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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:569,610 / 5,734
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Selling Options on Futures?

Old March 5th, 2013, 11:19 AM   #951 (permalink)
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MJ888 View Post
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.

MJ, can I have your views on short strangles on far OTM? Thanks.

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Old March 5th, 2013, 12:46 PM   #952 (permalink)
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Homerjay View Post
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.

I figured you have the position on for real but I just wanted to simulate it so I can get a better understanding of how it works. I wanted to observe how the margin requirements reacted to a sustained move in one direction. And that is exactly what CL is doing now.

And yes I see that the premium on the short June 108 CL calls have deteriorated nicely. So I do understand what you mean when you say one side usually decays quicker.

Here are my questions Homerjay: Are you concerned about how close the June 83 CL puts are getting to the money given the sell off in CL the past 10 sessions? And what is your stop loss strategy should CL continue to sell off moving you even closer or maybe even INTO the money on this leg of your trade?

Thanks!

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Old March 5th, 2013, 01:24 PM   #953 (permalink)
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Quoting 
The Dow Jones Industrial Average rose to its highest level ever, erasing losses from the financial crisis after a four-year rally fueled by the fastest profit growth since the 1990s and monetary stimulus from the Federal Reserve.

Almost $10 trillion has been restored to U.S. equities as retailers, banks and manufacturers led the recovery from the worst bear market since the 1930s. It took the Dow less than 65 months to rise above its previous high set on Oct. 9, 2007, more than a year faster than the recovery from the Internet bubble.

While the Dow has more than doubled in the four years since its bear-market low, its valuation remains 20% less than the price-earnings ratio at the previous peak and 15% below its 20-year average. Bulls say thatís a signal stocks have room to keep rallying, while to bears it shows a lack of confidence in earnings growth and concern over the Fedís ability to continue spurring the economy.

...

Dow Average surges to record as profits stoke four-year rebound

Looks like puts are good for ES.

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Old March 5th, 2013, 01:35 PM   #954 (permalink)
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A quick question for the OEC users out there: Has anyone using OEC run into overnight position fees?

The only mention of overnight position fees on the OEC website is "Positions held overnight generating a full exchange margin will be charged an additional $0.20 per contract." I didn't think that selling far out of the money options generated full exchange margin. At $0.20 per position, per day is going to kill me.

I used to work with an IB, but just switched to working directly with OEC. I'd never seen these fees before and when I asked OEC they replied:
"When positions are held overnight, Gain Capital is required to post more capital for these positions overnight thus incurring a overnight fee, IBs are not charged this fee by OEC. I would recommend possibly a higher commission rate if you plan on holding these positions on a nightly basis. The higher commission cost would probably work out better if you do not trade a lot of contracts."

It seems like there are either suggesting I start working with an IB or agree to higher commissions in order to avoid these fees. I was just wondering if anyone has experience with this.

Thanks

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Old March 5th, 2013, 01:57 PM   #955 (permalink)
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Dudetooth, they charged me those when I first opened an account there. I raised a stink about it and they dropped them. But that was before they were sold to Gain.

First work with them to drop them. Then be a pain in the butt if you have to. Threaten to leave.

Let us know if you had any luck.

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Old March 5th, 2013, 02:53 PM   #956 (permalink)
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gigi View Post
MJ, can I have your views on short strangles on far OTM? Thanks.

Gigi,

My option selling style has evolved over the years. Much of my earlier options selling was influenced by the book The Complete Guide to Option Selling by James Cordier and Michael Gross. Based on the book, I sold plenty of strangles on ES, CL, GC, SI, and the grains. You could even say that strangling became my default strategy for awhile. There were two reasons why I liked using it so much. One was SPAN margin. If I was going to use $2,500 in margin to sell puts, I figured that I might as well sell some calls too to make the best use of SPAN to potentially double my profits. Secondly, I liked how a strangle provided me a hedge on the opposite side on any given trade should one side go severely against me.

In the book, the authors suggested to look to sell options with a delta below 0.20 with premiums between $400-$700 and that is what I did. For a stop loss, I followed their 200% rule, which means I would exit a losing position when the premium I sold for doubles at the close of the regular trading session. I would look to exit the next day if that occurred.

For years, my typical position would look like this: I would be short a put with delta between 0.15-0.20 for a premium of about $600 and also short a call with delta between 0.15-0.20 also for another $600. Collecting the same exact premium is not necessary but I tried to get as close as possible especially with the very liquid options in ES and the grains. I also did not trade the front month options, I selected options that contained 60-90 days, sometimes even more until expiration. I would only have on ONE position in ES, CL, GC or SI (never both), and ONE of the grains. This kept it somewhat diversified.

I almost never stayed in the trade until expiration. I would usually take profits early when I can lock in 75% or more of the premium. In this example, it would be locking in a profit at $900+

With this trade, one side provided a hedge for the other. Based on the 200% rule, I would exit the entire strangle should one side's premium double. In this case, let's say the premium on the put doubled from $600 to $1,200. I would show a loss of $600 on the put but the premium on the call would have decayed by at least half or more giving me a profit of $300. Thus, my final loss on the position would be about $300.

I was generally profitable on three out of every four of these strangles. On the three winners I would make about $900 each for $2,700. The loser would cost $300 so a total profit of around $2,400

Even if I was only profitable two out of every four trades, I still came out nicely ahead. Two winners = $1,800 and the two losers = $600 meaning I still have a profit of $1,200

If I were to only be profitable one out four times, I would be at around break even with a tiny loss due to commissions.

The only time this did not work well for a long period of time was in 2008. I had eleven consecutive losers. But when things calmed down, I was able to recoup the losses rather quickly.

Even though I was profitable, I admit that I paid no attention to seasonal tendencies with the exception of the grains during the spring and summer months. I felt that if I were to enter any short position, it HAS to be a strangle because I felt very exposed, if you will, when I am only naked puts or naked calls without a hedge.

I can't stress enough how important being disciplined is. I had two or three memorable draw-downs when I did not exit at double the premium with CL and SI. Ended up losing over five times what I was supposed to lose. And mind you those were not one lots, more like 20-30 options! Live and learn! I sure as hell did.

This is how I use to sell options........I will post later on my current views.

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Old March 5th, 2013, 04:22 PM   #957 (permalink)
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MJ888 View Post
I figured you have the position on for real but I just wanted to simulate it so I can get a better understanding of how it works. I wanted to observe how the margin requirements reacted to a sustained move in one direction. And that is exactly what CL is doing now.

And yes I see that the premium on the short June 108 CL calls have deteriorated nicely. So I do understand what you mean when you say one side usually decays quicker.

Here are my questions Homerjay: Are you concerned about how close the June 83 CL puts are getting to the money given the sell off in CL the past 10 sessions? And what is your stop loss strategy should CL continue to sell off moving you even closer or maybe even INTO the money on this leg of your trade?

Thanks!

I trade a mechanical system so I didn't specifically pick the strike but my system generated it, and today I'm showing a +$3.8K open profit on the spread (it's smaller than what you'd model given I'm long 3 extra contracts on both the long legs, vs. the -$1.1k loss yesterday). I'm almost 2 weeks into this trade, so my time stop probably won't kick in on this trade.

Don't mean to sound flippant, but I specifically try to keep busy doing other things and having a portfolio of different trades so that I can actively avoid being concerned or having emotions detract from my ability to follow all of my system's signals as it's designed to be traded.

I have a set maximum loss trigger that would force me to close out the position if it got hit, however in practice I've never had to use this for a couple of reasons 1) I peel off a portion of a position early (and can repeat this a few times) if it's not performing as expected so my position size reduces and so I'm taking smaller losses before I've had to take a big loss and 2) because I'm long more contracts than short if there's big fast move 'against' me the implied volatility usually increases faster on the long legs even though they are further out so I actually have a small profit - which is nice when closing out a 'bad' trade.

And I'm position sized appropriately, so if something crazy happened and I took the full theoretical loss on any given spread Iíd dent my P&L for the year but it's wouldn't stop me continuing to trade the system.

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Old March 5th, 2013, 05:34 PM   #958 (permalink)
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Thanks Homerjay. It's good that you look for other trades to keep distracted because option selling can be boring most of the time.

After today's small CL rally, both short legs are showing a nice healthy profit. The June 83 puts are up $957 and the June 108 calls are up $1,373 as I type this.

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Old March 5th, 2013, 08:54 PM   #959 (permalink)
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Beginning April 8, electronic and floor trading hours for CBOT Corn, Soybeans, Wheat, Soybean Meal, Soybean Oil, Rough Rice, Oats, and KCBT Wheat futures and options, plus all related CBOT and KCBT calendar spread options and inter-commodity spread options, will be amended as follows:

Sunday to Friday, electronic trading from 7:00 p.m. to 7:45 a.m. CT
Monday to Friday, break in electronic trading from 7:45 a.m. to 8:30 a.m. CT
Monday to Friday, floor and CME Globex trading from 8:30 a.m. to 1:15 p.m. CT

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Old March 5th, 2013, 09:04 PM   #960 (permalink)
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Just placed my first trade. Sold 5 ES 1250P with the May expiration and a delta of -0.03. The market is having a strong rally up. It will be interesting to see, however, how the market reacts around the all-time high mark which is only about another 50 points away. Should we have a clean break, there could be a sustained move for at least a little while longer which bodes well for put sellers.

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