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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:569,146 / 5,728
Last Reply:December 6th, 2016 (05:26 PM) Attachments:642

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Selling Options on Futures?

Old March 5th, 2013, 09:17 PM   #961 (permalink)
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It will be interesting to see how Chavez's passing will influence the oil markets when an new administration is put in place. Venezuela, I believe, is one of the top oil producing countries so there will be either a friendlier, less friendlier, or about the same administration towards the US. With the US export demands falling off due to the increased production stateside...will it even matter who is in charge in V? This will take some time to fall into place but it will be interesting.

Summer driving season and hurricanes are just around the corner.

Gotta love those trading variables.

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Old March 6th, 2013, 12:12 AM   #962 (permalink)
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ron99 View Post
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

IMO, this is a good change, especially the CME Globex trading hours from 8:30 a.m. to 1:15 p.m

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Old March 6th, 2013, 12:16 AM   #963 (permalink)
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rsb619 View Post
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.

Good luck! What premium did you sell at? I see it at 1.90 now.

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Old March 6th, 2013, 12:28 AM   #964 (permalink)
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As far as seasonals go, would now be a good time to sell puts for CL and then starting in May should a drop off begin to make itself apparent, sell calls?

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Old March 6th, 2013, 12:41 AM   #965 (permalink)
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MJ888 View Post
Good luck! What premium did you sell at? I see it at 1.90 now.

Thanks MJ, I got filled in at a limit price of 1.70. Still trying to get used to bid/ask spread when pacing orders but next time I think I will place an order closer to the ask and adjust from there. Since this is a demo, I just wanted to get in the trade so that I can get a feel for the the movement of option prices.

Currently I am looking at the 65P for CL priced at 0.05 with the May 16th expiry. CL looks like it is making a bounce up. I am going to monitor it for a while though before making my decision as the down trend could continue.

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Old March 6th, 2013, 03:36 AM   #966 (permalink)
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rsb619 View Post
Thanks MJ, I got filled in at a limit price of 1.70. Still trying to get used to bid/ask spread when pacing orders but next time I think I will place an order closer to the ask and adjust from there. Since this is a demo, I just wanted to get in the trade so that I can get a feel for the the movement of option prices.

Currently I am looking at the 65P for CL priced at 0.05 with the May 16th expiry. CL looks like it is making a bounce up. I am going to monitor it for a while though before making my decision as the down trend could continue.

Because of how liquid ES options are, I would always use a limit order at the ask or higher, I want the market to come to me instead of adjusting lower. If the market moves away from my limit price, so be it, I won't chase it to get in at a lower price, I try again tomorrow.

I exited my May CL 75 puts at 0.07 a little while ago, since I sold at 0.19, I booked a 0.12 or $120 profit per option. I feel a little bit uncomfortable being short puts even though the seasonal's say that CL should move higher. Gut feeling is telling me that today is just a dead cat bounce and the trend lower may continue with CL especially if the equities markets sell off after getting to record highs. Of course I could be wrong and CL rallies from here! Watching......

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Old March 6th, 2013, 09:24 AM   #967 (permalink)
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rsb619 View Post
As far as seasonals go, would now be a good time to sell puts for CL and then starting in May should a drop off begin to make itself apparent, sell calls?


rs:

Aside from just the seasonal tendencies I have a few other things to consider before entering. Charts are on other variable to consider. Crude is in a downtrend but may but is at a critical level around 90 right now. If this area breaks then 86 looks to be the next target. This means that you might be able to sell puts a little lower than (psychologically safer?) than what you could have initially. I always let the trend, stalls, or pullbacks dictate my entry. Crude is at a fundamentally and technical juncture right now. Chavez passed away yesterday but the US has become less reliant on foreign oil due to US production on the rise and more fuel efficient vehicles. I have crude on the watch list but I am waiting to see what price does over the next few weeks. If this is the 'bottom' and oil moves back up from this point I'll sell puts later. They might be a few strikes higher but I am still waiting on the chart to tell me what might be happening.

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Old March 6th, 2013, 09:54 AM   #968 (permalink)
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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 Id dent my P&L for the year but it's wouldn't stop me continuing to trade the system.


Homerjay, as a fellow IB user, I am very interested in what you are doing for margin optimisation.
I wonder if you could clarify how you monitor volatility. I presume your system is not using TWS alone....

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Old March 6th, 2013, 11:33 AM   #969 (permalink)
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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.

MJ, thank you for sharing your experience and the detailed explanation. I find short strangles less stressful. It's like watching a digital pet (Tamagotchi), spending a few minutes a night to check out the position and see if the profits are growing. Thank you.

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Old March 6th, 2013, 03:40 PM   #970 (permalink)
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I just got done reading this thread from page 1. What a wealth of information, thanks everyone that contributed and especially Ron for starting this.

I've been trading seasonal futures for years in outrights and never thought to get into looking at options until this year. My main bread and butter trade is taking long positions in July corn during March and covering during May to expiration. This year everything looks good technically but the fundamentals are mixed. Will we get a continuing drought or no?

So I have started looking at options for possible ways to profit on this trade even if things go sideways for the next few months in Corn. Currently we are at about 687 July 13 Corn. I'm thinking to wait for a push down to 650-660 and then sell July 13 puts OTM at around 600-610 depending on what I can get a reasonable delta for.

Also, I've noticed a seasonal tendency for volatility to pick up dramatically in mid-May to early July (currently we are at like 5 year lows for Corn volatility). Ron I think you mentioned that this doesn't affect your trades (except in terms of margin hikes). How would you (or would you) factor this into this type of trade?

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