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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:567,835 / 5,727
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Selling Options on Futures?

Old February 23rd, 2013, 11:01 PM   #871 (permalink)
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Thanks for the insight and glad to hear you are doing well Ron.

Vic Sperandeo's books are some of the few that helped me out and he warned that in the long run ppl selling naked OTM options have the buyer expire worthless 90%+ of the time, but the rare 10% crude (or whatever) move against them kills the profits. Scared me off.

My difficulty in general with buying options through a broker has been having a good idea the levels - but not the timeframe parameter in which it occurs - and worry over time decay.

"Be right and sit tight." - Jesse Livermore
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Old February 24th, 2013, 11:01 AM   #872 (permalink)
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vmaiya73 View Post
Very dumb question guys so i apologize in advance.

On Friday I initiated a position in /Nasdaq futures by selling puts deep OTM with delta .02; prior to the futures market closing i was up a little. Check my account a while ago and it says im down 385 ? anybody know why that is ?

thanks

V

What was the contract and the strike price? If the option was "deep OTM" you have a long time to wait for time decay to kick in.

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Old February 24th, 2013, 11:10 AM   #873 (permalink)
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whatnext View Post
Thanks for the insight and glad to hear you are doing well Ron.

Vic Sperandeo's books are some of the few that helped me out and he warned that in the long run ppl selling naked OTM options have the buyer expire worthless 90%+ of the time, but the rare 10% crude (or whatever) move against them kills the profits. Scared me off.

My difficulty in general with buying options through a broker has been having a good idea the levels - but not the timeframe parameter in which it occurs - and worry over time decay.

Dr. John Summa (OptionsNerd.com) debunked the "90% expire worthless" myth years ago. The CBOE, which certainly can quote contract statistics, clears things up with a brief note here:

Advisors - Knowledge Center Article

Statistics aside, selling options on futures is an exciting and unique strategy that remains the obsession of a select few!!

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Old February 24th, 2013, 12:16 PM   #874 (permalink)
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opts View Post
When you hear 'unlimited risk' it's because prices can keep going up so selling calls, shorting a stock or future, the risk can be unlimited. However, selling puts, or going long a stock or future the risk is limited because zero is the lowest anything can go.

the issue is not how low the stock will go, the issue is how low your account will go before you get a margin call.

Selling a Put is a fixed-reward/unknown-risk trade. The loss can be many times the reward. You can sell a put for $1000, and that put can move several thousand dollars against you.

Don't sell options that you don't intend to be exercised on. If buying stock at price X is part of your trading strategy, then it's okay to sell a Put a strike price X.

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Old February 24th, 2013, 01:31 PM   #875 (permalink)
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JMarsh View Post
Dr. John Summa (OptionsNerd.com) debunked the "90% expire worthless" myth years ago. The CBOE, which certainly can quote contract statistics, clears things up with a brief note here:

Advisors - Knowledge Center Article

Statistics aside, selling options on futures is an exciting and unique strategy that remains the obsession of a select few!!

And a quote from the article


Quoting 
Note that 90% of options go unexercised, which is very different than expiring worthless

From the sellers point of view I don't see how unexercised and worthless are all that different. For most traders though the margin will force you out before you even have to worry about having the contract put to you.


Last edited by mongoose; February 24th, 2013 at 01:40 PM.
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Old February 24th, 2013, 01:40 PM   #876 (permalink)
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mongoose View Post
And a quote from the article



From the sellers point of view I don't see how unexercised and worthless are all that different.

I think unexercised means "closed out before expiration." Those options could be profitable or not when the are closed out. They just were never exercised, but they would have some value at the time of closing - otherwise why close them out?

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Old February 24th, 2013, 05:07 PM   #877 (permalink)
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Homerjay View Post
Sure, building it up from basics:
• Vertical spread = same type (call/put), same month, different strikes
• Calendar spread = same type, different months, same strikes
• Diagonal spread = same type, different months, different strikes
[Traditionally a diagonal spread is long the furthest out month, and short the nearest month (which people do to help pay for some of long option they’ve bought)]

Reverse diagonal spread (because we're option selling, we want a credit spread) = long the nearest month (but furthest out in strike price) and short the furthest month (the more expensive one, but closer strike)
[In a trending market for my system's time frame, I'll sell a single side spread e.g. calls in bear trend or puts in bull trend]

• Reverse double diagonal is doing 2 reverse diagonal spreads (one above the market with calls, and one below the market with puts). It's like an iron condor but with different months (and different strikes), when my system's time frame is signaling 'sideways'. You get the benefit of double perimum on a single margin.

Real example, last Wednesday nights load of the EOD data into my system it generated the following signals to be executed on Thursday:
• Sell June 83 Put and
• Sell June 108 Call

So to create the reverse double diagonal I did the following trades which brought in about $30k in premium on about $17k of margin with IB:

• Sell 30 x June 108 Calls for 0.39 each
• Buy 30 x May 110 Calls for 0.13 each (done as a single spread)

• Sell 30 x June 83 Puts for 1.44 each
• Buy 30 x May 80 Puts for 0.60 each (done as a single spread, 3 dollar spread vs. 2 dollars on the calls was a judgment call, usually I do the same size spread on both sides but I find having a round number in the spread helps get a better relative fill)

I usually do the spreads as equal numbered initially (e.g. sell 30 calls and buy 30 calls) and then right after I'm filled pickup an extra few calls and puts on the long side for black swan protection e.g. in the end I'm short 30 x June 108 Calls, long 33 x May 110 Calls, short 30 x June 83 Puts and long 33 May x 80 Puts. The use of 30 contracts in this specific trade comes from my dynamic position sizing algorithm but it varies with my total account size.

Note most of my system's profits actually come from volatility collapse vs. time decay so I'm usually only in the trade for 3 - 5 weeks when I can take 70% - 80% of the spreads' profit and get out early freeing up margin. I still keep a healthy % of total portfolio in cash however doing my option selling this way is pretty stable and allows a lot of staying power in fast moving markets which helps boost my overall win rate to ~95%.

Welcome. Thanks for sharing. I used your method and plugged in various strike combinations with CL and W, when I have time I will try it on KC, SB, GC and a few others. So far I really like the potential results, especially if I can collect 2x to 3x more premium than the required margin.

Here are some of my observations and questions:

1) At first I was concerned about the extra commissions but I quickly realized that the potential profit will more than cover the costs. Plus being able to stay in a position to weather the volatile times is always a good thing. Keeping margins low and manageable is also very important to me.

2) I know you mention that you usually only stay in a trade for 3-5 weeks and exit with a nice profit. And I can understand why too cause if the front month long options expire you would be left with a short naked position or have on a strangle which will require 2x-3x or even more margin. So my question is have you stayed in a trade until expiration and how do you deal with the margin increases? Especially on IB too where margins are much higher than most places.

3) A 95% win rate is obviously awesome but how do you deal with the 5% of losers? What is your stop loss plan? I realize that your positions provides a 2-3 point hedge but a position of 30 CL's is $60,000 to $90,000 in potential losses. I am certain you will not allow any trade to get to that point so where and when would you take a loss?

Thanks!

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Old February 24th, 2013, 06:05 PM   #878 (permalink)
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JMarsh View Post
Dr. John Summa (OptionsNerd.com) debunked the "90% expire worthless" myth years ago. The CBOE, which certainly can quote contract statistics, clears things up with a brief note here:

Advisors - Knowledge Center Article

Statistics aside, selling options on futures is an exciting and unique strategy that remains the obsession of a select few!!

I believe that study was done on stock options.

Here is a John Summa study done on CME data on options on futures.
Do Option Sellers Have a Trading Edge?

Quoting 
Based on data obtained from the CME, I analyzed five major CME option markets - the S&P 500, eurodollars, Japanese yen, live cattle and Nasdaq 100 - and discovered that three out of every four options expired worthless. In fact, of put options alone, 82.6% expired worthless for these five markets.

93.9% of S&P 500 put options expired OTM over 3 years.

Here's the full Summa study
http://app.topica.com/banners/forms/900067555/900031275/SELLERSVSBUYERSWHOWINS.doc

Since this data is from 1997-1999, that is why grains, metals and energies aren't included. They weren't owned by CME then. I believe.


Last edited by ron99; February 24th, 2013 at 06:38 PM.
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Old February 24th, 2013, 06:08 PM   #879 (permalink)
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JMarsh View Post
What was the contract and the strike price? If the option was "deep OTM" you have a long time to wait for time decay to kick in.

He answered contract and strike price earlier.

His position is 21 DTE. Time decay has already kicked in strongly.

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Old February 24th, 2013, 06:26 PM   #880 (permalink)
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MJ888 View Post
Welcome. Thanks for sharing. I used your method and plugged in various strike combinations with CL and W, when I have time I will try it on KC, SB, GC and a few others. So far I really like the potential results, especially if I can collect 2x to 3x more premium than the required margin.

Here are some of my observations and questions:

1) At first I was concerned about the extra commissions but I quickly realized that the potential profit will more than cover the costs. Plus being able to stay in a position to weather the volatile times is always a good thing. Keeping margins low and manageable is also very important to me.

2) I know you mention that you usually only stay in a trade for 3-5 weeks and exit with a nice profit. And I can understand why too cause if the front month long options expire you would be left with a short naked position or have on a strangle which will require 2x-3x or even more margin. So my question is have you stayed in a trade until expiration and how do you deal with the margin increases? Especially on IB too where margins are much higher than most places.

3) A 95% win rate is obviously awesome but how do you deal with the 5% of losers? What is your stop loss plan? I realize that your positions provides a 2-3 point hedge but a position of 30 CL's is $60,000 to $90,000 in potential losses. I am certain you will not allow any trade to get to that point so where and when would you take a loss?

Thanks!

Actually had to drop KC & SB from my system as had trouble getting reasonable fills at the strikes my system indicated, but it works great for markets like ES, GC, CL, W.

1) Yes the commissions are more than for naked options, but it's certainly worth it from an ROI perspective. I do often end up keeping the long legs until expiration as by the time I'm taking profits on the short legs the longs are worth very little, so keeping them saves on closing commission and gives me a portfolio that's actually black swan friendly (which is nice when selling options!)

2) No ever stayed until expiration as once I'm past 70% profit on the spread I bring in the shorts (and sometimes due to weekends/long weekends/luck I'm actually closer to 80% profit by the time I get my order in and filled). Margin increases haven't been too much of a problem because I hold a lot of cash and peel off some contracts if a margin increase takes me too far from my ideal position size. However with spreads any margin increases have a much smaller impact than with naked options.

3) I'm really risk averse and it's taken me over 12 years to get to my current level of profitability, so to me not making money = risk of losing money so if by 3 weeks into a trade I'm not reasonably profitable I close it out early (a time stop if you like on losses, breakeven or minor profits) so my losses are relatively small given the size of trades I do. Yes I'm probably giving up some trades that would ultimately be profitable but this rule works for me. Also with the double diagonal spreads one side will always be very profitable if one side is approaching a loss. My system is specifically looking to enter on a volatility spike so usually turmoil gets me in and a quieter day really allows the shorts to decay rapidly. The $ risk looks big but are position sized appropriately to my account size (Van Tharp has an excellent and very detailed book on position sizing, doesn’t cover option selling specifically but the principles are solid and can be made to work).

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