Thanks for your reply. It is really helpful. Not surprised about you not being able to get reasonable fills on KC & SB as the options do not appear to be that liquid and I often find a wide bid-ask range. I was thinking that your system would work well using ES puts especially after a decent sell off. Volatility would cause the put premiums to explode. GC puts probably looks good now too after last week's sell off.
It makes perfect sense that you would never hold the shorts naked or until expiration, especially if you are booking 70%-80% profit after being in the trade 3-5 weeks. No need to hold it any longer. And I like how you do not buy back the long options and just leave them as Black Swan protection. It's great that you have those with an option selling account.
The following user says Thank You to MJ888 for this post:
Is it possible to find out the margin requirements for each of my current position on OX, without having to go to Trade Calc? After big hit on CL and GC, my margins are increasing and I really want to know the composition of each position. As I am following Ron's advise on keeping the 66% cash, I can find out which is already over 3 times the initial margin.
In IB, there is a margin report and also I can also do check margin when I tried to close / open a position before clicking on the final Transmit button.
That's why I called it weird. The only thing I can think of is somebody is spreading options and needed these to lower his margin requirement. Like maybe selling 28s and buying 26s? Having the 26s lowers the margin required on the 28s by 2000.
EDIT But now I look at all of the strikes above the 26 and none of them have traded as many times as this one. So I just don't know.
EDIT I have also seen computer programs incorrectly placing bids on options. As soon as I sell them at one strike all of the other strikes with the too high bids disappear instantly.
Last edited by ron99; February 25th, 2013 at 10:45 AM.
Reason: Added info
Actually in the long term, the reverse is probably more true. Selling OTM will get you in
bigger trouble due to "black swan" events as someone brought up.
false false false! Look into the history of limit moves
someone already has. His name is Nassim Taleb
No discussion of trading strategy is worthwhile unless you look at the worst case
scenario, so let's look at the example given by MJ888.
There are two different kinds of "worst case scenarios:" there is the worst case for a
*single trade* and there is the worst case for the number of losing trades as a fraction
of the number of total trades.
Perhaps MJ888 will provide statistics: over the past year or two, how
many of these trades resulted in a net loss, and how many have resulted in a net win?
Regarding the worst case for a single trade, this is easy to calculate:
The worst case is when June settles at 80.1. At this point, you've lost out on
all the premium you paid for the May calls and puts:
0.13 x 33 = $130 x 33 = $4,290
0.60 x 33 = $600 x 33 = $19,800
You keep the premium on the June 108 Calls:
0.39 x 30 = $390 x 30 = $11,700
You lose premium on the June 83 puts:
(4.44 - 1.44) x 30 = 3.00 x 30 = $3,000 x 30 = $90,000
And you lose commissions and fees, for simplicity (and lowballing it) let's say
$5 x 60 = $300
What is the best case scenario? Since this strategy is essential a vertical credit spread (on both ends, and with different month which just buys you some time premium but otherwise is the same as doing it in one month), the best case is for prices to stay exactly in the middle.
So if price in June settles at 95 or whatever, your profit is the initial credit you received on both ends, minus the cost of the "black swan" protection:
credit received on upper end = ($390 - $130) x 30 = +$7,800
credit received on lower end = ($1440 - $600) x 30 = $25,200
cost of black swan protection = ($130 x 3) + ($600 x 3) = $2,490
Total profit for "best case scenario" = +$30,510
At this point, you need to determine statistics (through backtesting or models) to determine what percentage of trades end up between the "put spread" or the "call spread" (these are the losses) and what percentage of trades end up somewhere in the middle, which represents various degrees of profit.
As the most simplistic visualization, you need to have 3.65 times as many best case wins as worst case losses in order to breakeven (102,690 / 30,510). If you experience a worst case loss once a year, you need to have at least 4x as many best case wins in order to come out with a small profit.
Last edited by mwtzzz; February 25th, 2013 at 11:27 AM.