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Diversified Option Selling Portfolio


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Diversified Option Selling Portfolio

  #1341 (permalink)
 myrrdin 
Linz Austria
 
Experience: Advanced
Platform: TWS
Broker: Interactive Brokers
Trading: Commodities
Posts: 1,938 since Nov 2014
Thanks Given: 3,686
Thanks Received: 2,651


sinpeople View Post
Hi folks,

James Cordier collects premiums by selling options that is far deep out of money guided by the fundamental info. Every trade has only one leg. That's simple.
Carley Garner's method is a little bit complicated. For a bullish setup, she will buy a future contract and at the same time selling a call option slightly above. And at the same time, she will buy a put option below as insurance leg.

Can some one compare these two different styles to list out the pros and cons? Thank you.

Best Regards
David

To compare different trading concepts with options (and to trade these concepts successfully) you have to have a good understanding of the Greeks.

There are numerous books on the market. Books I read regarding options include:

Carley Garner: "Higher Probability Commodity Trading", very easy to follow,
Lawrence McMillan: "Options as a Strategic Investment", more scientific,
James Cordier: "The Complete Guide to Option Selling", limited to option selling.

Best regards, Myrrdin

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  #1342 (permalink)
 myrrdin 
Linz Austria
 
Experience: Advanced
Platform: TWS
Broker: Interactive Brokers
Trading: Commodities
Posts: 1,938 since Nov 2014
Thanks Given: 3,686
Thanks Received: 2,651


sinpeople View Post
Thank you for your sharing.

I also saw the recommended from Carley. Though the cotton trade didn't go idea, she hasn't execuated a stop loss yet. So far the only adjustment is to roller up the insurance leg.

I liquidated this trade very soon after entering it with a loss. There was a limit up move that showed that the fundamentals - in this case the weather - were not as anticipated. As I had no idea when it would start to rain again I quit this trade. In the meantime, there was some rain in the cotton areas, and cotton prices stay in a range for the time being.

I usually do not sell options in a weather market, and this was another good example.

Best regards, Myrrdin

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  #1343 (permalink)
 sinpeople 
Singapore
 
Experience: Beginner
Platform: TDAmeritrade
Trading: Options On Futures
Posts: 44 since Aug 2017
Thanks Given: 4
Thanks Received: 10


Hi,

For the normal position size of 3% of total portfolio, is it 3% of total net liq value (which changes from time to time when market is open) or total cash (which changes only when new position is added)?

Thank you!

Best Regards
David



myrrdin View Post
I trade a diversified option selling portfolio for many years. Different than other concepts to sell options, I strive for diversification (I strive for holding 8 – 15 options), and, thus, spend a lot of time studying fundamentals of various commodities. I do not spend a lot of time optimizing delta or DTE. (But contributions to this topics are highly welcome – I simply do not have enough time.)

Main criteria for the selection of options include:

Fundamental data, eg. Supply & Demand, Seasonals, COT Data.
Days to expiry: 90 – 180
Option price: $200 – $500
Delta: 0.02 – 0.2
Selection of commodities: Mainly Grains & Beans, Energies, Softs, sometimes Metals, Currencies, and Indices (mainly ES puts, selected according to Ron’s strategy, which I adapted to my concept).
Normal position size: 3 % of portfolio. Sometimes I sell double positions (6 % of portfolio), rarely triple positions.

Exit criteria: If profitable, I exit at 10 – 50 % of the entry price. Otherwise, I exit at approx. double the entry price. Usually I choose a chart criteria for the underlying future which is close to this condition (or closer, eg. at 120 % or 150 %). I also exit if fundamentals have changed significantly. After exiting, I sometimes „roll“ the trade to a new option. But only after careful study of the fundamentals.

I am a discretionary trader, and evaluate each trade on its own. Once in a while I go beyond my defined criteria.

Currently I hold the following positions:
LCV P132-P120
LCZ P136
LHZ C74 & C76
CLZ C60-C75
NGZ P2.25
NGZ C4.3

Additionally, I hold future positions in commodities that do not have enough open interest in the options, and spreads. (Currently: RRX, OZ, KWZ-WZ, LHG6-LHZ5, SK6-SX5, MPU,CDU-ADU.) To avoid clump risk, I usually hold 8 – 15 positions, which are (more or less) independent from each other. Usually the share of option positions is larger than currently, but I just liquidated several positions in the grains and in cotton as well as the ES puts.

I would be happy to discuss all issues regarding this strategy, especially interesting options to sell.

Best regards, Myrrdin


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  #1344 (permalink)
 myrrdin 
Linz Austria
 
Experience: Advanced
Platform: TWS
Broker: Interactive Brokers
Trading: Commodities
Posts: 1,938 since Nov 2014
Thanks Given: 3,686
Thanks Received: 2,651


sinpeople View Post
Hi,

For the normal position size of 3% of total portfolio, is it 3% of total net liq value (which changes from time to time when market is open) or total cash (which changes only when new position is added)?

Thank you!

Best Regards
David

Since the writing of this text I further reduced the "Normal Position Size" to 1 - 3 %, and almost eliminated double positions. Overall profits are better now.

I take the total net liq value as a base. The order of magnitude should remain constant, if your trades are small enough and you diversify.

Best regards, Myrrdin

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  #1345 (permalink)
 sinpeople 
Singapore
 
Experience: Beginner
Platform: TDAmeritrade
Trading: Options On Futures
Posts: 44 since Aug 2017
Thanks Given: 4
Thanks Received: 10

Thank you for sharing.

With your normal position 1-3% of total account net liq and about 10 trades to diversify, you are using 10-30% of your total capital.

When will you decide to stop adding new positions in your stragety?


Thanks again. I learnt a lot from your system.


Best Regards
David


myrrdin View Post
Since the writing of this text I further reduced the "Normal Position Size" to 1 - 3 %, and almost eliminated double positions. Overall profits are better now.

I take the total net liq value as a base. The order of magnitude should remain constant, if your trades are small enough and you diversify.

Best regards, Myrrdin


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  #1346 (permalink)
 myrrdin 
Linz Austria
 
Experience: Advanced
Platform: TWS
Broker: Interactive Brokers
Trading: Commodities
Posts: 1,938 since Nov 2014
Thanks Given: 3,686
Thanks Received: 2,651


sinpeople View Post
Thank you for sharing.

With your normal position 1-3% of total account net liq and about 10 trades to diversify, you are using 10-30% of your total capital.

When will you decide to stop adding new positions in your stragety?


Thanks again. I learnt a lot from your system.


Best Regards
David

My risk is 1 - 3 % of total account net liq. Risk is the maximum loss I am willing to accept. (In real trading it might be a bit more as I usually only exit end of day.)

I use approx. 50 - 60 % of net liq as margin. Beyond this value, I do not enter new trades without closing an old one.

If diversification is very good, I am willing to accept 60 % (or perhaps 70 %). Otherwise it will stay at 50 %.

Currently I hold 11 trades, and I use 55 % of net liq as margin.

Best regards, Myrrdin

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  #1347 (permalink)
 sinpeople 
Singapore
 
Experience: Beginner
Platform: TDAmeritrade
Trading: Options On Futures
Posts: 44 since Aug 2017
Thanks Given: 4
Thanks Received: 10

Thanks for sharing. Your risk is 1-3% of total account net liq. Is this risk the "Initial Margin" for this trade, or it is something else?

Normally I use 50% percent of net liq as stop sign. If only 1 trade in one future product, then the sum of all Initial margin divided by total net liq is this percentage. The margin of two legs of strangle will cancel each other. In that case, the total initial margin divided by total net liq is larger than the actual margin% in use.

Glad to learn something from you!



Best Regards
David



myrrdin View Post
My risk is 1 - 3 % of total account net liq. Risk is the maximum loss I am willing to accept. (In real trading it might be a bit more as I usually only exit end of day.)

I use approx. 50 - 60 % of net liq as margin. Beyond this value, I do not enter new trades without closing an old one.

If diversification is very good, I am willing to accept 60 % (or perhaps 70 %). Otherwise it will stay at 50 %.

Currently I hold 11 trades, and I use 55 % of net liq as margin.

Best regards, Myrrdin


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  #1348 (permalink)
 myrrdin 
Linz Austria
 
Experience: Advanced
Platform: TWS
Broker: Interactive Brokers
Trading: Commodities
Posts: 1,938 since Nov 2014
Thanks Given: 3,686
Thanks Received: 2,651


sinpeople View Post
Thanks for sharing. Your risk is 1-3% of total account net liq. Is this risk the "Initial Margin" for this trade, or it is something else?

Normally I use 50% percent of net liq as stop sign. If only 1 trade in one future product, then the sum of all Initial margin divided by total net liq is this percentage. The margin of two legs of strangle will cancel each other. In that case, the total initial margin divided by total net liq is larger than the actual margin% in use.

Glad to learn something from you!



Best Regards
David


Risk is the maximum loss I am willing to accept.

Example: Account size is USD 100,000, max. risk is 1 % or USD 1000. I buy two corn futures at 3.60. For the corn future, 1 Cent corresponds to USD 50. Thus, I have to exit at 3.50 .

In my risk calculation margin is not included.

Best regards, Myrrdin

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  #1349 (permalink)
 sinpeople 
Singapore
 
Experience: Beginner
Platform: TDAmeritrade
Trading: Options On Futures
Posts: 44 since Aug 2017
Thanks Given: 4
Thanks Received: 10

Thanks for the clarification. However, still something not clear.

I am more on the Options side. I understand the part that you exit each position with a loss when the loss is accumulated to 1-3% of the total net liq. How do you determine how many naked short option contracts you are going to open when you enter a trade?


Best Regards
David


myrrdin View Post
Risk is the maximum loss I am willing to accept.

Example: Account size is USD 100,000, max. risk is 1 % or USD 1000. I buy two corn futures at 3.60. For the corn future, 1 Cent corresponds to USD 50. Thus, I have to exit at 3.50 .

In my risk calculation margin is not included.

Best regards, Myrrdin


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  #1350 (permalink)
 myrrdin 
Linz Austria
 
Experience: Advanced
Platform: TWS
Broker: Interactive Brokers
Trading: Commodities
Posts: 1,938 since Nov 2014
Thanks Given: 3,686
Thanks Received: 2,651



sinpeople View Post
Thanks for the clarification. However, still something not clear.

I am more on the Options side. I understand the part that you exit each position with a loss when the loss is accumulated to 1-3% of the total net liq. How do you determine how many naked short option contracts you are going to open when you enter a trade?


Best Regards
David

The number of short options depends on the risk in USD (eg. 1 % of account value) and the amount of loss I am willing to accept per option, which again depends on entry price and stop loss.


Example:
Account size is USD 100,000, max. risk is 1 % or USD 1000.
I intend to sell corn calls for $ 400 per option. I intend to buy them back at a price of $ 600 (stop loss). The risk is $ 200 per option. Thus, I can sell 5 of these corn options. (Or, if I am careful and consider that I will buy back end of day at a higher price, I will sell 3 or 4 corn options.)


I hope I could make it clear. Otherwise please ask again.

Best regards, Myrrdin

PS: Instead of writing "Thank you" please use the "Thanks"-Button.

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Last Updated on May 26, 2022


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