A summary does not do justice to the depth and breath of topics covered, therefore it is advised to read through and understand the many different ways people are approaching selling options, that way your understanding will be infinitely improved compared to merely reading a summary.
But here are key points
- It's not whether your strike goes ITM it's whether you can ride out the loss of premium and the increase in margin. So you need to pick a strike that will allow you to do that and not pick a strike that you don't think futures will reach. They aren't the same.
- SELL options 60-120 DTE (days to expiration)
- Delta <= .0300
- When your (CURRENT IM + (CURRENT PREMIUM$ - OPENING PREMIUM$)) > (3 * OPENING IM), you exit your trade
- 2/3 of account in cash for increased margin requirements / ride out positions if move towards strike over time
-When I put a position on I have 2 times the Initial Margin required for cash excess.
For example, if I sell an option for $100 and the margin required is $500, I will have $1000 excess.
If the margin increases to $1200 and the premium is higher than $400 then the cash excess is gone and it is time to exit.
Things to know
Number one, compare margin requirements between brokers and the exchange minimum. Some FCMs (Brokers) charge extra. Some don't charge any extra. That will severely cut ROI.
Number two, a big one. Margin calls, check if your broker will automatically trade you out of the position (auto-liquidation) with a market order (IB). You do not want that to happen. Huge unnecessary losses could result.
Futures and options charts http://futures.tradingcharts.com/ Prices / Quotes & Commodity Charts where you can check futures (10 minute delayed) and options prices together with volume traded and open interest up to previous day close.
You can get free option deltas at the above reports but that is only the prior day's delta. But that is probably good enough for most option trading.
Read the Dow Jones news on OX to get a feel for current thoughts on commodities, check Hightower occasionally. Do Google searches (news) for quotes by these knowledgeable analysts. John Kemp. Tim Evans. Oliver Jakob.
@ron99, I know there are stocks options traders here, but maybe not a lot of futures options traders. I tried myself, but found that a more scary and less liquid than stocks options.
But if you start to talk about how you trade them, you may find people interested in it .
Success requires no deodorant! (Sun Tzu)
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I've been reading the book. There's a new edition out which sells heavily discounted on book resellers. Don't know
if that's a good sign or not. But the book is a nice read. I'd already been shorting puts on stocks for a while, so not much new to me except
it seems some fundamentals is involved in predicting commodities price range according to the book. Or should I just stick to TA.
Ron, I was trying to do some demo futures option trades, but ThinkOrSwim usually says "not traded". Are there only certain times one can buy or short options on futures?
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The book is probably discounted because there aren't many option on futures sellers. But it did get a second edition printing.
TA is used very little for option selling. I never use it.
Options are traded certain times of the day. It varies by commodity. For example the Sugar pit closes at 1:30pm ET. Oil and Gold trade electronically until 5:15pm ET and reopen at 6pm ET. But there is very little trading volume during night time in the US. Most options have moved to electronic trading. But there is pit trading still for all options. Check to see whether TOS is sending the orders to the pit or electronically.
Admittedly, the volume on options is not that great. You just have to keep trying. Certain strike prices have more volume than others. Usually the round numbers. For example in Gold, the $50 increment like 1350 or 1400 trade more than the strikes in between like 1360 or 1365. Check the open interest of the strikes to see where the trading is happening.
Also certain commodities have more volume than others. Obviously corn, oil and gold have a lot of volume. While copper has zero option volume. Medium volume for options is Sugar, Coffee, Silver, Soybeans, Wheat, Nat Gas. Unleaded Gas (RBOB), Heating Oil, Cocoa, and Cotton are on the low side of volume.
Never, ever place a market order on options on commodities. Always limit orders.
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