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Selling Far OTM Options on Futures
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Created: by ron99 Attachments:4

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Selling Far OTM Options on Futures

  #1 (permalink)
Market Wizard
Cleveland, OH
 
Futures Experience: Advanced
Platform: QST
Broker/Data: QST, DeCarley Trading, Gain
Favorite Futures: Options on Futures
 
Posts: 2,730 since Jul 2011
Thanks: 794 given, 4,779 received

Selling Far OTM Options on Futures

In order to have a more focused thread on just selling far OTM options on futures, I am starting this thread.

Much of the discussion we had previously can be found early in this thread.
https://futures.io/options-cfd-trading/12309-selling-options-futures.html

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  #2 (permalink)
Quick Summary
Quick Summary Post

But here are key points
- Sell based on where price is very unlikely to go, far OTM
- SELL options with LESS than 90 DTE (days to expiration)
- Delta less than .0300
- 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.

When your (CURRENT IM + CURRENT PREMIUM - OPENING PREMIUM) > (3 * OPENING IM), you exit your trade

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.

- Always place limit order, never market order
- do not trade between major strikes ie CL $80.50 Low OI (Open Interest)
- Be mindful of seasonal tendencies
- Consider adding to positions as OTM options get closer to expiry and margin drops (subject to having 67% of account in cash)
- Avoid volatile commodities

other incidentals rules Ron observes; post 196 https://futures.io/commodities-futures-trading/12309-selling-options-futures-20.html#post255970

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.

Very interesting videos of a VERY successful option seller. 30-50% ROI per annum.
Part 1. 24 minutes Trader - made $41 million profit in 3 years option trading - YouTube
Part 2. 51 minutes http://www.youtube.com/watch?gl=US&hl=en&client=mv-google&v=BquDGE9KxZQ&nomobile=1 OPTION TRADER makes $105MM PROFIT in the NDX, SPX & RUT - Her STORY Uncovered - YouTube[/url]
Karen returns for another interview. http://www.youtube.com/watch?v=py1PnCMUUbA

Summary is that she sells stock index options in the NDX, SPX & RUT about 17% OTM at 56 DTE. About 250-270 points on ES puts.

Tasytrade interview with Craig who only sell CL options. http://www.youtube.com/watch?v=vMt6P7LrV7I


Here is an excellent, excellent website for an economic calendar.
http://www.bloomberg.com/markets/economic-calendar/]Economic

Here is a website for some of the agricultural reports.
http://www.nass.usda.gov/Publications/index.asp]NASS - Publications

This page is where you can sign up to receive emails about the margin change notices for the CME, CBOT, NYMEX and COMEX. http://www.cmegroup.com/tools-information/communications/sub-center.html

You can sign up for ICE margin change notices to be emailed to you here.
https://www.theice.com/Subscription.shtml

Futures and options charts http://futures.tradingcharts.com/]Commodity 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.

Prior day volume and OI are available on the CME daily bulletins. http://www.cmegroup.com/tools-information/build-a-report.html?report=dailybulletin

ICE contracts go to Category=End of Day Report, Report=ICE Futures US Options, then pick product.
https://www.theice.com/marketdata/reports/ReportCenter.shtml

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.

Free seasonal charts http://www.ccstrade.com/futures/seasonal/

A summary of the thread in a Word doc by Iridium. https://futures.io/attachments/122805d1378659415


Last edited by ron99; July 13th, 2014 at 06:49 PM. Reason: Fix mistake
 
  #3 (permalink)
Trading Apprentice
Vancouver, Canada
 
Futures Experience: Intermediate
Platform: TradeStation, Questrade
Favorite Futures: Options
 
Posts: 5 since Jun 2014
Thanks: 0 given, 0 received


I guess the one question I have (that is not easily found anywhere on the web), is one of the points you make in your post: how to find a broker with favorable margin requirements when selling options!

I've been selling options for years but have always needed to maintain pretty high margin excess to avoid margin calls. I'd love to see a list of which brokers are the best in providing traders more margin room!

To make things worse, I'm Canadian so we have far fewer options than Americans. I've been with Questrade for years, but have recently moved to Interactive Brokers. Unfortunately, we are NOT allowed to use Portfolio Margin and are restricted to Reg-T accounts (I'm assuming Portfolio Margin is better for selling options?)

Any info around this area would be highly appreciated. For the time being, I'm going to keep using IB and keeping a careful eye on my Liquidity Excess.

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  #4 (permalink)
Trading for Fun
St Paul, MN, USA
 
Futures Experience: Advanced
Platform: Abacus
Broker/Data: RJO, Interactive Brokers
Favorite Futures: Commodity Futures & Options
 
Posts: 196 since Jan 2014
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Excession View Post

To make things worse, I'm Canadian so we have far fewer options than Americans. I've been with Questrade for years, but have recently moved to Interactive Brokers. Unfortunately, we are NOT allowed to use Portfolio Margin and are restricted to Reg-T accounts (I'm assuming Portfolio Margin is better for selling options?)

The Reg-T and Portfolio margin structures are for equity options.

SPAN (it's an acronym) is for futures options.

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  #5 (permalink)
Trading Apprentice
Zurich
 
Futures Experience: Intermediate
Platform: Amibroker
Favorite Futures: Fesx
 
Posts: 31 since Feb 2011
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Which futures to select for options writing?

Hi all,

I `ve been writing options on equity and stock index futures (european exp.style) for quite some time - and survived despite of some black swans crossing my way. Ron99 mentioned that he doesn`t use indices anymore as underlyings, but other futures like CL for better ROI.

My question, which underlyings (neither equity nor indices) would be rewarding and comfortable for an experienced beginner?

Thanks a lot

Forex37

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  #6 (permalink)
Trading Apprentice
San Francisco
 
Futures Experience: Intermediate
Platform: InteractiveBrokers, ThinkorSwim
Favorite Futures: options
 
Posts: 1 since Jul 2014
Thanks: 3 given, 0 received

When to Exit Clarification

I think there is a small error in the Quick Summary formula or example on when to exit.


Quoting 
When your (CURRENT IM + CURRENT PREMIUM - OPENING PREMIUM) > (3 * OPENING IM), you exit your trade

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 $900 and the premium is higher than $200 then the cash excess is gone and it is time to exit.

Filling in the formula with the exit example yields:

$900 [CURRENT IM] + $200 [CURRENT PREMIUM] - $100 [OPENING PREMIUM] > (3 * $500 [OPENING IM])

$1000 > $1500 ? which is false so the position should not be exited.

Perhaps the formula should be " > (2 * OPENING IM) exit trade" or the example given isn't correct?

Or am I reading something incorrectly?

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  #7 (permalink)
Market Wizard
Cleveland, OH
 
Futures Experience: Advanced
Platform: QST
Broker/Data: QST, DeCarley Trading, Gain
Favorite Futures: Options on Futures
 
Posts: 2,730 since Jul 2011
Thanks: 794 given, 4,779 received


SFbaddog View Post
I think there is a small error in the Quick Summary formula or example on when to exit.



Filling in the formula with the exit example yields:

$900 [CURRENT IM] + $200 [CURRENT PREMIUM] - $100 [OPENING PREMIUM] > (3 * $500 [OPENING IM])

$1000 > $1500 ? which is false so the position should not be exited.

Perhaps the formula should be " > (2 * OPENING IM) exit trade" or the example given isn't correct?

Or am I reading something incorrectly?

The example is wrong. Sorry I didn't check what the other person wrote. I'll fix it. Thanks.

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  #8 (permalink)
Market Wizard
Cleveland, OH
 
Futures Experience: Advanced
Platform: QST
Broker/Data: QST, DeCarley Trading, Gain
Favorite Futures: Options on Futures
 
Posts: 2,730 since Jul 2011
Thanks: 794 given, 4,779 received


Forex37 View Post
Hi all,

I `ve been writing options on equity and stock index futures (european exp.style) for quite some time - and survived despite of some black swans crossing my way. Ron99 mentioned that he doesn`t use indices anymore as underlyings, but other futures like CL for better ROI.

My question, which underlyings (neither equity nor indices) would be rewarding and comfortable for an experienced beginner?

Thanks a lot

Forex37

I still use indices. Their ROI is lower now. So I would not use as many.

It just depends if I can find other things with better ROIs and sufficient volumes or not how much of my portfolio includes indices. But indices always offer the best volume.

CL would be the first choice. Others have some risk but what doesn't? NG, KC, SB, Grains. Metals (GC, SI) have been low ROI but they just lowered margin.

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  #9 (permalink)
Market Wizard
Cleveland, OH
 
Futures Experience: Advanced
Platform: QST
Broker/Data: QST, DeCarley Trading, Gain
Favorite Futures: Options on Futures
 
Posts: 2,730 since Jul 2011
Thanks: 794 given, 4,779 received

For those of you who sold the Aug Milk (DA) 18.75 puts, they are trading at 0.01 now. I traded out of mine and made 8.3% monthly ROI on them.

If your costs aren't too high you may want to consider buying them back at 0.01 instead of waiting 52 more days for expiration. But if you want to ride to expiration that is OK because Aug futures will expire far higher than 18.75.

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  #10 (permalink)
Elite Member
Reno, Nevada
 
Futures Experience: Advanced
Platform: NinjaTrader
Favorite Futures: ZN, ZB, FDAX
 
phantomtrader's Avatar
 
Posts: 158 since May 2011
Thanks: 13 given, 226 received

OTM Options


I like FOTM credit spreads. I signed up at this website a while back and have done well so far. www.myweeklyoptiontrades.com

I'm looking at a few other low risk spread strategies as well to diversify, maybe looking at monthlies as well.

I like the indexes as opposed to stocks. Just doing some testing myself, stocks have more price spikes whereas the indexes seem to have less chance of spiking into the money at expiration. Margin requirements are relatively high, but at least you know your risk upfront. Stops are not practical on options so you really have to rely on good trade management to get yourself out of loser.

Overall though, I like the credit spreads. Have to look at some different indexes too.

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