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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:568,490 / 5,727
Last Reply:December 2nd, 2016 (12:40 PM) Attachments:642

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Selling Options on Futures?

Old February 24th, 2013, 06:32 PM   #881 (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.

The main problem with most people's theory's on losing big on selling options on futures is that they are probably looking at closer to ITM options, which can and do blow up big time.

Yes you will have losers selling far OTM. But because they are so far OTM, you have time to get out without blowing up, unlike strikes closer to ITM.

Someday somebody should do a study looking at far OTM options, delta < 0.0500 at 60 DTE, and see how many increase significantly in premium and how many expire OTM. I don't have time now.

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Old February 24th, 2013, 08:02 PM   #882 (permalink)
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Homerjay View Post
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).

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.

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Old February 25th, 2013, 05:47 AM   #883 (permalink)
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margin on ox


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.

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Old February 25th, 2013, 09:31 AM   #884 (permalink)
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sluhur View 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.

No

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Old February 25th, 2013, 09:52 AM   #885 (permalink)
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Futures Edge on FIO
Today is expiration day for March Silver. The current price is 28.935.

Somebody's computer program doesn't know that today is expiration day and is bidding 0.006 for 26 puts.

I highly doubt that silver will expire today at 26 or less.

The SPAN margin on these is 5877. OX is 6465.

EDIT They are gone. That was weird. OI for this option was 881. It has traded 1292 times today. Many of them above Friday's settlement when SI is up .450 today.

EDIT The 881 was Thursday's OI. Friday is 931.


Last edited by ron99; February 25th, 2013 at 10:46 AM.
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Old February 25th, 2013, 10:06 AM   #886 (permalink)
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ron99 View Post
Today is expiration day for March Silver. The current price is 28.935.

Somebody's computer program doesn't know that today is expiration day and is bidding 0.006 for 26 puts.

I highly doubt that silver will expire today at 26 or less.

The SPAN margin on these is 5877. OX is 6465.

EDIT They are gone. That was weird. OI for this option was 881. It has traded 1292 times today. Many of them above Friday's settlement when SI is up .450 today.


What would explain the large volume? I can't understand 1) people buying to open a position, or 2) current shorts buying them back, especially with Silver up today.

Am I missing something?

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Old February 25th, 2013, 10:12 AM   #887 (permalink)
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kevinkdog View Post
What would explain the large volume? I can't understand 1) people buying to open a position, or 2) current shorts buying them back, especially with Silver up today.

Am I missing something?

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
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Old February 25th, 2013, 11:06 AM   #888 (permalink)
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ron99 View Post
The main problem with most people's theory's on losing big on selling options on futures is that they are probably looking at closer to ITM options, which can and do blow up big time.

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.


Quoting 
Yes you will have losers selling far OTM. But because they are so far OTM, you have time to get out without blowing up,

false false false! Look into the history of limit moves


Quoting 
Someday somebody should do a study looking at far OTM options, delta < 0.0500 at 60 DTE, and see how many increase significantly in premium and how many expire OTM. I don't have time now.

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

Total net loss in the worst case scenario is:

$11,700 - $4,290 - $19,800 - $90,000 - $300 = -$102,690

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.
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Old February 25th, 2013, 11:19 AM   #889 (permalink)
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mwtzzz, you can believe that and meanwhile I will make huge returns year after year.

It wasn't MJ888 who did those trades.

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Old February 25th, 2013, 11:30 AM   #890 (permalink)
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ron99 View Post
mwtzzz, you can believe that and meanwhile I will make huge returns year after year.

It wasn't MJ888 who did those trades.

Just be sure you are protecting yourself against limit-move type of events so that you don't give those profit back to the market.


Huge returns ALWAYS means huge risks.


Last edited by mwtzzz; February 25th, 2013 at 11:35 AM.
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