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Diversified Option Selling Portfolio
Started:September 6th, 2015 (11:22 AM) by myrrdin Views / Replies:26,628 / 589
Last Reply:20 Hours Ago (01:16 PM) Attachments:39

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Diversified Option Selling Portfolio

Old January 4th, 2016, 05:21 PM   #111 (permalink)
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jokertrader View Post
MRCI comes up with recommendations for outrights based on seasonal patterns and also spread recommendations
I have heard their spread recommendations are more accurate or follow fundamental seasonal patterns better

So do u use both to decide on option selling or more the spreads?

For example in 2015, their recommendation was
Buy June Lean Hogs/Sell April Lean Hogs on early Jan and get out mid Feb

How would u use this to sell options?
a) Just sell April calls? This does not seem to work
b) Enter an ATM diagonal to mimic the spread?
c) Enter an OTM diagaonal to mimic the spread

Am i looking at this incorrectly?

Side question: With your MRCI login, can u see all the recommendations for 2015 (past monthly trade ideas?) or only future as they come out

As a basis for option selling I only use the outrights. But, as mentioned several times, a suggestion of MRCI is never sufficient to enter a trade.

Meats are an own story. Whereas for many commodities there is a strong relationship between contracts for different months, this relationship is very weak in the meats. Meat contracts for different months almost move like different commodities. Reason is, that it is difficult to store meat for several months, whereas is easy to store gold, grains or coffee. And you never have two contracts related to the same crop, as in the grains or in the softs.

Currently I see the trade suggestions for entering in January and February, in addition open trades suggested earlier. But I also have access to the seasonals for all contracts and many spreads - but without a trade suggestion.

Best regards, Myrrdin

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Old January 5th, 2016, 05:49 PM   #112 (permalink)
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Looking at corn

Got a trial to Season Algo. Only Corn available for analysis
From what i can see in the charts, looks like Corn increases in price generally until about March and then it falls into mid June
Prices currently seem to be at multi year lows
They say 70- 80% chance that it will rise within next 3 months

Am i reading this correctly?

Regarding volatility I have not checked
Regarding current trend and weather pattern i have not checked

If these all check out, would we consider a put spread
If yes, then where is the short strike and expiration
Just winging it: Maybe April expiration at 30 delta

If general idea is good, then will research more on volatility, expiration and strike

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Old January 6th, 2016, 07:26 AM   #113 (permalink)
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jokertrader View Post
Got a trial to Season Algo. Only Corn available for analysis
From what i can see in the charts, looks like Corn increases in price generally until about March and then it falls into mid June
Prices currently seem to be at multi year lows
They say 70- 80% chance that it will rise within next 3 months

Am i reading this correctly?

Regarding volatility I have not checked
Regarding current trend and weather pattern i have not checked

If these all check out, would we consider a put spread
If yes, then where is the short strike and expiration
Just winging it: Maybe April expiration at 30 delta

If general idea is good, then will research more on volatility, expiration and strike

Some comments on corn:

I do not work with Season Algo, and, thus, cannot comment on your question if you read their information correctly.

According to MRCI data, corn prices will move slightly down in January, up in February, and down in March. It should have moved up in August, October, and December. But moved down in all of these months. It looks like this is not a typical year. In my opinion, it does not make sense to sell options based on seasonals in such years.

There will be the January USDA report on the 12th of the month. This report is well known to produce a significant number of limit moves. To hold short option positions through this report requires deep knowledge of supply and demand, and deep pockets.

There is a lot of corn in the bin. South American crop progresses well, and there is no sign that US farmers will reduce acreage. The only possibility for rising corn prices in the next couple of weeks is weather in South America. In my opinion, prices will grind down slowly for some weeks, if weather in SA does not change significantly.

If you sell the May options, which expire in April, at a Delta of approx. 30 % you sell the 340 strike. This can bring you into the money rather quickly. Have a look at the longterm charts from 2007 onwards, when corn traded at approx. todayís price level. There are several years when prices went downwards for the first months of the year (2007, 2009, 2010, 2015). (In most of the other years after 2007 corn traded in a significantly higher price range.)

Last, but not least: Implied volatility for corn has been rarely lower at this time of the year. And probably will fall further after the report.

There are better trades around. (My current favourite is the LCZ-LCQ spread, which I entered yesterday.)

Best regards, Myrrdin

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Old January 6th, 2016, 08:21 AM   #114 (permalink)
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Live cattle Dec vs August

Just read up that Live cattle usually bottoms in dec and rises through March. For options.. Christmas would have been a good time to sell put spread.. not sure if i am too late..

regarding your spread: Long Dec, Short August i will look at my other book and get back with my analysis.....but wondering why a spread so far out?

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Old January 6th, 2016, 09:09 AM   #115 (permalink)
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Futures Edge on FIO

jokertrader View Post
Just read up that Live cattle usually bottoms in dec and rises through March. For options.. Christmas would have been a good time to sell put spread.. not sure if i am too late..

regarding your spread: Long Dec, Short August i will look at my other book and get back with my analysis.....but wondering why a spread so far out?

ad 1) I entered a long LCM position in December, and added LCM 126 calls later. The futures might go up a little bit further, but in my opinion it is too late to enter short puts. I think about a short call in the LCG or LCJ after a turnaround.

ad 2) Because it works. The trade was successful in 14 of the past 15 years without any significant drawdown. This year I like it especially, as the spread moved down to its lowest values. It has never been below 1 (current value) since 2002. (I did not check older charts.)

Best regards, Myrrdin

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Old January 6th, 2016, 10:26 AM   #116 (permalink)
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myrrdin View Post
Sold two naked option positions today:

KCH C150 (one lot),
NGH C3 (half lot).

Both commodities are in a downtrend, but moved back up in recent days. There is a lot of coffee around, as well as there is a lot of Natural Gas stored in the US.

Traders have to monitor the weather forecasts (Dryness in South America regarding Coffee, and extreme cold in the US regarding Natural Gas).

Best regards, Myrrdin

Bought back NGH C3 with a profit of approx. 35 %.

Still hold the KCH C150.

Best regards, Myrrdin

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Old January 6th, 2016, 11:23 AM   #117 (permalink)
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Just found a publication on corn prices in 2016 by U of IL:

"(U of ILís Dr. Schnitkey on harvest corn prices) History suggests a wide range of possible
prices, with a significant chance of the harvest price being below $3.00. Some farmers may
be considering lowering coverage levels on crop insurance in order to lower premium costs.
This may not be prudent as history suggests there still is a large risk of low prices."

Best regards, Myrrdin

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Old January 7th, 2016, 08:25 AM   #118 (permalink)
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jokertrader View Post
Mrci gives this a 100% win rate

Would u be tempted if u get more premium on a down move?

Since 4th of January (date of your question) the RB contract moved down more than 10 cents (1 cent equals $ 420 for the outright future). In spite of MRCI suggesting a 100 % win rate. I assume that your stop loss would have been hit.

Many of the 100 % win rates work out at the end, but show drawdowns for some years that are not acceptable.

In the case of RB it might work out, but it is hard to find an entry point.

Best regards, Myrrdin

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Old January 7th, 2016, 08:44 AM   #119 (permalink)
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Drawdown may not be acceptable - agree

Especially cannot/should not put stops on spreads.. might take quite a lot of heat agree not worth blindly following MRCI

With this Chinese rout, all energies are in the toilet.. but RB might recover more easily than CL which has such a glut.

On the other hand, when there is blood on the streets and vol is high, good to sell small qty of put spreads and adjust as needed.. of course tough to catch the falling knife to predict the turn. prob best to wait for a signal say on daily to be safe. and with seasonals.. energy prob recover only by late Feb/March

Thanks for your update on Corn. Read some more.. looks like we have more ways to fall with South America weather not showing much issues yet

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Old January 7th, 2016, 09:07 AM   #120 (permalink)
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jokertrader View Post
Especially cannot/should not put stops on spreads.. might take quite a lot of heat agree not worth blindly following MRCI

With this Chinese rout, all energies are in the toilet.. but RB might recover more easily than CL which has such a glut.

On the other hand, when there is blood on the streets and vol is high, good to sell small qty of put spreads and adjust as needed.. of course tough to catch the falling knife to predict the turn. prob best to wait for a signal say on daily to be safe. and with seasonals.. energy prob recover only by late Feb/March

Thanks for your update on Corn. Read some more.. looks like we have more ways to fall with South America weather not showing much issues yet

There is a glut in RB, too. Have a look at yesterdays EIA report. The reason why i think there is a chance that RB prices move up is that cheap gasoline prices will motivate drivers to consume more of it. Additionally, the warm winter in the US makes this easier.

I just entered another seasonal trade, suggested by MRCI for the 19th of January: RBH - CLH (they suggest the July contract, but I prefer the March because of better fills). But be careful - this spread can move strongly.

Best regards, Myrrdin

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