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Diversified Option Selling Portfolio
Started: by myrrdin Views / Replies:28,937 / 620
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Diversified Option Selling Portfolio

  #261 (permalink)
Market Wizard
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Jerard View Post
The're is some worries over increased supply of Live Cattle in July, while demand deemed to be lower. What's your read on the market?

Yes, in my opinion supply will grow. I had the opinion that also demand would grow and cash prices would move upwards strongly until end of June, but cash prices move more or less sideways. Reasons for my opinion of stronger demand and cash prices were holidays early July and improved weather for barbacues.

Cash price yesterday was $ 128, which is more than $ 10 above the June futures and $ 14 above the August futures. This difference is extremely high - according to Hightower the 5 years average is $2.90 for the LCQ .

I still expect the LCQ moving sidewards at least, but I am not so sure anymore about a strong performance. Thus, I liquidated the (in the money) LCQ P120 options at a loss, and sold the LCQ P106. I intend to keep them at least until end of June, when we might reach a maximum.

Best regards, Myrrdin

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  #262 (permalink)
Market Wizard
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ron99 View Post
When I see a market that just was limit down I usually avoid them for a few days till they settle down.

I would agree if I had only liquidated the position. In this case I rolled it out to the LCQ P106, to liquidate the in the money puts. These LCQ P106 profited from the high volatility, whereas I had to pay up for buying back.

Best regards, Myrrdin

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  #263 (permalink)
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Some questions that have been bothering me


I've been following your thread quite actively and selling options to some extent as well, but haven't come around to write here before. I have mainly focused on the ES future options, but as diversification is almost the only holy grail in the investing business I have been interested for a long time to have a more diversified option selling portfolio. Regarding that I have a couple of questions that have been bothering me for some time now:

1) What I like about option selling is the fact that time (theta) is on your side and the that you can go out to levels that are very unlikely to be reached (low delta), which makes the short term price action and entry much less relevant. But it seems to me that if you exit the trades at double the entry price then you allow for very little moves against you. If I understand correctly then:
Example1: GC Aug 1220 Put with delta 10 and price 2.1 would allow only ca. 1.6% (!) move in the underlying (21/1284) to force you out.
Example2: LH Aug 96 Call with delta 13 and price 0.4 would allow only ca. 3.4% increase in the underlying (3/88.1) before forcing an exit. And this is rather conservative assumption as it doesn't take into account the rising delta during the adverse moves.

So the questions around that are:
  • How long do you usually stay in the trades? Does time decay and volatility play a big role in your trading strategy?
  • How do you use seasonals and other macro/fundamental analysis in your trading? (right now it seems to me that with so little leeway in the trades it is more important to have a perfect entry rather than correct fundamentals as the market noise can easily take you out even if the seasonal tendency holds)

2) You have mentioned a couple of times in the thread that you have decided not to venture into technical analysis or some other areas as the existing trading style already takes up a lot of time. Regarding that I was wondering how much time do you spend on managing your diversified option selling portfolio? Are you doing it full time?

I'm impressed by your consistency in trading and highly appreciate the level of commitment you put into this thread. Would be very interesting to hear your thoughts about these things.

All the best,
Jürgen

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  #264 (permalink)
Market Wizard
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Bought back the LHQ calls with a loss of approx. 30 %, as the LHQ futures closed above the highs.

Best regards, Myrrdin

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  #265 (permalink)
Market Wizard
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Which products do you trade?

 

ron99 View Post
I'm curious what do you look at in the COT reports. Here is what I look at.
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It's my DCOT report on my tableau graphs page.
https://public.tableau.com/profile/ron.h8870#!/

Please find here the link to the COT data (sorry - in German language):

https://www.wellenreiter-invest.de/cot-daten/weizen

The large speculants are shown with a short position of 50,000 futures, some days ago they were short 80,000 futures. Since 2006 they were short more than 60,000 futures only for a short time in 2015 and in 2016.

Best regards, Myrrdin

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  #266 (permalink)
Market Wizard
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Jyrgen View Post
I've been following your thread quite actively and selling options to some extent as well, but haven't come around to write here before. I have mainly focused on the ES future options, but as diversification is almost the only holy grail in the investing business I have been interested for a long time to have a more diversified option selling portfolio. Regarding that I have a couple of questions that have been bothering me for some time now:

1) What I like about option selling is the fact that time (theta) is on your side and the that you can go out to levels that are very unlikely to be reached (low delta), which makes the short term price action and entry much less relevant. But it seems to me that if you exit the trades at double the entry price then you allow for very little moves against you. If I understand correctly then:
Example1: GC Aug 1220 Put with delta 10 and price 2.1 would allow only ca. 1.6% (!) move in the underlying (21/1284) to force you out.
Example2: LH Aug 96 Call with delta 13 and price 0.4 would allow only ca. 3.4% increase in the underlying (3/88.1) before forcing an exit. And this is rather conservative assumption as it doesn't take into account the rising delta during the adverse moves.

So the questions around that are:
  • How long do you usually stay in the trades? Does time decay and volatility play a big role in your trading strategy?
  • How do you use seasonals and other macro/fundamental analysis in your trading? (right now it seems to me that with so little leeway in the trades it is more important to have a perfect entry rather than correct fundamentals as the market noise can easily take you out even if the seasonal tendency holds)

2) You have mentioned a couple of times in the thread that you have decided not to venture into technical analysis or some other areas as the existing trading style already takes up a lot of time. Regarding that I was wondering how much time do you spend on managing your diversified option selling portfolio? Are you doing it full time?

I'm impressed by your consistency in trading and highly appreciate the level of commitment you put into this thread. Would be very interesting to hear your thoughts about these things.

All the best,
Jürgen

I prefer entering a trade with 100 or 150 days until expiry. This allows for a larger move of the underlying before being stopped out. An exception are the meat options, as here the futures with different expiry date move very independent from each other. Thus, I sometimes choose options with less DTE.

The problem with staying in the trade too long (loss of 300 or 500 or 700 %) is that it takes a large number of winning trades to make up for one loosing trade. I do not get out exactly at 200 % of the entry value, this is a general rule of thumb that I use. I choose a stop loss not too far awav from this value. But it can be much closer. I liquidated the LHQ C90 and 92 options with a loss of approx. 30 % as the futures closed at a new high today (this was my stop).

Yes, you do not have to find a perfect entry, but the entry should be reasonable.

If I am stopped out it is often soon after the entry. After some weeks time value helps.

Some of the winning trades I keep until there are only 10 % left. I case an option looses value very quickly or if fundamentals change significantly, I get out earlier (eg. wheat calls today).

Yes, I use fundamental data for my trades as major reason for entering a trade. I communicate these fundamentals with some of my trade entries. In case of questions regarding a trade or a commodity please ask. I do not elaborate fundamental data myself, but buy it via some reports.
No, I do not trade full time. But I spend some hours per day on trading, some days more, some days less. Main part of of the time I spend studying fundamentals.

I hope I answered all of your questions. If anything is missing please ask.

Best regards, Myrrdin

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  #267 (permalink)
Market Wizard
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Sold a small (= 50 %) lot of KCU C2.

The coffee crop in Brazil shlould be very large even if in some smaller areas there might be frost during the next couple of weeks. The word "frost" has brought the coffee prices to a level which in my opinion is too high.

I placed a further order to add to my position at a higher price.

Best regards, Myrrdin

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  #268 (permalink)
Market Wizard
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Sold a first small lot (50 %) of ESU P1600. Will add at yesterdays lows.

Best regards, Myrrdin

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  #269 (permalink)
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myrrdin View Post
Sold a small (= 50 %) lot of KCU C2.

The coffee crop in Brazil shlould be very large even if in some smaller areas there might be frost during the next couple of weeks. The word "frost" has brought the coffee prices to a level which in my opinion is too high.

I placed a further order to add to my position at a higher price.

Best regards, Myrrdin

This weather forecast is for a city in the main coffee growing area of Brazil. I am not sure if the weather is different for the coffee groves in this area.

https://weather.com/weather/tenday/l/Pocos+de+Caldas+Brazil+BRXX0183

This forecast is for a city further south (colder) at the southern most coffee growing areas.
https://weather.com/weather/tenday/l/Londrina+BRXX0137:1:BR

I'm seeing 40s but no freezing temps.

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  #270 (permalink)
Market Wizard
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ron99 View Post
This weather forecast is for a city in the main coffee growing area of Brazil. I am not sure if the weather is different for the coffee groves in this area.

https://weather.com/weather/tenday/l/Pocos+de+Caldas+Brazil+BRXX0183

This forecast is for a city further south (colder) at the southern most coffee growing areas.
[URL="https://weather.com/weather/tenday/l/Londrina+BRXX0137:1:BR"]https://weather.com/weather/tenday/l/Londrina+BRXX0137:1:BR[/URL

I'm seeing 40s but no freezing temps.

Yes, that is how I see it. Last week there was talk that for a very small coffee growing area in the South (less than 5 % of the area) there could be frost during the weekend. This never materialized, and, as you show, temperatures are far away from freezing temperatures. But the coffee prices remain high ...

Last Thursday I wrote: "Reason for the strong move of coffee prices seems to be talk about frost in Parana next Monday / Tuesday. Major damage seems unlikely as Parana typically produces only 5 % of Brazil coffee. Unless the cold reaches San Paulo or Minas Gerais, the impact should be minimal."

In my opinion a good place to sell small lots of far out of the money options.

Best regards, Myrrdin

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