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Selling Far OTM Options on Futures
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Selling Far OTM Options on Futures

  #11 (permalink)
Trading Apprentice
New York
 
Futures Experience: Advanced
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Posts: 23 since Jul 2014
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Hi All:

I was reading Forex37 comments and have some comments of my own.

I assume this is a naked strategy for the selling? Now some words of wisdom and this is just my opinion.

You could be going along for months even years selling the low delta .03 and lower. However, if the Black Swan shows up then you have the risk of giving back those profits in a big loss. When that position gets a delta of about .15 - .25, you are going to start feeling some pain (loss). Depending on you expiration, you might get by for that month. However, if that position goes from .03 to .50 and then expires in the money you could have a great loss.


This type of loss can emotionally deflate you as all the time and profits can be lost.

My words of wisdom is make sure you have an exit plan for when the Delta's get too rich and option gets pricey.
Just stalling and not be proactive can hurt. Remember if your goal is to make money every month ensure you keep funds around to deploy again. I do not sell naked contracts, but respect people that do, but have been burned by not exiting when the Delta's exceeded my expectations. I just waited just to have the Deltas increase even more. So to make hundreds I gave back thousands. Ensure your plan covers this scenario.

Thanks,

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  #12 (permalink)
Elite Member
Charlotte NC
 
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Potential gains

Is it possible to make any money using this strategy if one has to pay $6 fees roundtrip?
Can anyone show a recent example detailing fees expense?

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  #13 (permalink)
Trading Apprentice
New York
 
Futures Experience: Advanced
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Posts: 23 since Jul 2014
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Meyer99:

I do not think the expectation is to have a round trip just the sell transaction. The expectation is that the options will expire worthless. However, if you get stuck in a ditch and the position goes against you will have to make the round trip to get out.

I wonder with the recent sell off if anyone got stung with selling out of the money Put options? The VIX moved from about 12 to 16 pretty quickly and the increased implied volatility causes the Vega to increase and the Put options can get premium rich pretty fast.

For example, tonight I looked at some 174 Put options, OTM, on SPY for OCT. These are pretty far out of the money the these moved from .95 on 7/15 to 1.23 by 7/31. Why did I look at these? Reason being, I was researching when I think the VIX is too low what would be the impact to buy OTM options waiting to a volatility spike? If you look at the VIX you see it spike every 4 months or so.

Just some more thoughts,

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  #14 (permalink)
Market Wizard
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spreadhead View Post
Meyer99:

I do not think the expectation is to have a round trip just the sell transaction. The expectation is that the options will expire worthless. However, if you get stuck in a ditch and the position goes against you will have to make the round trip to get out.

I wonder with the recent sell off if anyone got stung with selling out of the money Put options? The VIX moved from about 12 to 16 pretty quickly and the increased implied volatility causes the Vega to increase and the Put options can get premium rich pretty fast.

For example, tonight I looked at some 174 Put options, OTM, on SPY for OCT. These are pretty far out of the money the these moved from .95 on 7/15 to 1.23 by 7/31. Why did I look at these? Reason being, I was researching when I think the VIX is too low what would be the impact to buy OTM options waiting to a volatility spike? If you look at the VIX you see it spike every 4 months or so.

Just some more thoughts,

This thread is for options on futures.

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  #15 (permalink)
Elite Member
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margin call

Ron or anyone else:

Do you know if ThinkorSwim will close the trade at market in case of a margin call?

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  #16 (permalink)
Market Wizard
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meyer99 View Post
Ron or anyone else:

Do you know if ThinkorSwim will close the trade at market in case of a margin call?

I have never traded there so I don't know. Maybe someone else knows.

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  #17 (permalink)
Trading Apprentice
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meyer99 View Post
Ron or anyone else:

Do you know if ThinkorSwim will close the trade at market in case of a margin call?


I don't think so.

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  #18 (permalink)
Elite Member
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This might help ES options traders

Now back to the SKEW vs. VIX. Why? Because the ratio between them is an indicator of the uncertainty premium. It is only an indicator, but it may be one that can be used to estimate the impact of the fog of war.

The ratio between the SKEW and VIX is a ratio of two different indices that measure option premiums. Those premiums give indications of market-based pricing of risk. When the SKEW-VIX ratio widens, it says that out-of-the-money options on American stocks are being bid up for the purposes of insuring against tail-risk events. Tail-risk events are higher-volatility swings, that is, swings that could be greater than one or maybe two standard deviations. History suggests that wide ratios between the SKEW and VIX result in market reactions that can be serious. That is why we watch the SKEW-VIX ratio. We give a hat tip to the analysts at BCA Research, who have discussed this in great detail in their work.

We have taken the SKEW-VIX ratio, plotted it against the S&P 500 Index, and put it on our website for readers to see. The data starts in 2008. The ratio and the performance of the US stock market for the entire period of the financial crisis and subsequent rally can be seen. Look at it and draw your own conclusions. Here is the link: http://www.cumber.com/content/misc/SKEW-VIX.pdf .

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  #19 (permalink)
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Interesting...

I've only been selling deep OTM options for 9 months and have not run into this before...

I am short several HO calls expiring in October and November, 36 and 69 DTE, respectively. They have performed well and I am trying to buy them back in. I have a standing offer to buy the 3.40 and 3.45 Oct calls for $0.03 and the 3.60 Nov calls for $0.07. The weird thing is the 3.40 and 3.45 calls are closing well below what I am offering ($0.01 vs $0.03). I am surprised that my bids haven't been hit. The Bid/Ask on the Nov 3.6 option is .07/.10, but the settlement price today was $0.04.

Ron, have you seen this happen very often?

mu2pilot

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  #20 (permalink)
Market Wizard
Cleveland, OH
 
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mu2pilot View Post
I've only been selling deep OTM options for 9 months and have not run into this before...

I am short several HO calls expiring in October and November, 36 and 69 DTE, respectively. They have performed well and I am trying to buy them back in. I have a standing offer to buy the 3.40 and 3.45 Oct calls for $0.03 and the 3.60 Nov calls for $0.07. The weird thing is the 3.40 and 3.45 calls are closing well below what I am offering ($0.01 vs $0.03). I am surprised that my bids haven't been hit. The Bid/Ask on the Nov 3.6 option is .07/.10, but the settlement price today was $0.04.

Ron, have you seen this happen very often?

mu2pilot

It happens. Just have to be patient.

This is one of the downsides to trading low vol options. Just be glad you aren't trying to exit because market is going against you. That gets ugly.

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