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Hi,
Im currently looking at CCK puts with 57 days to expiration, and the delta is -0.152, -0.112, -0.078, -0.053, -0.036, -0.026, -0.012 and so on, and on the calls side it is 0.147, 0.118, 0.096, 0.078, 0.048, 0.037, 0.027. Im using Interactive Brokers. The Call side does seem "deeper", but still this is not as for example grain market during growing season. Is there a reason for this?
Besides, bid/ask spread for example in Calls CCK with 57 days goes like 21 - 23, 16-19, 12-14, 9-12,... I think thats pretty big jumps. Or maybe Im wrong and it is normal? I think I definitely seen a lot more markets with smaller jumps.
Regarding "deepness", I would consider this as normal befaviour. The differencies between puts and calls reflect the interest of the market. You will find this also for options with very high volume, eg. the ES.
bid / ask ist generally rather high at ICE. Market makers might haave an influence, but I do not know about this subject. Additionally, this is certainly influenced by the lower volume.
Hi,
I know this question has been asked a lot, but in case anything has changed in everyone's trading method, what is your current exit strategy in selling options?
I know that Ron's strategy is a famous formula that was introduced to all of us years ago. I simply cannot follow it at the moment cause I (for personal reasons) have to use Interactive Brokers at the moment and SPAN margin doesnt apply here. Also, using this strategy will eventually lead to us having to close at much bigger than x2 losses if we do eventually reach the exit point, am I correct? So the losses are less frequent, but are bigger.
For now Im still using the x2 rule, put simply: if option doubles in value then I either roll or close at least 1/3 of position and gradually all of it,depending on the situation. However I am seeing more and more problems with this:
- The 1st problem is that as I gradually build a position over lets say 10-14 days, I have a different strike prices, not just one strike, therefore some options may double in value (entering very early) and others may be far from it. Im experimenting with using x2 rule for the WHOLE position, but obviously this can have disadvantages as well (for example being in denial of accepting the loss, clining into strikes that should have been closed or rolled).
- The 2nd problem is that I sell options with delta around 4-6, therefore chance of these option doubling in value is a lot higher than options with say 8-9 delta (cause further out of money options more easily rise in value because of increase in volatility). And if Im not mistaken, lets assume I sold an option with delta of 6, it doubles in value and delta now is 9, and with regard to increase in volatility it has become a SAFER option right? (With paper losses though). Of course it probably also became closer to money, thus more dangerous, so it depends on situation.
With that being said, I think I need to think of a better exit strategy. I recently saw my KC calls nearly double in value (only the closest strike) just to lose all the gains, everything happened in matter of 5 days or less. Thankfully I always wait for the opening price of the next day to see if the premium gain is "real" or not, but this just shows me that maybe my exit strategy can be improved a bit.
I do not think that currently is a good time for option selling. Implied volatility (IV) is relatively low for almost all commodities. After taking a short look at MRCI data, only Lean Hogs show an acceptable IV for contracts with 60 or more DTE. I closed my LHJ P64 popsition yesterday with a nice profit, as these options get rather close to expiry date. Currently I do not hold any short option position.
But back to your question:
I usually determine a support / resistance in the underlying (!) on a closing base, where I would buy back the short options. I choose this support / resistance in a way that the value of the option has approximately doubled.
I also quit short option trades in case the basic fundamental idea does not work anymore.
And I exit short option positions, which are rather close to the money, in case the expiry date gets close.
I hope this helps. In case of further questions, please do not hesitate to ask.
Can you please tell me how do you estimate the resistance/support points where options double in value?
In addition to your statement, I do agree that IV across the assets that I usually trade is rather low, but some trades are that Ive entered for a while still seem to be acceptable for me. I do however strongly agree with you, and Im trading with lots of cautios at the moment waiting for better opportunities. This also leads to a question: how do you determine if current IV is the appropriate IV to sell options? For IV I usually look at the recent and historical volatility, do you use anything more advanced?
I make a very rough judgement of a suited sesistance / support level, using a static delta. I so not care if I exit at 2.0 or 1.7 or 2.5, but I like to have a fix exit point. As I usually exit end of day, the exact exit condition is not hit anyway.
I compare different trades - short options, future spreads, outright futures. And take the one that is best suited. In recent months often suture trades had a better relation between risk and profit potential.
In my opinion, it started with short covering due to bullish COT data. Since Friday it helped that the stock market strongly moved upwards, and that it looks like the number of Corona patients does not rise significantly anymore in China.
I did not write anything in this tread recently, and the reason is simple: i did not sell any options to report about. The environment is extremely volatile, and difficult to predict. Thus, I prefer other strategies. See in the commodity section.
Once in a while, the best trade is staying on the side line.
