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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:568,268 / 5,727
Last Reply:December 2nd, 2016 (12:40 PM) Attachments:642

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Selling Options on Futures?

Old March 3rd, 2013, 04:03 PM   #941 (permalink)
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rsb619 View Post
Hi Everyone,

I am a relatively new trader with a year's experience trading forex and stocks but none in futures. Recently, I have been looking into trading options because of the flexibility they offer and I am glad I found this forum and specifically Ron's thread.

I would like to thank everyone who had contributed to this thread so far as it has provided a lot of good insight for someone new to trading, like me. I have learned quite a bit from reading your guy's post and feel fairly ready to demo trade selling options.

Here is a trade I am looking into at the moment and I was hoping to get some of insight. I am looking to sell a put on the the Emini. Currently it is trading a little bit above 1500 and I was looking to sell the 1250 puts that expire on May 17th which is offering a premium of $165 per option. I am not sure what the delta of this trade is as I am using Barcharts.com for the option info but it looks like a relatively safe trade.

My reasoning behind the trade is that the market is in a current uptrend and the 1250 figure is under a major support level with the market having to bypass three support levels to reach my strike. Also if it reaches my strike it will wipe out all of the gains it made this year and last year which seems very unlikely given the time frame of the trade. I was also looking to sell some call options above 1700 but I can't seem to find a decent premium so I decided to skip on that for now. Also I understand that the market has sold off in recent years during the upcoming months but I think that my strike is a good distance out of money.

I still need to do more research on the market fundamentals for the upcoming months but for now I was wondering what your thoughts were on this trade.

Thanks!

Welcome. I took a look at the May ES 1250 put. The Delta is 0.05. Margin requirements at OX would be $653.40 initial and $594 maintenance. At IB, the initial would be $2,398 and the maint would be $1,919, so where you trade makes a huge difference.

I took a glance at the 5 year and 10 year seasonal chart for the s & P and it does show that in general it should rally higher between now and May 17. I also agree with your analysis that selling the May ES 1250 put is relatively safe. But with financial indices, anything can happen at any time to cause a sudden sell-off. Where is your stop loss should the position go against you? How much are you willing to risk? Yes, 1250 is a good distance away but the issue is not really whether the s & p will trade down to or expire at that level. Your position will feel heat way before it ever reaches 1250. Your margin requirements will explode higher with a 100-125 point move lower. Are you prepared to stay in the position if your margin triples and quadruples? The premium of 3.30 you sold at will be at 12.00 or higher.

I am not saying to NOT place the trade but consider your exit strategy before entering. A "safe" looking position like this can blow up your account. I am speaking from years of experience selling ES options using various strategies such as naked, strangles and credit spreads. Right now I will only look into selling ES puts if it sells off 10% or more. Premium on ES calls are too low at the closer strikes for me to consider. I prefer to sell options in CL, C, and W.

This is just my opinion, I am sure others here will have more suggestions......

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Old March 3rd, 2013, 04:38 PM   #942 (permalink)
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MJ888 View Post
I have simulated the CL reverse diagonal spread trade on IB that Homerjay and I discussed earlier. My position size is only 1/3 of his since I have my sim account set to realistic levels. The results should be the same, just on a smaller scale. I will post updates as needed.

Sold 10 June CL 83 puts @ 1.18 +$11,800 Loss $1,721.11
Bought 10 May CL 80 puts @ 0.42 -$4,200 Loss $324.93

Sold 10 June CL 108 calls @ 0.30 +$3,000 Gain $1,377.22
Bought 10 May CL 110 calls @ 0.09 -$900 Loss $523.46

Commissions @ IB = ($23.20 x 4) = -$92.80

Total Premium Collected = +$9,607.20 Loss $1,192.28

Initial Margin Required is $7,206 IM is $9,086.31
Maintenance Margin is $5,765 MM is $7269.05

Note that I did not buy additional calls or puts.

Here is an update of the simulated CL spread that I placed last Monday. The column on the right is the current gain/loss and current margin requirements on IB.

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Old March 3rd, 2013, 09:45 PM   #943 (permalink)
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MJ888 View Post
Welcome. I took a look at the May ES 1250 put. The Delta is 0.05. Margin requirements at OX would be $653.40 initial and $594 maintenance. At IB, the initial would be $2,398 and the maint would be $1,919, so where you trade makes a huge difference.

I took a glance at the 5 year and 10 year seasonal chart for the s & P and it does show that in general it should rally higher between now and May 17. I also agree with your analysis that selling the May ES 1250 put is relatively safe. But with financial indices, anything can happen at any time to cause a sudden sell-off. Where is your stop loss should the position go against you? How much are you willing to risk? Yes, 1250 is a good distance away but the issue is not really whether the s & p will trade down to or expire at that level. Your position will feel heat way before it ever reaches 1250. Your margin requirements will explode higher with a 100-125 point move lower. Are you prepared to stay in the position if your margin triples and quadruples? The premium of 3.30 you sold at will be at 12.00 or higher.

I am not saying to NOT place the trade but consider your exit strategy before entering. A "safe" looking position like this can blow up your account. I am speaking from years of experience selling ES options using various strategies such as naked, strangles and credit spreads. Right now I will only look into selling ES puts if it sells off 10% or more. Premium on ES calls are too low at the closer strikes for me to consider. I prefer to sell options in CL, C, and W.

This is just my opinion, I am sure others here will have more suggestions......

Hey MJ, Thanks for responding,

Yea maintaining the trade after putting it on is the part that I am still having trouble figuring out. The thing with options is that I don't have concrete info to go off of for exits like for example: if the price moves X amount I will have Y amount of loss, as there are too many other variables that come into play. I think I will have a more sound exit strategy after I play around with options for a bit to see how they move which is why I wanted to throw this trade on my demo account.

Right now I was thinking about exiting if the premium triples or something like that. Also another strategy I was thinking about, which I believe I read in a book somewhere a while back, is to purchase a put option as protection if the price moves against me a certain amount.

For example: I could sell 5 OTM put options which expire in 3 months with a buffer of lets say 300 points between the current price and strike price. Then lets say in a month if the market moves 100 points against me I could buy 1 put option a little bit OTM like about another 100 points away with the same expiration as and using the money from the premium of the puts I sold.

My thinking is that the put should provide adequate protection to ride the trade out a little bit more and negate the losses should the trade continue to go against me. I could then sell back the put I purchased for a small loss should the market turn favorably or if it continues to go against me, perhaps purchase another put or simply accept the loss at that point.

As you can see I don't have a completed plan just yet. I am just trying to experiment and come up with ways to minimize risk and loss, should things go against me. Again your guy's thoughts and how you handle bad trade would be appreciated. Thanks.

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Old March 4th, 2013, 02:36 AM   #944 (permalink)
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There are no exact rules when it comes to establishing where to set your stop loss with option selling. It comes down to your risk tolerance. Scroll back a little in this thread and look for Ron99's advice on keeping 66% of his account in cash to deal with his very far OTM short positions going against him. It is very effective. Whatever you decide on, write it down. It requires a lot of discipline to take a loss. It is very human to "hope" that a losing trade will turn even though it has reached your stop loss. This is where most traders get into trouble.

Back in the days when I was selling a lot of ES options, I exited when the premium doubled but I was selling strikes that were much closer to the money, usually with delta's of 0.15-0.20. The premium that I collected was usually around $400-$600 per option. I sold a lot of strangles using a variation of this stop loss method. For example, I would sell a call and a put that contained about the same premium. Let's use $400 for each. I would collect $800 total. Should either side double, I would exit the entire strangle. My reasoning was that the markets can't go in both direction at the same time. I would lose $400 on one side but the opposite side would gain at least half, in this case $200, this would limit my total loss to $200. For a few years I did well selling ES strangles. I was profitable on 75% of my trades.

I stopped because the margin on ES keeps going up and the imbalance of the premium with the calls vs puts became larger and larger. Like I mentioned in my last post, it is hard to find the right call strikes to sell in ES, premium is so low at the farther strikes that it is not worth it. I can use my margin much more effectively selling CL or grain options.

I am not a fan of buying an option(s) to offset my short options. I would rather exit and take the loss instead of trying to apply a band-aid to a losing position. For me, it is better to get out and re-evaluate.

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Old March 4th, 2013, 11:20 AM   #945 (permalink)
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Interesting read on US crude oil production:

US Oil and Gas Boom Takes Many by Surprise

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Old March 4th, 2013, 11:54 AM   #946 (permalink)
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Thanks for the article opts. I have some friends that work in refineries in the Houston area and they are telling me the same thing. And the supply glut in Cushing is no surprise to anyone. But yet CL prices remain at these levels. So what gives?

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Old March 4th, 2013, 01:07 PM   #947 (permalink)
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MJ888 View Post
Thanks for the article opts. I have some friends that work in refineries in the Houston area and they are telling me the same thing. And the supply glut in Cushing is no surprise to anyone. But yet CL prices remain at these levels. So what gives?

Don't forget CL is already "on sale" with regards to Brent as there is a $20 odd discount available (due to the glut, which has been around for years and is not new).

Also I understand the costs of fracking are greater than "straight" drilling in the North Sea, Middle East or North Africa.
So if there is much more of a decline it may become uneconomical to produce which is something the oil majors are not going to allow. Just imagine them losing money, I shiver at the thought.

As the US reduces imports and becomes more self sufficient and builds more storage facilities if necessary I can see the price difference reducing back to parity. The Saudis won't let Brent go below $100 - they simply cut production if that is threatened and the US majors will take the opportunity to push CL up, not down IMHO.

Brit

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Old March 4th, 2013, 02:49 PM   #948 (permalink)
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vmaiya73 View Post
Question for the forum,

I know the seasonal tendency for /CL is to go up during the summer time period but given the way our government is behaving as well as right now the trend is down for /CL is down; would anybody consider selling deep OTM CALLS? or would you still stick with PUTS ?

thanks

V

Lately there has been a huge drop in CL, ES too, in early May. Selling Jul-Sep CL calls late April, covered calls if you want risk protection, would be the time to do it.

The last 3 years Jun CL has dropped the 1st week of May by 11, 16 and 9. Last year Jul CL dropped from 105 to 83 during May.

Early May is one of the few times I buy puts. Getting a large move in a short time frame is the best time to buy.

Of course, past results may not be indicative of future performance or something like that.

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Old March 4th, 2013, 09:36 PM   #949 (permalink)
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86 is a very congested area on the charts, then 81 after that. I'm just sitting back right now. And I agree, the Saudi's will do whatever they need to, or want to, to get more US$ for their oil.

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Old March 5th, 2013, 08:47 AM   #950 (permalink)
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MJ888 View Post
Here is an update of the simulated CL spread that I placed last Monday. The column on the right is the current gain/loss and current margin requirements on IB.

Thanks MJ888, I have that position on live (along with several more in other commodity markets) and it's behaving exactly the way the reverse double diagonal spread usually does given the quicker time decay on the closer long legs. It's the next few weeks that usually start to show a building profit as the long legs don't change much more relative to the further out short legs which accelerate their decay. One side will usually have decayed quicker so I often buy in that short leg (and as discussed keep the long to expiry) then bring in the other side's short leg a few days to a few weeks later.

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