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EW3 is the same contract that was non-quarterly ES option expirations before the change. Like ESn before 2016.
The other EW weekly contracts, EW1, EW2, EW4, don't start trading until about 5 weeks from expiration. Right now EW1n17 is the one with highest DTE, 37 DTE.
Based on a quick study of historical data, it doesn't look like dollar cost averaging (DCA) works very well for the type of option writing described in this thread. It produces quite a bit lower ROI overall and has limited risk management value. There are several reasons for this:
You are often under-invested. For example, if you add positions of 25% of your account every week so that you are fully invested over a 1 month period, more likely than not some of your positions will hit an exit point within the month. So you will often have money on the sidelines not earning anything.
Exit points converge. Even though you may have different entry points, an increase in price or a drop in vol often means that your exit point is the same for the different positions. So if you put on contracts on 1/1 and more on 1/8, both might reach the exit point on 1/15. In itself this is not a big deal but it ties back to #1 where you are chronically under-invested.
Risk is spread over time. Positions opened over a period of time, sometimes 2 to 4 weeks, have a similar risk profile. This is like #2 in reverse. If you open positions on 1/1, 1/8 and 1/15 and the market crashes on 1/17; all three positions will be hurting. Some more than others but there isn't a huge amount of diversification across time because of the short-term nature of these trades.
DCA does reduce your risk because you're under-invested much of the time so there's less of your account on the line if something bad happens. If our objective is to maximize returns within an acceptable level of risk, another approach might be to:
Lower the risk on your trades, e.g. use spreads instead of naked selling
Diversify the underlying and the direction of your trades (use calls and puts). See myrrdin's great post on this topic.
This is a really interesting post. One of the biggest reasons that I don't diversify btw is because i quite frankly don't know much of anything about the other commodity markets so I stay 100% in stocks. Most of my portfolio was in S&P500 stocks before I started trading so this was just a natural fit for me. If there's a really good resource for trading other commodities or methods that are just as mechanical then perhaps I'll look more into them, but for now it's good to know that one large position is no better or worse than multiple small ones.
I need a better understanding of margin calls and what the requirements are when positions change. I'm still trying to model purchasing protective options when things get dicey (rsm005's idea) and want to be sure I get the margin call logic right. I would really appreciate guidance on this. Below are scenarios and how I believe margin calls work, please correct and make changes as needed.
When a naked option is sold, you do not go on margin call if:
Margin Held + Initial Value > Maintenance Margin(t) + Option Value(t)
Where,
Margin Held = the cash margin you are holding for the position
Initial Value = the option premium when the position was opened (what you are hoping to gain from the trade)
Maintenance Margin(t) = the maintenance margin requirement at time t
Option Value(t) = the value of the option at time t
For a credit spread, it is very similar:
Margin Held + Init Short - Init Long > Maintenance Margin(t) + Short(t) - Long(t)
Where,
Init Short = the value of the short option when the position was opened
Init Long = the value of the long option when the position was opened (you hope to gain Init Short - Init Long from the trade)
Short(t) = the value of the short at time t
Long(t) = the value of the long at time t
Here's where the uncertainty build for me. If you purchase another long option as protection after the position was already opened, you avoid a margin call if:
Margin Held + Init Short - Init Long - Init ProtectiveLong > Maintenance Margin(t) + Short(t) - Long(t) - ProtectiveLong(t)
Where,
Init ProtectiveLong = the value of the long option when initially purchased.
ProtectiveLong(t) = the value of the long option purchased after at time t. The maintenance margin would also reflect the additional long
And now I'm shooting in the dark a bit; if you roll your initial short position, you avoid a margin call if:
Margin Held + Init Roll Short - Init Long > Maintenance Margin(t) + Roll Short(t) - Long(t)
Where,
Init Roll Short = the initial value of the short after the roll
Roll Short(t) = the value of the short after the roll at time t
Thanks for any clarification you can provide.
PS: I have the same question out to Carley in here AMA thread here.
I have a meeting coming up but I wanted to give you a bit more color on the conditions that I was thinking of regarding this strategy. Hopefully this will help you code it better. I'm working on a java program myself that will populate an excel dashboard automatically. I'm trying to dynamically calculate margin for my spread on an hourly basis and chart it, keeping the numbers in a DB for historical measurements. It requires me to pull this information from my platform, now ThinkorSwim, but that's proving to be tough. I may have to screen scrape it but I still can't figure out how to do this in Java....
Conditions
1. Start with the 80/20 rule. When Margin hits 80% of Ron's exit point a put should be added to reduce the total margin hold
2. This DOES NOT change the the original exit point, simply reduces the total loss. My thought here is if the margin hits 80% of Ron's exit assume it's going to 100% and enter a "capital preservation" mode. Not a, let's see how far this thing will go mode.
3. Backtest condition 1 to see if 80% is the right number of it should be lower or higher based on which entry point for the protective put reduces the total loss the most.
TFOpts all look good except on the last one I would think you need to have the profit or loss on exiting the initial short added to the left of the > sign.
Also entry commissions and fees need to be subtracted to the left of the > sign.
I was thinking about this and wondered if mROI was higher on Monday trades because the IM was lower on Monday because of weekend lowering of IM because of lower DTE.
When you did this study did you use the margin and prices for Monday for both? When I make a trade on Monday I am using Friday's IM to determine 6xIM for that Monday trade.
Margin Held + Init Short - Short Buy + Init Roll Short - Init Long > Maintenance Margin(t) + Roll Short(t) - Long(t)
Where,
Init Short = the value of the short option when the position was opened
Short Buy = the value of the original short option at the time it was bought back
Init Roll Short = the initial value of the short after the roll
Init Long = the value of the long option when the position was opened
Roll Short(t) = the value of the short after the roll at time t
Long(t) = the value of the long at time t
