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So i'm familiarizing myself with the process of option selling on the zaner360 demo. I understand mostly everything except a few things:
1. When I select a specific option i'm looking to sell, how do I know how much the margin will increase by when things either go my way or the opposite way? and how do i calculate it. I understand the further out of the money (low delta) the more prone the margin is to volatility? Also what if the price goes against me (but doesnt hit the strike price), how do i calculate how much maximum Margin I would need in excess. A typical method is x4 IM. However, is it possible the IM can go more than x4? Also in the Zaner360 is there a way to calculate this quicker. Also will the increase of margin be different, if I have a covered spread (a buy cover) also placed with my sell option.
2. In the margin calculator, I see initial margin and maintenance margin, what's the difference? And I see various risk margin etc, when a trade is placed in the portfolio summary menu, what do they relate to? and what is the most important factor I should concentrate on with the various margins.
3. As I intend to get decent commission rates, what are the pro/con of really far out of the money options? The initial problem I noticed, when selling such a far out of the money PUT OPTION, I try looking to BUY a PUT (covered buy) for a slightly reduced lower price than my Sell, however, there isn't a lower ASK price available than my buy price, due to being so far out of the money. It is at the stage where the buy ASK can't go any more down, so some of these have to be sold as NAKED. However, the advantage of these options are the ones I've highlighted, it's VERY much unlikely for the price to hit the strike price at my DTE. Sitting there for hours I've seen some good such opportunities by going to various markets, different DTE's, and strike prices, highlighting the likelihood's and price movements historically. (fundamental analysis is my next stage before I select a candidate). With this strategy, i've noticed you require a lot of capital for risk protection, hence may seem like small gains (larger number of contracts so more fees), but if the likelihood of successful trades is high, that doesn't matter.
4. I've manually been looking at previous price movements of markets, say, my question is (EXAMPLE), "Historically, how many times has Gold dropped by 300 dollars or more within a 2 month period". I download charts of prev. 15 years, and manually right down each time the price lowers rapidly within a month and mark the dollars. However, this can be quite time-consuming. Do MRCI/SeasonALGO allow such analysis based on my specific requirements?
A lot to read, thanks for any replies in advance.
Can you help answer these questions from other members on NexusFi?
I have a different approach regarding margin and other Topics you mention, and, thus, never came across some of your questions. I will explain how I proceed.
I have a diversified portfolio. Diversified regarding commodities, and instruments (outright futures, futures and options spreads, short options, in rare cases long options). I put a lot of emphasis on a balanced portfolio (eg. a balance between positions that are correlated with the USD and positions, which are negatively correlated with the USD). Thus, considerations regarding margin are not as important for me as for others who have an account with only short ES puts.
My risk / margin management mainly consists of two components: Keep margin in the order of magnitude of 50 % of the account value, and keep risk per position below 3 % of the account value. (And balancing the account, as mentioned before.)
Initial margin is the margin you have to provide at the beginning of your trade. In case the trade goes against you maintenance margin is applied.
Ron has done excellent studies on margin, and will be able to give more detailed answers to your questions than myself.
The advantage of FOTM options obviously is that the probability of getting in the money is close to zero, and that their value decreases faster if the trade goes in your direction. Disadvantages are, that in case of rising volatility their value usually grows faster than for OTM or ATM options, that they use more margin per premium, and that fees are higher. I prefer selling with a premium in the range of 200 to 400 USD.
Please be sure to sell options (or watch bid / ask) only at the main trading hours (for the ES 3.30 pm until 10 pm central European Time). AT other times, fills can be bad, and bid / ask wide.
MRCI does not have a feature to answer your question. You could use the Trade Navigator (or other chart software) to solve this problem.
1. There is no answer for this question because there are so many variables into how margin is calculated. There is no way to know how much margin will increase. Yes covered spreads margin will move less because there is limited risk. 4xIM is too low unless you are specifically doing the ES spread trade I am doing now. Especially in commodities other than ES.
2. Initial margin is how much you need in your account to add new positions. Maintenance margin is the amount needed in your account when calculating if you are on margin call (maintenance margin is higher than your account balance.
Thank you Myrrdin and Ron for your insightful replies.
Myrrdin, when you said the trade goes against me, the maintenance margin is applied. Is that the maximum my margin will increase by? (what the maintenance margin is showing).
Ron, when you traded commodities FAR out of the money, what IM X did you keep excess? Somewhere I read it was IM x 6. Was that the case?
Initial margin is the margin you have to hold in your account if you are selling the option today.
Maintenance margin is the margin that will be applied today, if you have sold the option some time ago, and is has risen in value since.
Maintenance margin will grow significantly in case the trade goes against you. This is why Ron is absolutely correct in holding IM x 4 or IM x 6 for his ES puts trades.
Thanks guys for the replies. I have 2 things bugging me:
1. DELTA is how much the option price moves according to the movement of the underlying. This means a LOWER delta (further out of the money) it’s option price would move slower than a higher delta (closer to the money). So i don’t get the conflicting information i’m getting... I have been told further out the money is more volatile to price movement. Isn’t that going against the basic meaning of what Delta is in the first place! Shouldn’t option price of further out the money be less volatile to the underlying. (Move slower than a higher delta when underlying future moves drastically).
2. When you have sold an option. And looking to do an early buy back for profit. On zaner360, you click CLOSE market position. But what price will it close at? As you are BUYING the option now instead of selling, the ask price is being used now instead of the bid? Is that correct. Also when you mention you buy back when 50% of option value has dropped, are you talking about the price that you sold the option price at? Because to me it feels that would make no sense, because you aren’t selling at the BID price you sold at, you have to follow the ASK price as that will usually be higher than your original BID price you sold at. So it would have to move more than 50% to get double premium (excluding costs).
3. Is there a calculator to convert option price (of any futures markets), to USD price. I know S and P 500 mini is multiplication of 50. But I get confused with the others.
4. What sort or commodities exit strategy do you follow? (And when you talk about example exiting at 400%, again is that option value at bid price or ask price. As buying back will always be at the ask price? .. connects to question above).
Hope that makes sense. Thanks. I’m looking to start placing trades but want to be precise on a lot of matters, so thought i’d ask these questions beforehand!
1. You are correct if you compare selling 10 options with a small delta and 10 options with a large delta. In this case, options with a large delta move faster with the underlying (and receive a higher premium). But often you look at selling several options with a premium of eg. 2 % of the account. In this case, the larger number of options with a low delta often moves quicker, as they react stronger to a change in volatility.
2. You should always trade options using a limit order. I usually place this order between bid and ask. Often you get filled in the middle, sometimes you have to move a bid to your disadvantage.
3. You find this information at the sites of the exchanges under "contract specification". (You should have a look at contract specifications anyway.)
4. You find my exit strategies in detail in this thread.
1. It is important that you fully understand what you are doing. It does not make sense to enter trades because tastytrade or someone else suggests to do so.
2. You might want to read through Ron's thread "Selling options on Futures" and my thread "Diversified Option Selling Portfolio". You will find many ideas why short option trades are successful or not. After doing so, please feel free to ask all remaining questions.
