I post my other commodity trades in the Diversified Option Selling Portfolio thread. Right now I am using 80% of my account for ES spread trades. 20% for NG strangles (with warm weather coming I may be exiting them). I have also done a few other commodity trades this past winter.

Ron,

Based on my reading of this thread, you had good success with commodity options for a long time and only started concentrating in ES for the last couple of years. I understand the ES advantage of being further OTM, having a very high win rate, and still collecting good ROI. What I don't understand well is your reason for moving away from commodities. From what I gather, there appears to be an advantage commodities have over ES: the ability to pretty accurately estimate the direction (or really the unlikely direction) of commodity prices.

I used to think this but I find the ability to accurately estimate commodity direction is not a sure thing and getting harder. Way too many variables. Some of which are completely unpredictable and come from out of the blue. Plus the risk of loss is much higher in every other commodity because you are closer to ITM and are unable to prevent losses.

What I'm trying to get at here is a clearer picture of your investment philosophy.

A simplistic representation of two strategies might be:

1. ES Strategy (Ron's preference) - Focus mainly on ES and occasionally use commodity futures when good opportunities present themselves
   • Pros: Very high win rate, good returns, easy to be fully invested, mechanical investment strategy
   • Cons: Concentration risk, risk of large drawdowns
2. Diversified Strategy (@myrrdin's preference) - Make a point to diversify underlying and direction as much as possible
   • Pros: Diversified, smaller drawdowns, decent returns, reasonably high win rate
   • Cons: Often underinvested, time-consuming (need a large knowledge base)

From my perspective (this is saying very little), strategies #1 and #2 seem to be two extreme ends of the options selling spectrum. So my question is, why not somewhere in the middle? Why take such large concentration risk (in the case of #1)? Or why focus so much on diversification at the cost of potential returns (in the case of #2)? Is it just comfort level around investment risk or is there something more?

PS: although this post is addressed to Ron, I hope to hear other's perspectives as well. I'm in the process of building my own investment strategy and I'm looking to compare notes.

I've been wanting to make this point for a while, but haven't because I didn't want to be perceived as nit picking or being negative. An obvious flaw of the back test is that it uses EOD prices. Intra day prices can be very different. Also slippage is asymmetrical. You might get slight positive slippage on trades but you'll never get significant positive slippage. The opposite is not the case. When fear hits, the slippage is enormous. These will be even more pronounced if you don't have the ability to execute the trade as a spread, and are actually managing individual legs. While backtests may show the strategy survived Aug'2015 go back and read some of the posts from that period regarding the bid/asks etc especially on Sunday Night the 23rd.

Also slippage is asymmetrical. You might get slight positive slippage on trades but you'll never get significant positive slippage. The opposite is not the case. When fear hits, the slippage is enormous. These will be even more pronounced if you don't have the ability to execute the trade as a spread, and are actually managing individual legs. While backtests may show the strategy survived Aug'2015 go back and read some of the posts from that period regarding the bid/asks etc especially on Sunday Night the 23rd.

@ron99

Quick question, have you given a thought to the exit method given the above quote? If the spreads get extremely wide during a big market move how does that affect the exit? When you calculated the loss during the moves in the back test did you account for the wider spreads and slippage?

There are no losing trades in the backtest.

I'm curious about how this is managed when fear overtakes sanity.

@TFOpts

Did you do any of your tests accounting for slippage or super wide margins?

/rsm005/

I am not sure what you referring to.
Spreads could be entered as one trade (the spread) but on the statements you can see the actual instruments that are building the spread. We are pretty transparent with trading commissions.

Thank you,
Matt Z
Optimus Futures

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.

@ron99
Quick question, have you given a thought to the exit method given the above quote? If the spreads get extremely wide during a big market move how does that affect the exit? When you calculated the loss during the moves in the back test did you account for the wider spreads and slippage? I'm curious about how this is managed when fear overtakes sanity.

You can say this about anything in finance. Eventually systems stop working or take heavy drawdowns. Over the last 8 years selling vol has been extremely profitable - but what if this strat continues to be profitable for another 8 years if CB's continue to keep stocks supported? To this day it's an ongoing joke/meme in the finance community - 'sell vol and live in a mansion'.

One thing you should note - LTM took excessive positions due to greed and despite having smart people trading, their risk management was poor which would have been on the risk department to manage. Berkshire do sell ES puts as part of their strat. Also note that many funds are positioned to mitigate risk and so wouldn't be able to take on such strategies - many funds underperform in bull markets but outperform in bear markets or high vol. There are many ways to play the market and of course there will come a time when this strategy goes through some heavy drawdowns, but there are thousands of other strats that will too and so you need to prepare in your own way - there is no free lunch in the markets.

Finally, I believe @ron99 actually said "I don't understand why you think 10-20 contracts can be managed but hundreds not" which was more to suggest that - technically what is the difference between managing a position of 20 contracts and 100 (as long as liquidity is there and your account size is suitable)?

Adam,

I don't understand something in your logic. The backtesting has proven and several volatile trading days have proven that the spread will prevent a massive draw-down up to a point. That point is beyond $50 and in some cases well over $100 for the ask. Given that how can you say the spread won't work? Of course there are modifications that can be made to your position to help buy time or mitigate the loss if the position continues to work against you. For example, buying puts NTM with 5 or even 10 days to expiration and taking a small loss rather than a big one.

The reason LTM and "Super Trader Karen" got into trouble is because they were over leveraged too close to the money, Karen for example went 1-STD deviation 45 days out. Keep the margin excess high also limits total size. This is why Ackman and others can't do this, the positions they would need to make any meaningful gain on their total capital are just too big. It's just easier to buy the company or a large portion of it and harass management. For example, it's easy to open or close 50-350 contracts when the OI is 1500.

Yes to the last paragraph.

I never said 10 to 20 contracts couldn't be managed. Link to the post where you think I said that.

I also never sell ES puts naked.

You need to read the last 100 pages of this thread and understand the strategy before you start debating on the merits of it.

If you continue to make up stuff in your posts you will be blocked from this thread for wasting people's time.