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Diversified Option Selling Portfolio


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Diversified Option Selling Portfolio

  #1421 (permalink)
 myrrdin 
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rajab View Post
Hey Myrrdin
What would you say the advantages and disadvantages of selling an ATM credit put spread with a DTE of 360days? I have been selling GC credit put spreads and up to couple of weeks a go doing good. But gold dropped for what ever reason and now I am ITM. It moved fast on me. My margin is still about 20% of my account. I am thinking of keeping my position and adding a long dated credit put spread to what I already have.
Thoughts please?

Babak

1. If I do not understand what is going on fundamentally, I quit.
2. In my opinion, margin of 20 % of the account for one trade is far too much.
3. Keep it simple and stupid. I do not like complicated repairs of a trade.

In case I were still convinced that the Gold price would move upwards, I would close the trade and open a new one with margin and risk well suited for my account size.

Best regards, Myrrdin

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  #1422 (permalink)
 
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 SMCJB 
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myrrdin View Post
1. If I do not understand what is going on fundamentally, I quit.
2. In my opinion, margin of 20 % of the account for one trade is far too much.
3. Keep it simple and stupid. I do not like complicated repairs of a trade.

In case I were still convinced that the Gold price would move upwards, I would close the trade and open a new one with margin and risk well suited for my account size.

Know nothing about Gold currently but think that this answer contains excellent advice to everybody.

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  #1423 (permalink)
zxcv64
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I realise Myrrdin has already given an excellent response, but I'd like to chip in.

What would you say the advantages and disadvantages of selling an ATM credit put spread with a DTE of 360days?

360 DTE is way too long - the time decay on the spread will be painfully slow and the trade will move at a snails pace.
I would personally aim at a shorter time period like 90-120 DTE.
It seems that you want to sell an additional long dated P spread to make up for the potential loss on the existing short put spread - be careful with doubling down like this. I have found it better to take the loss and wipe the slate clean, otherwise you will become over-weight in one particular commodity and your overall portfolio risk rises.

I have been selling GC credit put spreads and up to couple of weeks a go doing good. But gold dropped for what ever reason and now I am ITM.


The put credit spreads have been working out well because the seasonals and actual GC movement show bull periods for Dec-Feb. See attached image of GCZ19. The seasonals do not show such a bullish move for the next few weeks/months, so it's best to re-consider the current position on GC.

(I have had similar GC put spread experience from Aug '18 - my earlier posts in this thread list the details.)

Hope that helps.

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  #1424 (permalink)
 myrrdin 
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zxcv64 View Post

360 DTE is way too long - the time decay on the spread will be painfully slow and the trade will move at a snails pace.
I would personally aim at a shorter time period like 90-120 DTE.

There are rare occasions when I sell strangles with 360 DTE. That is when volatility is historically high. The profit comes from a reduction in volatility and not from time decay. The advantage of being 360 DTE is that OTM options with a strike far away from the current price have a significant value. I remember having sold CL strangles successfully some months ago.

But volatility of Gold currently is historically low ...

Best regards, Myrrdin

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  #1425 (permalink)
MGGer
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MGGer View Post
this time acting with shorter DTE worked fine for me: closed 0.95 KCK Puts@profit target, still hold the 0.975 KCK Puts. I would buy the futures and roll them over until the price is back above 1.00 or plus 0.025 in the futures rolled over.

it was quite close, and I was not delivered any coffee bags.

Depending on various sources the cost of production for coffee varies from 1 USD to 1.20 and even up to 1.50 and more. I haven´t got any reliable data for Vietnam, as their production is only slighty up from last year, they hardly send prices down. So with Futures prices at more or less 1 USD I feel quite safe writing KC Puts at different expiries.

For May [email protected] you get about 650 USD, I don´t mind a high delta of about .33 as I it is fine (in the medium run, at least) buying coffee below 1 USD. I suppose it won´t be too long time below 1 USD, and I would write covered calls at one or two strieks above my buying price, once I wuld have been exercised.

Prices have been down to 0.95 lately, late in September 2018. Last time price around that level was in autumn 2013 and it didn´t remain there for longer than a few weeks.

I´d gladly know what anyone thinks about it ...

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  #1426 (permalink)
 myrrdin 
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MGGer View Post
it was quite close, and I was not delivered any coffee bags.

Depending on various sources the cost of production for coffee varies from 1 USD to 1.20 and even up to 1.50 and more. I haven´t got any reliable data for Vietnam, as their production is only slighty up from last year, they hardly send prices down. So with Futures prices at more or less 1 USD I feel quite safe writing KC Puts at different expiries.

For May [email protected] you get about 650 USD, I don´t mind a high delta of about .33 as I it is fine (in the medium run, at least) buying coffee below 1 USD. I suppose it won´t be too long time below 1 USD, and I would write covered calls at one or two strieks above my buying price, once I wuld have been exercised.

Prices have been down to 0.95 lately, late in September 2018. Last time price around that level was in autumn 2013 and it didn´t remain there for longer than a few weeks.

I´d gladly know what anyone thinks about it ...

I sold the KCN P1 options near the lows, and also bought some outright futures. The options to make profit on a more or less sidewards move, the futures for the case that there are severe weather issues in the next couple of months.

Most of the Vietnam coffee is "Robusta", which is mainly used for instant coffee. Most of the coffee produced in Brazil is "Arabica", a higher priced sort. Of course there is some correlation between the prices of the two sorts, but they cannot be compared directly.

Best regards, Myrrdin

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  #1427 (permalink)
 myrrdin 
Linz Austria
 
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I received a question via private message, but decided to make the answer available to everybody in this thread.

Question: "I am considering that above 110 dollars at the expiry on 16 August for lean hogs contract August (LEQ19 ) is a relatively high price (considering the recent level of price and environment). Therefore starting with selling a call vertical option (then going with a quote ratio if my timing was not good i.e. selling a naked call options at 120 later on if needed) seems attractive to me. Do you have an opposite opinion?"

Currently I do not sell any options on HE (not LE, this is Live Cattle). I am sure you have read about the severe problems regarding hogs in China.

In case there is a deal between the US and China, the price of HEQ might go through the roof, and volatility might rise much further. The HEQ contract was above 130 in 2014, when another desease plagued hogs in the US. There are clever people calculating a maximum price, but if there is panic you never know ... I do not intend to sell call options on HE futures in the near future. The time will come when a deal between the US and China has been made.

In case there is no deal between the US and China, the price of HEQ might go down to approx. 70 - thus, I will not sell put options.

Hogs are a typical case for high volatilities, which are tempting. But they are justified.

I am long hogs via the HEV-LEV spread. In my opinion, live cattle are overpriced, and the effect of a deal will be much larger for HE than for LE. In case there is no deal or the deal is postponed too far out, the price of LE will come down further together with the price for HE. Thus, the risk of the spread to me seems to be smaller than for outrights.

I am also thinking about buying a small lot of HEG20 futures, which currently are about 82. I hope for a set-back to enter this trade.

Best regards, Myrrdin

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  #1428 (permalink)
Sagal
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Thanks for your answer myrrdin.
It seems that I am more willing to take risk than you...on lean hogs...I will continue to assess the situation however...on close watch
I do not think a trade deal between China and US will play any role here (on soybeans it is slightly different). What is in play in my opinion is this Swine Fever Virus and already this it the main reason for the current increase in price. Of course this can go on but when searching for opportunities in 4 months from now and not looking to sell at 50% but keeping my short vertical spread up to the expiry date, I will feel more confortable shorting at 110 or slightly higher with expiry dage on 16 August than going long above 90 for the same date.
What I was mentioning for the context is in line with the seasonality and the fact that august 2008 was the last month on a continuous contract for lean hogs above 110 (July 2014 was higher but not August 2014). I recognise that before 2008 it was the rule to have lean hogs around and above 130 in August, but time changes and there is as well a relative overproduction of pork currently that is not going to be reversed soon.
I join a monthly graph from Prorealtime illustrating that part

I recognize that it is this way of thinking that make me lose money on February contract where I couldn't imagine lean hogs below 60 and it went there. I had a bad timing as the month after it went up significantly...

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  #1429 (permalink)
Sagal
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It is correct that I consider as well live cattle price relatively high currently and that they will not be influenced by a trade deal and it is going to be one of my next assessment for August expiry (selling a vertical call option spread).

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  #1430 (permalink)
 myrrdin 
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Sagal View Post
It is correct that I consider as well live cattle price relatively high currently and that they will not be influenced by a trade deal and it is going to be one of my next assessment for August expiry (selling a vertical call option spread).

As mentioned before, I am short Live Cattle via the HEV-LEV spread. some days ago I took profit on some LEM short calls.

Best regards, Myrrdin

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Last Updated on May 26, 2022


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