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Selling Options on Futures?


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Selling Options on Futures?

  #5741 (permalink)
 ron99 
Cleveland, OH
 
Experience: Advanced
Platform: QST
Broker: QST, DeCarley Trading, Gain
Trading: Options on Futures
Posts: 3,081 since Jul 2011
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Thanks Received: 5,785


dvbattul View Post
Hi Ron,
This is about exit. Should we not exit also when Acct Balance =100%? Is not this similar to margin call? When this happens, your drawdown may not be small. But I think it is better than big loss. Will be thankful for your opinion.
Regards,
Dilip

I don't understand why you are asking this question if I am understanding it correctly. Are you saying that Acct Balance = 100% is the account losing all of its money?

The max draw down (daily loss of account balance) was 25.6%. It never reached 100% in that study.

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  #5742 (permalink)
dvbattul
Singapore
 
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ron99 View Post
I don't understand why you are asking this question if I am understanding it correctly. Are you saying that Acct Balance = 100% is the account losing all of its money?

The max draw down (daily loss of account balance) was 25.6%. It never reached 100% in that study.

Hi Ron,
In my post in which I quoted your post, you were replying that exit it based on 50% drop from initial premium. It was suggested in another post ->"why not exit also when premium increases by 100% to avoid big loss?" to which you had replied that in such cases one may be exiting too many times unnecessarily. So, only criteria for exit is a drop in 50% premium because in your study you never encountered any big loss.
I am suggesting another strategy for exit based on your very old criteria. This is to avoid a loss when futures drop. In your study, Acct Balance never reached 100% but it reached 92.7% although drawdown was 16.3%. But suppose in future, if Acct Balance reaches 100%, could we exit also to avoid big loss although drawdown may be higher than 16.3%?
Regards,
Dilip

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  #5743 (permalink)
 ron99 
Cleveland, OH
 
Experience: Advanced
Platform: QST
Broker: QST, DeCarley Trading, Gain
Trading: Options on Futures
Posts: 3,081 since Jul 2011
Thanks Given: 980
Thanks Received: 5,785



dvbattul View Post
Hi Ron,
In my post in which I quoted your post, you were replying that exit it based on 50% drop from initial premium. It was suggested in another post ->"why not exit also when premium increases by 100% to avoid big loss?" to which you had replied that in such cases one may be exiting too many times unnecessarily. So, only criteria for exit is a drop in 50% premium because in your study you never encountered any big loss.
I am suggesting another strategy for exit based on your very old criteria. This is to avoid a loss when futures drop. In your study, Acct Balance never reached 100% but it reached 92.7% although drawdown was 16.3%. But suppose in future, if Acct Balance reaches 100%, could we exit also to avoid big loss although drawdown may be higher than 16.3%?
Regards,
Dilip

Oh, you meant percent of Acct Balance to cover IM. That is different than Acct Balance.

If your acct balance to cover IM reaches 110% (100% of maintenance margin) then you have hit a margin call and need to exit some or all positions or roll the positions.

Yes that could be an exit point.

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  #5744 (permalink)
 ron99 
Cleveland, OH
 
Experience: Advanced
Platform: QST
Broker: QST, DeCarley Trading, Gain
Trading: Options on Futures
Posts: 3,081 since Jul 2011
Thanks Given: 980
Thanks Received: 5,785

I have updated my backtest of the ES short 5 delta put with 2 long puts that are 1.50 delta. Sold at 90+ DTE and exited at 50% drop in net premium. Uses 6x IM. Excel spreadsheet is attached.

The study now covers 4 years. 2013 to 2016. If you started the study with $100,000, after 4 years you would have $227,115.64. That's +127.1% ROI or a compounded 32.5% per year.

2013 +20.4%
2014 +18.4%
2015 +22.6%
2016 +32.8%
Average +23.5%

It has never had a losing trade. 53 trades.

The largest drawdown was 26.6%. Maximum amount of the account balance for IM was 92.7% on 9/29/15.



New positions are added the same day that prior positions hit 50% or more drop of net premium from entry net premium using the IM from the day prior.

In reality there will be some slippage. Either the position won't hit 50% drop until settlement so you won't be able to enter till the next day or you won't be able enter at the settlement price used in this study. Of course there will be some days you enter at a better price.

It is fairly simple to trade. No timing of entry is used. As long as ES futures never drop to the strike of your short option you will make money.

The short averaged 371 below futures. The current trade is 1810 short strike when futures were 2255. That's a 445 difference or 20%. The only time that ES futures dropped that much is the ESz2008 contract (551.50). Since 2008 the largest drop in 90 days has been 268.50 (2093.00 on 12/01/15 to 1824.50 on 2/11/15) or 12.8%. Sometime in 2008 before Sep you should have figured out that 2008 wasn't a year you should be selling ES puts.

The largest percentage drop for ES futures since June 2009 was 19.3% or 260.00 for the ESz2011 contract.

It isn't huge ROI but steady and safe enough to let you sleep at night. It doesn't take a lot of work. 12 to 14 entries and exits per year.

If you want even more safety then increase the excess from 6x to a higher number. So if IM is $300 you would hold $1,800 for each position till exit. If you went to 8x then you would hold $2,400 for each position. This would decrease ROI during this study from 127.1% to 85.3%. But the highest account balance for IM would drop to 67.2% from 92.7% for 6x. If you change the Margin Factor number in cell O1 on the spreadsheet the results will change to reflect that change.

Attached Files
Elite Membership required to download: Option ES Study 5 Delta Short 2 Longs.xlsx
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  #5745 (permalink)
 myrrdin 
Linz Austria
 
Experience: Advanced
Platform: TWS
Broker: Interactive Brokers
Trading: Commodities
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ron99 View Post
I have updated my backtest of the ES short 5 delta put with 2 long puts that are 1.50 delta. Sold at 90+ DTE and exited at 50% drop in net premium. Uses 6x IM. Excel spreadsheet is attached.

Thanks a lot for sharing your strategy and for your excellent work on back testing. This strategy has a lot of advantages - very small number of losing trades, consistent profit for most of the time, easy to implement.

But there is no free lunch.

The issue that makes me hesitant is that if something unexpected happens the damage can be huge. Let me explain.

Assuming a margin of $300 per position and an excess factor of 6 you would hold $1,800 for each position till exit. For an account of $ 100,000 this would mean to hold more than 50 short put options. The ESZ11 moved down 19.3 % and recovered. A further severe move down - perhaps over the weekend - might be a severe problem for the account because of the large number of puts.

Still I think it is an excellent concept. But each trader has to be aware that it takes excellent nerves to stay in the trade when the ES loses 15 to 20 %.

I am currently looking into a concept using ratio spreads. Will describe it later.

Best regards, Myrrdin

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  #5746 (permalink)
foxtrot444
Philadelphia Pennsylvania
 
Posts: 4 since Mar 2015
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Ron,
I'm still trying to figure out your spreadsheet. Am I reading this correctly in that your commissions are $18.36 round trip; or about $2515 for the 12/7/16 trade of 137 positions? Seems like a very high cost compared to the net profit of $3992 on the trade.

Regular equity/index option commissions are usually much much lower.
Am I missing something?

thanks

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  #5747 (permalink)
 ron99 
Cleveland, OH
 
Experience: Advanced
Platform: QST
Broker: QST, DeCarley Trading, Gain
Trading: Options on Futures
Posts: 3,081 since Jul 2011
Thanks Given: 980
Thanks Received: 5,785


foxtrot444 View Post
Ron,
I'm still trying to figure out your spreadsheet. Am I reading this correctly in that your commissions are $18.36 round trip; or about $2515 for the 12/7/16 trade of 137 positions? Seems like a very high cost compared to the net profit of $3992 on the trade.

Regular equity/index option commissions are usually much much lower.
Am I missing something?

thanks

These are options on futures not options on stocks.

It costs me $6.12 per option round turn. I doubt there are many brokers offering lower commissions and fees on options on futures (unless they are like IB who have lower commissions but much higher margin requirements which makes ROI per trade lower).

I see E Trade charges $5.98 commissions per RT for futures + fees on top of that. I don't see that they allow trading on options on futures. Only options on stocks.
https://us.etrade.com/what-we-offer/pricing-and-rates

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  #5748 (permalink)
 ron99 
Cleveland, OH
 
Experience: Advanced
Platform: QST
Broker: QST, DeCarley Trading, Gain
Trading: Options on Futures
Posts: 3,081 since Jul 2011
Thanks Given: 980
Thanks Received: 5,785

Here are my results for trades closed in 2016

Made 17 ES spread trades, 1,218 spreads, net profit $44,558.22, zero losing trades, 14.8% actual ROI (174 days of trading) or 33.6% yearly ROI.

Made 6 spread trades with CL, KC, NG. 30 spreads, net profit $5,229.30, zero losing trades, 37.8% actual ROI (147 days of trading) or 121.7% yearly ROI.

I made zero naked short option trades in commodities other than milk. Lost a lot of money buying options (now I see again why selling options work so well). Lost a lot of money making milk trades this year.

Here is why I lost on milk this year. EXTREME volatility. I doubt I will be making many milk trades anymore. Manipulation reigns. Each horizontal gridline is $2,000 for futures.


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  #5749 (permalink)
 kulu 
Buckeye Nation
 
Experience: Intermediate
Platform: Ninja Trader
Broker: Amp/CQG, TOS
Trading: CL, 6E, YM and ES
Posts: 213 since Jul 2010
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ron99 View Post
Here are my results for trades closed in 2016

Made 17 ES spread trades, 1,218 spreads, net profit $44,558.22, zero losing trades, 14.8% actual ROI (174 days of trading) or 33.6% yearly ROI.

Made 6 spread trades with CL, KC, NG. 30 spreads, net profit $5,229.30, zero losing trades, 37.8% actual ROI (147 days of trading) or 121.7% yearly ROI.

I made zero naked short option trades in commodities other than milk. Lost a lot of money buying options (now I see again why selling options work so well). Lost a lot of money making milk trades this year.

Here is why I lost on milk this year. EXTREME volatility. I doubt I will be making many milk trades anymore. Manipulation reigns. Each horizontal gridline is $2,000 for futures.

Congratulations! This is really breathe taking and encouraging for folks like me who are just getting into option selling. I just started trading my IRA exclusively selling options in November 2016 (mainly IC and credit spreads on SPX, AMZN, RUT (that's where my losses were), CMG, TSLA)

Where most of your trades credit spreads? Where they Put Bull Credit spreads with the market mainly in a bullish zone for the year?

I would like to diversify my option selling portfolio with some commodity futures options. Any recommendations for material to get up to speed with options on futures? I just bought "A Complete Guide to Option Selling" by James Codier and Michael Gross.

Thanks for sharing and happy new year!

Kulu

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  #5750 (permalink)
 ron99 
Cleveland, OH
 
Experience: Advanced
Platform: QST
Broker: QST, DeCarley Trading, Gain
Trading: Options on Futures
Posts: 3,081 since Jul 2011
Thanks Given: 980
Thanks Received: 5,785



kulu View Post
Congratulations! This is really breathe taking and encouraging for folks like me who are just getting into option selling. I just started trading my IRA exclusively selling options in November 2016 (mainly IC and credit spreads on SPX, AMZN, RUT (that's where my losses were), CMG, TSLA)

Where most of your trades credit spreads? Where they Put Bull Credit spreads with the market mainly in a bullish zone for the year?

I would like to diversify my option selling portfolio with some commodity futures options. Any recommendations for material to get up to speed with options on futures? I just bought "A Complete Guide to Option Selling" by James Codier and Michael Gross.

Thanks for sharing and happy new year!

Kulu

Be very careful trading an IRA. Remember if you lose the money or go negative there is a limit on how much money you can put into the IRA.

The ES spreads were all short puts with long puts below the shorts. The other commodities were mixed put or call spreads.

That book is a good start. Carley Garner has some books too. A couple of threads here would be the next place to go.

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Last Updated on July 28, 2023


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