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

  #71 (permalink)
Trading for Fun
Reno, USA
 
Futures Experience: Intermediate
Platform: esignal
Favorite Futures: Oil
 
Posts: 70 since Jul 2011
Thanks: 14 given, 9 received

Gold and Coffee

Morning Ron,

Just was wondering what you thought about the following trades ?

Selling OTM calls on Coffee expiring in April---looks like seasonality wise coffee starts to make a run in April into May but right now its in a major downtrend ?

Selling OTM puts on Gold ? Looks like April into may it goes up but then again with a stronger dollar its pressure on Gold and Oil ?

thanks

Vijay

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  #72 (permalink)
Market Wizard
Cleveland, OH
 
Futures Experience: Advanced
Platform: QST
Broker/Data: QST, DeCarley Trading, Gain
Favorite Futures: Options on Futures
 
Posts: 2,727 since Jul 2011
Thanks: 793 given, 4,777 received

At the top of this webpage https://www.theice.com/softs

is a pdf link to the free monthly soft commodities analysis by J Ganes Consulting.

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  #73 (permalink)
Market Wizard
Cleveland, OH
 
Futures Experience: Advanced
Platform: QST
Broker/Data: QST, DeCarley Trading, Gain
Favorite Futures: Options on Futures
 
Posts: 2,727 since Jul 2011
Thanks: 793 given, 4,777 received



vmaiya73 View Post
Morning Ron,

Just was wondering what you thought about the following trades ?

Selling OTM calls on Coffee expiring in April---looks like seasonality wise coffee starts to make a run in April into May but right now its in a major downtrend ?

Selling OTM puts on Gold ? Looks like April into may it goes up but then again with a stronger dollar its pressure on Gold and Oil ?

thanks

Vijay

The seasonal trend for May KC is down from now into expiration of the May options. What KC does after May option expiration (4/10) is irrelevant to the discussion of May options.

Yes selling those is a good idea. But it was a better idea a few hours ago before the futures crash today. Many times I have looked at doing something then I look at futures and saw that I was a little late thinking of doing that. There should be a bounce after today.

Seasonals in metals are not strong so I quit looking at them. GC has been in a 200 range lately so a strangle should work.

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  #74 (permalink)
Trading for Fun
Reno, USA
 
Futures Experience: Intermediate
Platform: esignal
Favorite Futures: Oil
 
Posts: 70 since Jul 2011
Thanks: 14 given, 9 received

Thanks Ron

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  #75 (permalink)
Market Wizard
Cleveland, OH
 
Futures Experience: Advanced
Platform: QST
Broker/Data: QST, DeCarley Trading, Gain
Favorite Futures: Options on Futures
 
Posts: 2,727 since Jul 2011
Thanks: 793 given, 4,777 received


vmaiya73 View Post
Thanks Ron

Threads will be shorter if you use the Thanks button at the bottom right of my post instead of making a separate post saying thanks.

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  #76 (permalink)
Membership Temporarily Revoked
Memphis,TN
 
Futures Experience: Advanced
Platform: ThinkorSwim,FXCM, Ensign Software
Broker/Data: ThinkorSwim, FXCM
Favorite Futures: Futures, Forex, Options
 
mdsvtr's Avatar
 
Posts: 232 since Sep 2010
Thanks: 853 given, 28 received

Justfinished reading the Third Edition

of the " The Complete Guide to Option Selling " ( Fantastic Book ),
And I have also read through Ron99's Top notch thread covering the method of selling far OTM options on the Future market(s)

From just finishing the book, and from reading through the thread, I had a few question I would like to ask Ron and any other members who can add to the questions at hand please...

1. I use TorS as my platform , and they post a Daily initial Margin for each of the Future, which I am going to assume is as close to SPAN Margin as I can get , as far as the Margin requirements being accurate ?

Right now, I am showing ES at $5,060 initial margin
CL at $5,390 initial margin
GC at $4,400 initial
and ZC at $1,100 initial

Just giving some examples of what I'm currently showing , to see if it matches the " Actual " SPAN margin ?



2. As far as Limit Lock Up / Down is concerned..... it states in the book, that Options are Immune to Limit Up/Down days ..... so does that include selling both Naked and Credit Spreads ?


3. I know that when Implied Volatility is high, that this is not the main/sole reason to sell options for a credit..... But selling when any product is at high IV definitely makes the premiums juicy, and benefits the Option seller that much more... I.E. the more credit received for Selling

So given that high IV is a plus when selling Options, what is the best Indicator to use on the Charts, to " Tell us " when IV is at high / extreme levels....... Bollinger Bands ? Standard Deviation Regression Lines ( with 2 and 3 standard deviation levels plotted ) ?


4. Ron, I know that you mentioned , as well as it recommends in the book, that using each individual Future's " Seasonal " chart, and comparing it to that Future's actual chart , will help in showing us what the tendencies for ' Big " up and down moves have been over the course of say 15 years , and that this can really give us great insight, as to which direction to look to trade that Future... I.E. trade with it's Seasonal move's tendencies and not trade against it

Where do you find these Seasonal charts please ?



5. and lastly please, relating to Margin..... you mentioned the following:

" 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. "

Regarding the margin increasing to $1,200 and the premium going higher than $400, this would mean an increase in required margin of 1.5 x the initial $500
AND
an increase of the credit you received when the trade was put on.... increasing to 4 x the amount you received ?

Are these hard set rules that you use on when to Exit a trade ?

Or is it based on other factors surrounding the trade itself ? What Future you're trading ?


Ron, thank you very much for starting this thread and for sharing all of your knowledge and experience from selling OTM options,
Really appreciate it - Michael

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  #77 (permalink)
Market Wizard
Cleveland, OH
 
Futures Experience: Advanced
Platform: QST
Broker/Data: QST, DeCarley Trading, Gain
Favorite Futures: Options on Futures
 
Posts: 2,727 since Jul 2011
Thanks: 793 given, 4,777 received

1. Link for CME Margins. Multiply Maint times 1.1 to get our non-member initial margin.

http://www.cmegroup.com/clearing/margins/#e=all&a=all&p=all

2. No limits on options. Period.

3. IV should be available from your data provider.

4. I make my own. You can buy them from MRCI or Seasonalgo.com.

5. Yes hard rule.

"Regarding the margin increasing to $1,200 and the premium going higher than $400, this would mean an increase in required margin of 1.5 x the initial $500 AND an increase of the credit you received when the trade was put on.... increasing to 4 x the amount you received ?"

Not quite.

If the IM was $500 when you put the option on and the IM increased to $1200 that is a $700 increase.

If the premium was $100 when you put it on and now the premium is $400 (meaning you are losing $300) then your $1000 cash excess you held when you entered the trade is gone ($1000 minus 700 minus 300) and it is time to exit.

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  #78 (permalink)
Membership Temporarily Revoked
Memphis,TN
 
Futures Experience: Advanced
Platform: ThinkorSwim,FXCM, Ensign Software
Broker/Data: ThinkorSwim, FXCM
Favorite Futures: Futures, Forex, Options
 
mdsvtr's Avatar
 
Posts: 232 since Sep 2010
Thanks: 853 given, 28 received

Thanks so much Ron for the explanation of how the Margin works and the way in which we determine when to Exit the trade for a Loss..... The calculation of how to compute this was throwing me off, but now thanks to you I understand it


One quick thing please,
What is the bare minimum you recommend someone start out trading this strategy?

I have an account with TorS , so I need to contact them and see what their minimum is to be able to sell these trades " Naked " VS covered..... I may just have to start out doing them as credit spreads, and move my strikes in a bit ( while still staying as close to the probability of finishing OTM as I can )

Thank you again for your help and for sharing and starting this thread - Michael

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  #79 (permalink)
Market Wizard
Cleveland, OH
 
Futures Experience: Advanced
Platform: QST
Broker/Data: QST, DeCarley Trading, Gain
Favorite Futures: Options on Futures
 
Posts: 2,727 since Jul 2011
Thanks: 793 given, 4,777 received


mdsvtr View Post
Thanks so much Ron for the explanation of how the Margin works and the way in which we determine when to Exit the trade for a Loss..... The calculation of how to compute this was throwing me off, but now thanks to you I understand it


One quick thing please,
What is the bare minimum you recommend someone start out trading this strategy?

I have an account with TorS , so I need to contact them and see what their minimum is to be able to sell these trades " Naked " VS covered..... I may just have to start out doing them as credit spreads, and move my strikes in a bit ( while still staying as close to the probability of finishing OTM as I can )

Thank you again for your help and for sharing and starting this thread - Michael

The more money you have the less critical it is to be correct on every trade. One bad trade can easily wipe out a small account. Even leaving you owing them money.

Only fund your account with money you can lose and not affect your daily living.

$10k minimum? Smaller than that is just too hard to trade.

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  #80 (permalink)
Market Wizard
Cleveland, OH
 
Futures Experience: Advanced
Platform: QST
Broker/Data: QST, DeCarley Trading, Gain
Favorite Futures: Options on Futures
 
Posts: 2,727 since Jul 2011
Thanks: 793 given, 4,777 received


One trade that has been working well for me is selling ES puts that are 80+ DTE and not higher than a delta of 2.00. I then trade out of the position when the premium drops to < 0.80. You can usually ride out a 150-200 move down in ES futures with the excess of my formula.

Monthly ROI averages about 3-4%. Or 40-60% per year.

This is my variation of Karen the Supertrader's strategy. I think this works better. It's simple. It's easy to do because of the volume available in ES puts. It's safer because you are further OTM than Karen is at 56 DTE. Also you are at a lower delta than her.

I have done 497 trades, 16,138 contracts, selling ES puts. Only one loser of 50 contracts in Sep 2011. None since.

Like all trades, watch the fundamentals and if a major drop might be happening because of a US gov shutdown or major problems in EU, China or elsewhere or something else (recession), tread lightly with these puts.

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