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Selling Options on Futures?
Started:July 19th, 2011 (06:16 PM) by ron99 Views / Replies:569,059 / 5,728
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Selling Options on Futures?

Old March 7th, 2013, 10:40 PM   #981 (permalink)
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Hi MJ, I have the same trading style also, but on GC and CL.
But I don't have much experience on the grain. Can you tell which grains that you normally trade for strangle?





MJ888 View Post
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 7th, 2013, 11:07 PM   #982 (permalink)
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opts View Post
Yes. Once the trend is established it's the same mechanism as you would re-enter a long or short position if you were trading regular contracts. Looking at Wheat: once a downtrend has been determined it's a matter of waiting for a pullback in price, then wait for the continuation back down. The highlighted circle is the pullback and the arrows would be where I would look for calls to sell. This is where the technicals and fundamentals have to be monitored....grains in particular. A trend can only last for so long because of the seasonal tendencies that occur year in and year out. If a pullback in a given trend is underway, downtrend, and the trend has been true for some time you have to ask yourself "Has the seasonal bottom begun and has the trend run it's course?" If your answer is yes, the last thing you would want to do is continue to sell calls, especially if you write calls several months out. When selling options you have to have some sort of crystal ball...

Not sure if you have this link...very good seasonal charts:

Wheat Futures (CBOT) W - Seasonal Charts


You said:

"Also the lower wicks produced by the past couple of candles shows that people are buying at this range." = Good stuff


Thanks for the clarification opts and yes I found the link of the website you posted earlier somewhere on this thread and saved it for future use. I actually remember reading your posts on Phillip's thread in forexfactory. It was unfortunate, however, that by the time I joined the forum the thread's activity had died down. I still learned a lot from reading that thread and credit a lot of my trading knowledge to it and forexfactory in general.

I see you are still using the 8 and 21 EMA's in your trading. I will have to add those to my charts. Another thing I just noticed that I failed to mention in my previous post is that CL seems to be forming a perfect bounce of the treadline starting from the june 2012 lows. From a technical standpoint, it looks like a good time to sell puts. I was thinking about selling the puts and should there be a strong break of the treadline buy back the options for a minimal loss. If however it takes a while to breakdown or goes up, the position will be in profit.

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Old March 8th, 2013, 01:20 AM   #983 (permalink)
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Non-Farm Payroll out tomorrow with new jobs added expected to be around 160,000. Oil and Gold futures seem to be waiting on the report before making a decisive move.

Also, not sure if anyone uses them but I found this website which seems to have some good info on commodity futures: Commodities & Futures News

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Old March 8th, 2013, 03:34 AM   #984 (permalink)
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Quick question for you guys, how reliable are the hightower reports provided by optionxpress? Do you have any other recommendations of websites for fundamental research? Thanks!

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Old March 8th, 2013, 09:02 AM   #985 (permalink)
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rsb619 View Post
Quick question for you guys, how reliable are the hightower reports provided by optionxpress? Do you have any other recommendations of websites for fundamental research? Thanks!

Crude is at the top of my radar list right now and yes I agree, the 90.00 area looks pretty solid. The only market I am in right now is gold..strangled with the 1820 calls and 1400 puts that expire on the 25th of March. Still watching wheat but the return in crude is a little better and 'faster'.

Aside from hightower I'll check out Barchart.com - Commodity, stock and forex; quotes, charts & analysis when I'm looking at option premiums. If you select one of the grains and scroll down you'll see a few contributing editors with charts or fundamental news. I scan some of the 'chartists' input and will actually read the fundamental reports that relay the weather, import/export, and how the US$ rate can influence futures prices.

Yes, I still use the 8,21,and 50. The MACD is there to look at but I do pay attention to the RSI to look for divergence. The one thing I miss about FOREX is that it is a continuous market with almost no gaps so there is a nice flow to the charts, indicators, and price action. Because futures 'close' a the end of the day the charts can look a little broken at times.....

'Palmer'

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Old March 8th, 2013, 11:35 AM   #986 (permalink)
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rsb619 View Post
Quick question for you guys, how reliable are the hightower reports provided by optionxpress? Do you have any other recommendations of websites for fundamental research? Thanks!

I am a regular reader of Hightower. He is as good as anyone out there at looking at the big picture fundamentals. I, like Ron, use fundamentals and seasonal tendencies more that technicals. I have also been using more and more twitter and stock twits. I follow guys like Dominick Chirichella, Platts, and others for engergies. I have also set up a RSS feed with all of the CME reports that come out.

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Old March 8th, 2013, 03:24 PM   #987 (permalink)
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sluhur View Post
Hi MJ, I have the same trading style also, but on GC and CL.
But I don't have much experience on the grain. Can you tell which grains that you normally trade for strangle?

I have traded corn options for a number of years and just recently started to do some wheat options. With grains, understanding the seasonal tendencies is very important. Grains are volatile, they are affected by weather (actual and rumors), USDA reports, export numbers, ect ect. I tend to take smaller positions in grains because of this and I try to wait until there are oversold and overbought conditions before I take a position. With the grains, big rallies and sell-offs are often overdone, a retracement is likely. This is often the best time to sell out of the money options with inflated premium. An example was back in late August early September of last year during the drought. Corn was trading close to 850. The Dec 1050-1100 calls had premiums of $500 or higher. Of course, there are no guarantees that corn would not trade higher but the chances of it going to even 975-1000 was remote at best since cooler weather was arriving and harvesting was also beginning with the crop damages already priced in. Selling the corn Dec calls was one of my smoothest trades of 2012.

Opts also trades wheat options so I am sure he can jump in and offer his experiences too.

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Old March 8th, 2013, 07:29 PM   #988 (permalink)
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eudamonia View Post
Ok so if I understand what you are saying, you basically like taking the new crop trade for next year better than trading the current crop, due to volatility picking up in the next few months and then likely peaking in late May or June. Makes sense. Thanks.

Any thoughts on the following seasonal plays for the next few month or so?

Currently sell OTM puts on June 13 Crude (seasonals on track w/ current price action, fundamentals mixed to bullish, volatility modestly high atm).

In late March/early April sell OTM puts on June 13 Coffee (seasonals on track w/ current price action, fundamentals mixed to bullish, volatility modestly high atm).

Anything else you are currently tracking?

New crop corn futures will drop if the weather conditions are good. More so than old crop contracts.

On coffee you probably want July not June. Much more volume for July options.

KC may be one to strangle the next few months. I'd be more worried about the puts than calls so be plenty OTM on those.

I'm doing SB calls. The spike the last few days looks to be mainly technical. OI dropping and the specs were short. Very interesting how today May SB went over 19 for 5 minutes then crashed severely.

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Old March 8th, 2013, 07:32 PM   #989 (permalink)
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opts View Post
I saw that there was a bid for the April GC 2000 calls @ .10 with 19 days to go. The first thing that popped into my head was "Ron"...Is he scraping these things up? Then I saw the volume of 1 contract...couldn't be him.

Not me. But if I saw them I would have taken them.

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Old March 8th, 2013, 07:35 PM   #990 (permalink)
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Dudetooth View Post
I don't think I did a good enough of a job being a pain. They insisted that the overnight position fee has to be applied to anything held overnight and they only way that they will allow the fee to be waived is if you are working with an IB or if you agree to higher commissions ($3.5-$5/side) ... OEC, or at least the new OEC, stands firm on this.

From what I have been able to gather, Gain has replaced the entire back-office staff of OEC with their own people, which hasn't been for the best in all cases. I wasn't too keen on my dealings with their new brokers, but I thought maybe it was just me, so I had a friend call to get info and he got the same story. I don't think that they were trying to take advantage of me, but something seems wrong if a company will penalize you for working directly with them.

For now, I still want to keep an account at OEC, but I decided not to bother threatening to leave and just went and found an IB. I'll get the same commissions, I won't have to worry about the overnight fees, and I don't have to negotiate to get what I consider a fair deal.

So you add an IB into the mix and you still pay the same commissions and don't have to pay the overnight fee?

Did you get the $4 rate from RJO approved?

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