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Diversified Option Selling Portfolio
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Diversified Option Selling Portfolio

  #611 (permalink)
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myrrdin View Post
Whereas last year I sold naked ES put options I will return to a more conservative strategy in 2017. Reason is that I expect a more volatile trade under president Trump.

I decided to sell ratio spreads, buying a put 2.5 % below current price, and selling puts 5 % and 7.5 % below current price. I intend to sell options with 90 to 110 DTE.

These spreads can currently be sold for approx. $500.

Differences to Ron’s excellent trading system are:

Ron’s protection works in the beginning of the trade, and, thus, Ron closes his trades when the value of the option has decreased by 50 %. For ratio spreads, the protection works in the second half of the trade, and it is more than a protection. I will get to this point later.

Ron’s system can be set up easily. There are clear rules for entry and exit of a trade. Ratio spreads allow for more flexibility when exiting the trade. But you have to decide.

Independently of the kind of protection I prefer to be closer to the money to own a smaller number of options. Disadvantage is that I will be stopped out more often. Advantage is that the damage in case of a “catastrophe” is smaller. To give you an order of magnitude: For an account of $100,000 Ron will hold more than 50 puts, compared to a maximum of 6-12 puts for the ratio spreads. But there is no free lunch …

As mentioned above, the protection of ratio spreads is strong in the second half of their life time. Thus, I intend to sell 1 lot each week with 90 to 110 DTE. I would like to own permanently ratio spreads just entered and ratio spreads which I already own for a while. The second group has lower risk and even can pay for some of the potential losses. In case one of the ratio spreads expires 2.5 – 10 % below the price where I sold it, the long put contributes essential profits. (But this is not the main target of the concept.)

There are various ways to exit a trade.

To begin with the most annoying one: I exit the trades when the break even at expiry time is reached (entry price minus 10 % minus selling price). This is my stop loss.

For the successful trades, I can exit the trade when the price of the spread is zero. This often happens somewhere around 50 % of DTE. But I also can hold them for longer, wait until a few days before expiration and sell the long put (more aggressive) or the long put and the first short put (less aggressive). And I can wait for the long put to expire in the money and provide some extra profit.

I expect profits to be in the order of magnitude of 20 – 30 % per year, but the prediction is not as easy as with Ron’s concept. The probability of being stopped out is significantly higher, but an extra profit via the long puts is possible.

I hope I could make the concept understandable. In case of any questions, please feel free to ask.

And, as always, I am happy about comments.

Best regards, Myrrdin


First of all, a successful 2017!
I did some homework with your ratio spread on worst trading days in 2015 (2015/08/17 and 2015/12/29). With all my respect I did`t find any additional protection during big drop (please see Exel with 3 spread strategy). Or I have not correctly understood your approach?

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  #612 (permalink)
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uuu1965 View Post
First of all, a successful 2017!
I did some homework with your ratio spread on worst trading days in 2015 (2015/08/17 and 2015/12/29). With all my respect I did`t find any additional protection during big drop (please see Exel with 3 spread strategy). Or I have not correctly understood your approach?

Thanks a lot for your comment and for your detailed study on the strategy. I really appreciate this work.

As I described above ratio spreads have a very limited protection in the beginning. They consist of a covered long put, which gains value, when the underlying moves downwards, and a naked short put. This short put gains value quicker than the covered long put, but there is some protection regarding the value of the spread. Margin is strongly dependend on the short put, and, thus, there is not much protection regarding margin.

It looks different the closer you get to the expiry of the options. A few days before expiry the ratio spread often gains value when the underlying moves downwards. The short put is too far out of the money to be affected.

Thus, it is important for me to hold ratio spreads which are just sold, and ratio spreads, which are mature.

The main advantage of ratio spreads is flexibility. If you want to hold your spreads until a well defined date, I would work with Ron's excellent concept. I give you an example what I mean with flexibility: In August of 2015 the S&P moved down sharply. I was short naked ES puts, and covered them when the S&P crossed the 200 dma. I got out with a small loss. Ratio spreads would have given me the opportunity to buy back one or two of the short options of one or several spreads, and get a more or less aggressive bearish constellation.

In case the concept is still not clear please do not hesitate to ask again.

Best regards, Myrrdin

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  #613 (permalink)
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ron99 View Post
myrrdin, what amount of excess will you hold for your ratio spread?

A good question and not easy to answer.

When selling a ratio spread, the risk is high in the beginning and significantly lower close to expiry. Thus, it makes sense to me to reduce the excess over time. But I am not sure to what degree, as I have to find out how the management of the spreads works in practice. How often I sell parts of a spread to achieve a more aggressive long or short position, and at what time I get out.

I will begin with 6x, and try to find out what value is suited in the long run. As the ES program is only a part of my account I have some flexibility.

Best regards, Myrrdin

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  #614 (permalink)
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After the holidays I hold the following short option position:

LHG C66

I expect to expire the LHG future somewhere between $60 and $65.

The report just before Christmas was bearish, the 3 most recent export reports were the weakest in 2016. Mexican Peso is weak, which makes hogs expensive for Mexicans.

I am looking to sell some LCG puts between 112 and 113 for the LCG, if given an opportunity.

Best regards, Myrrdin

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  #615 (permalink)
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I am currently building up positions of the ratio spreads.

Currently I hold the following strike prices:

+2190 / -2140 / -2080, expiring on March, 31st (2 lots),
+2195 / -2135 / -2080, expiring on April, 21st (1 lot).

Unfortunately, not all weekly options expiring in April are trading at this time of the year. Does someone know about the systematics when the different expiries begin to trade ?

Best regards, Myrrdin

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  #616 (permalink)
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myrrdin View Post
I am currently building up positions of the ratio spreads.

Currently I hold the following strike prices:

+2190 / -2140 / -2080, expiring on March, 31st (2 lots),
+2195 / -2135 / -2080, expiring on April, 21st (1 lot).

Unfortunately, not all weekly options expiring in April are trading at this time of the year. Does someone know about the systematics when the different expiries begin to trade ?

Best regards, Myrrdin


Quoting 
At any given time, four nearest weeks of EW1, EW2, and EW4 (Weeks 1, 2 & 4) and three nearest weeks of EW3 (Week 3) will be listed for trading

E-mini S&P 500 Weekly Options Contract Specs - CME Group

E-mini S&P 500 Weekly Options Calendar - CME Group

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  #617 (permalink)
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It looks like for the time frame we use for ES put option selling (80 - 120 DTE) the following expiries are available:

EW3 (week 3),
EW (end of month),
ES (end of future contract).

Best regards, Myrrdin

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  #618 (permalink)
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myrrdin View Post
It looks like for the time frame we use for ES put option selling (80 - 120 DTE) the following expiries are available:

EW3 (week 3),
EW (end of month),
ES (end of future contract).

Best regards, Myrrdin

Going forward I think the "ES (end of future contract)" are going away and being replaced with the "EW3 (week 3)" options as they roll off.

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Seasonally KCk peaks today. I am selling a KCk7c220c240 spread.

Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).

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  #620 (permalink)
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I am currently holding the following positions:

LHJ C70
LCJ C126
WH C4.3

I expect all options to expire worthless, and intend to take profit at 10 or 20 %. I will not be very patient if one of the options moves against me.

Best regards, Myrrdin

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