ3 C1900, 1x GCJ3 C2000, 2x GCJ3 P1400, 2x GCJ3 P1450, 1x GCM3 C1950; 2x CLH3 C115, 1x CLH3 P65, 1x CLH3 P70, 5x CLJ3 C115, 4x CLJ3 C120, 3x CLJ3 P70, 6x CLJ3 P75. I believe that the one JY C117 has a delta of 4, but the rest have deltas of 2 or less as of yesterday's close. Initial Margin $11k.

I know Iím heavy in CL and GC in this account, but as I was adding positions they seemed to have the best probabilities of the markets that I trade. I Ďm really hoping that I can get some unbiased opinions from some fellow traders Ö am I being far too risky? If so, what would you recommend I do to mitigate.

Thank you for your time.


Welcome fellow Ohioan! I'm up near Lake Erie, Ron's a bit further south of me, and you're in southern Ohio. We've got the state covered!


You definitely have a lot positions on, which may or may not be a problem, if you take the proper steps when prices slowly move against you.

But what about a price shock, where you can't exit quickly enough? That's what I'd be worried about (and what I do worry about in my own trading). Terrorist attacks, euro falling apart, Bank of Japan taking some dramatic actions, currency devaluations, US going back to gold standard, etc. All those have some non-zero chance of happening - and any of those has the potential to wipe you out and then some.


I've heard it said there are old option sellers, bold option sellers, but very few old, bold options sellers. Well, actually I heard that about traders in general, but you get my point.


Bottom Line: You might survive for years with this type of portfolio, but eventually I think you would blow it trading this way. But that is based on my risk preferences, not yours.

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Old February 13th, 2013, 09:54 PM   #773 (permalink)
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Dudetooth View Post
Hello All,

Iíve been reading this thread for the past few months and really enjoying it. Iíve held off commenting because I didnít really have much to add, but now Iíve come across a situation where asking a question on this forum seems to be the only place I might be able to get some unbiased advice (I apologize for the length up front).

Iíve been selling options on futures for the past 7 years with mixed results. I started out just selling options and it worked great. Then I tried some new types of trading and had a blow-out my second year. I was fortunate enough to be able to continue trading after that bad year. I focused on selling options, but I also toyed with futures, spreads, option spreads, day-trading and elaborate ways to cover bad options. It seemed like the only thing that was consistently making money was simply selling options. So two years ago and went back to just selling options, preferably far out-of-the-money strangles and keeping my margin at 50% or lower, and things have been going well.

After reading this thread I liked the idea of selling even further out-of-the money/ low delta options so much I started to shift my trading and liking the results. Iíve been enjoying the fact that my trading has become more and more boring. But perhaps I am in an Ďignorance is blissí situation.

Recently, Iíve decided to hit up my broker for lower commissions and in his rebuttal he tells me that I am vastly overleveraged Ö a one standard deviation move in CL away from a blow account. He couldnít go lower on his commissions because there would be no incentive left for him to have my account with that much risk on the books. My first reaction was that his remarks were a scare tactic to get me to stay. I know Black Swan events can happen (made it through one, thankfully), but the probabilities seem so remote that CL can move so far so fast that I would not be able exit my positions before losing it all.

I contacted OEC to talk with them about possibly switching one of my accounts to them. I was starting to second-guess my trading so I asked him to look at my account and give me his evaluation. I was kind of shocked to hear him say the same thing Ö in his opinion I was vastly over-trading, over-leveraged and in need of mentoring Ö fast. So now Iím thinking either he is trying to scare me to run to him or I have a problem with my trading.

The account in question is $28k with the following short positions: 2x ECH3 P126; 2x JYH3 C120, 1x JYJ3 C117; 2x GCH3 C1850, 2x GCH3 P1465, 3x GCJ3 C1900, 1x GCJ3 C2000, 2x GCJ3 P1400, 2x GCJ3 P1450, 1x GCM3 C1950; 2x CLH3 C115, 1x CLH3 P65, 1x CLH3 P70, 5x CLJ3 C115, 4x CLJ3 C120, 3x CLJ3 P70, 6x CLJ3 P75. I believe that the one JY C117 has a delta of 4, but the rest have deltas of 2 or less as of yesterday's close. Initial Margin $11k.

I know Iím heavy in CL and GC in this account, but as I was adding positions they seemed to have the best probabilities of the markets that I trade. I Ďm really hoping that I can get some unbiased opinions from some fellow traders Ö am I being far too risky? If so, what would you recommend I do to mitigate.

Thank you for your time.

Duuuude...

If you're a college football fan and you remember Keith Jackson commentating you this might sound familiar:

"Whoaaaaaaaa Nellllleeeeey!!!" That's the first thing I thought of when I saw this. My trading career started about 16 years ago or so and I have taken my share of hits during that time and have learned from them. As far as the broker goes, yeah, I'd be a little wary also but OX dropped their commission to $3.50 for futures options per side so they have become very competitive now. I don't think the broker is trying to scare you. He or she is just protecting their assets as well.

If I counted correctly..I see 40 uncovered positions with a 28K account. And, all of them are tied in some way with the US dollar. An adverse reaction in the currencies could really hurt here. I don't see any grains or softs contracts here. In other words, very little diversification. For the year 2013 I've only been in two markets, wheat and crude and for the month of January I returned just under 6% in my account. An unbiased opinion here...too exposed and not enough diversification.

However, you answered your question already.

"Iíve been selling options on futures for the past 7 years with mixed results. I started out just selling options and it worked great. Then I tried some new types of trading and had a blow-out my second year."

Again:

"I started out just selling options and it worked great." ...Why did you change your methodology? If it works, don't change it. That's always easier said then done. Re-think the 'good years' and what you did back then and try to relearn those positive returns.

If I was trying to reassess my current account and positions I would NOT take on any more positions. Let these play out and or exit early if needed. I think the majority of contributors to this thread look for options with less than two months of time left that are way OTM and less than $100 in premium. The probabilities are lower that those options will go ITM. This might be new for you but it is worth thinking about nonetheless. You will hear a lot about seasonal tendencies of the markets here also....what happens in the past has a good chance of happening in the future.

Ask Ask Ask....

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Old February 14th, 2013, 04:49 AM   #774 (permalink)
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opts View Post
Side note: If anyone uses NinjaTrader is there any way to squeeze more daily bars on to the chart? ... Any thoughts?

How about getting another monitor? If I press CTRL while I click Maximise Window then the chart spreads across all four monitors. But even two has got to be an improvement?

Just a thought.

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Old February 14th, 2013, 08:24 AM   #775 (permalink)
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Futures Edge on FIO
MGB

I can do that with my dual 22's with my desktop but I do the majority if my analysis from my laptop. The solution I posted works fine.

Thanks...
Wonder if I should change my name here to Datsun 280Z.

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Old February 14th, 2013, 08:42 AM   #776 (permalink)
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Dudetooth View Post
The account in question is $28k with the following short positions: 2x ECH3 P126; 2x JYH3 C120, 1x JYJ3 C117; 2x GCH3 C1850, 2x GCH3 P1465, 3x GCJ3 C1900, 1x GCJ3 C2000, 2x GCJ3 P1400, 2x GCJ3 P1450, 1x GCM3 C1950; 2x CLH3 C115, 1x CLH3 P65, 1x CLH3 P70, 5x CLJ3 C115, 4x CLJ3 C120, 3x CLJ3 P70, 6x CLJ3 P75. I believe that the one JY C117 has a delta of 4, but the rest have deltas of 2 or less as of yesterday's close. Initial Margin $11k.

I know Iím heavy in CL and GC in this account, but as I was adding positions they seemed to have the best probabilities of the markets that I trade. I Ďm really hoping that I can get some unbiased opinions from some fellow traders Ö am I being far too risky? If so, what would you recommend I do to mitigate.

Thank you for your time.

Well first the H3's are about to expire untroubled over the next week or so. The J3's also look quite OTM and have little value left. A quick move up in CL to above 100 would affect the C115s and C120s, although with only 4 weeks left, they might come under a bit of pressure and in my opinion are the most risky.

I am quite frankly amazed you have got so many on for only $11K margin. Your broker must be using bare SPAN and that is why he is feeling a little anxious and exposed. Your average margin for 40 contracts is $275. It is quite conceivable that a large move in the dollar could affect Gold and Oil and your margins could easily double or more.

I would heed Ron's advice and limit your margin to 33% or about $9.33k in your case. Apart from a little more diversification and seasonal recognition which others have mentioned already, I don't see that you are doing too much wrong.

Would you be willing to name your broker and give his commission charges as it will help to add knowledge to others seeking information of option unfriendly brokers.

Brit

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Old February 14th, 2013, 08:58 AM   #777 (permalink)
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How about getting another monitor? If I press CTRL while I click Maximise Window then the chart spreads across all four monitors. But even two has got to be an improvement?

Just a thought.

Hi MGBRoadster, welcome to our band of option sellers. I recall you from the Trade2Win SIPP thread. Did you go for the IB SIPP in the end and are you selling options yet.

Brit

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Old February 14th, 2013, 10:21 AM   #778 (permalink)
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Diversification

Hi all, I think it may have been discussed before on the previous thread. If it is, I apologize for that.

I'm pretty new to the commodity options and I've been trading CL and GC for a while.
I would like some more recommendation about other commodities that can be used for diversification in addition to CL and GC.

I noticed that some of you are trading KC and CT. Are they liquid?
As I read the book, it mention that not all the commodities are liquid.
By looking at the seasonal, is it ok now to sell put on CT?

Thank you for all your advice

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Old February 14th, 2013, 11:07 AM   #779 (permalink)
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britkid99 View Post
Hi MGBRoadster, welcome to our band of option sellers. I recall you from the Trade2Win SIPP thread. Did you go for the IB SIPP in the end and are you selling options yet.

Brit

Hi there Brit, long time no speak.

Yep Iíve got an IB SIPP as well as a standard account with them. I mainly trade futures, but Iíve been branching out into options, mainly CL and ES. Iíve found short straddles are paying off pretty well recently, particularly on CL, but I donít have historical options data, so I canít backtest how much thatís due to current market conditions.

Iíve been selling a few options, but the problem with IB as you know, is the margin. I was just about to open an account with OX when they stopped supporting non-US clients, so Iím now looking into OEC. The research continuesÖ

Really like the thread.

Say hello to the concrete cows for me.


Chris

(hint for non-UK readers: Google ďConcrete cows Milton KeynesĒ)

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Old February 14th, 2013, 12:30 PM   #780 (permalink)
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sluhur View Post
Hi all, I think it may have been discussed before on the previous thread. If it is, I apologize for that.

I'm pretty new to the commodity options and I've been trading CL and GC for a while.
I would like some more recommendation about other commodities that can be used for diversification in addition to CL and GC.

I noticed that some of you are trading KC and CT. Are they liquid?
As I read the book, it mention that not all the commodities are liquid.
By looking at the seasonal, is it ok now to sell put on CT?

Thank you for all your advice

Take a look at the grains (Corn, Soybeans, Wheat). The options on these are very liquid and there are far out strikes available to sell for decent premium. Take note of the seasonal tendencies with grains especially during the spring/summer months in USA.

I have not traded too many options on Coffee (KC) Sugar (SB) or Cotton (CT). Options on these are not as liquid but can be traded, you would just have to be patient by using limit orders to get the price you want to sell at. I find it is similar to Silver (SI) options in terms of liquidity. I am sure the other experienced members in this thread can give you more advice about trading options on the softs.

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