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Diversified Option Selling Portfolio
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Diversified Option Selling Portfolio

  #61 (permalink)
Market Wizard
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Sold a small lot of the CLK P45 at 3.

I might add to the position at lower prices.

The line of 40 $ should hold for the December / January futures.

Best regards, Myrrdin

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  #62 (permalink)
Market Wizard
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I modified the ES put selling program in the following way:

I buy back at 25 % instead of 50 % to reduce fees.

I sell a new (small) position whenever the value of all ES puts has decreased by approx. 10 %. The reason behind is that in this way the size of the position is always 90 to 100 % of the target. Furthermore, with time there will be a larger number of different strike prices and entry / exit dates in the portfolio. Entries and exits are averaged.

I hedge the position from time to time at 50 or 100 % via short outright futures. This is not so much for raising profits, but for a good sleep at night. Currently I am hedged at 50 %, as the resistance at 2040 / 2050 might cause a drawback.

Questions or comments are - as always - highly welcome.

Best regards, Myrrdin

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  #63 (permalink)
Market Wizard
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Rolled the WH C6 to the WH C5.5, taking 61 % profit on the WH C6.

Best regards, Myrrdin

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  #64 (permalink)
Market Wizard
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myrrdin View Post
I modified the ES put selling program in the following way:

I buy back at 25 % instead of 50 % to reduce fees.

But are you lowering your total profit for the year by doing this?

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  #65 (permalink)
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ron99 View Post
But are you lowering your total profit for the year by doing this?

I am not sure, and I would be interested in your advice in this regard.

What I have to consider is that I close trades sidnificantly more often than you do in case the market moves against us. I am out, when the options approximately double in value. This helped me to avoid severe losses in this summer, but of course several times I stepped out of a trade, where it would have been better to stay in the trade. But cost for commission, fee, and slippage rises - I have to pay it also for trades that I close with a loss.

I expect volatily markets for some months - more volatile than in spring. Thus, I might have to exit more often with a loss.

Can you roughly estimate the profitability of the second half of the way (from 50 % to 25 %) compared to the first half (from 100 % to 50 %) ?

I might reconsider this point.

Best regards, Myrrdin

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  #66 (permalink)
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ron99 View Post
But are you lowering your total profit for the year by doing this?

I had a short look at the Greeks. But I am no expert in this field, thus, please correct me if I am wrong.

Theta is the time decay in US$. Theta devided by price is the percentage the option loses value per day. High percentage should yield a good performance, not taking into account margin or price changes. Figures for the ESF:


strike theta price theta/price
1500 0,09 2,7 0,033
1600 0,13 4,5 0,029
1700 0,19 8 0,024

These figures show that strikes further out of the money show a higher time decay. As long as margin is not an essential criterium, it does not make sense to roll to higher strikes.

Deviding theta by margin, yields following result:

1500: 0,14 %
1600: 0,15 %
1700 0,16 %

There would be an advantage in exiting earlier and rolling to a closer strike, but this advantage would be small, and would partially be eaten up by commission, fees and slippage.

Any comment regarding this study is highly welcome.

Best regards, Myrrdin

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  #67 (permalink)
Market Wizard
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Something to consider is that as options decay, the volatility tends to trend upwards. Hence theta gains are partially offset by Vega losses. (I believe the theorists call this the second order greek "Veta"). I think you will find that this phenonem will be higher the further out of the money you go, as not only does the Vol increase, but skew increases as well. Maybe something to consider.

On a different but partially related note I've been watching the ES options recently and am very surprised how negatively correlated volatility and price are. Market rallies and calls go down in value due to the drop in Vega! Very different to many of the energy markets I've traded where they are often positively correlated.

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  #68 (permalink)
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The heat maps I posted also supported what Ron was saying.
I'll try and run some new ones tonite to post here and illustrate.

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  #69 (permalink)
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ron99 View Post
To get to 60% drop, 10% more, you have to wait 24 more days for just 10% more premium. And this was in an upward trending market.

Thanks a lot - this looks interesting. I would like to fully understand this issue, which I consider as essential.

To study why the step from 50 % to 60 % took so long it would help to see the chart of the ES contract at the time of the study. Du you still know the starting date for your study ?

We should make sure that there was no setback of the ES price after day 26, which might have caused the long way from 50 % to 60 %.

Best regards, Myrrdin

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  #70 (permalink)
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myrrdin View Post
Thanks a lot - this looks interesting. I would like to fully understand this issue, which I consider as essential.

To study why the step from 50 % to 60 % took so long it would help to see the chart of the ES contract at the time of the study. Du you still know the starting date for your study ?

We should make sure that there was no setback of the ES price after day 26, which might have caused the long way from 50 % to 60 %.

Best regards, Myrrdin

Each option month was started at about 90 DTE.

I am so sorry but that chart is wrong. I will post a correct chart as soon as I get it made.

EDIT: Amazing how a formula being off by one cell can affect so much of a table.

Here is the corrected table. I fixed the wrong Days Held numbers. I also changed the way I calculated MROI. Before I was using the settlement price on the day the option premium got below the required drop. Now I am using the percent drop. For example, if the starting premium was $100 and I am looking at a 50% drop, if the settlement was $40 I still used $50 to calculate the MROI. The old table used the settlement price.

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The average MROI in the last line of the table are not the MROI you would get if you traded this way. They are just a simple average of each month's MROI.

Because of the timing of the contract, the ESV5 60 and 70% drops hit margin calls before hitting their exit point. If you remove the margin call negative MROIs then the averages for the 60% drop is 7.4% and for the 75% drop is 5.8%.

Interestingly, the ESX5 contract which started on 8/21/15 did not have a margin call. It was close.

I've attached the spreadsheet with all of the data. Check it to make sure I don't have any errors.

Waiting for a 75% drop lowers your MROI. And you definitely do not want to wait till the option expires (MROI 100% column)

Attached Files
Register to download File Type: xlsx ES MROI.xlsx (501.8 KB, 7 views)

Last edited by ron99; October 22nd, 2015 at 10:15 PM.
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