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
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/]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.
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.
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.
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?
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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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.