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Selling Options on Futures?


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Selling Options on Futures?

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  #11 (permalink)
 dutchbookmaker 
NYC
 
 
Posts: 187 since Dec 2010

I don't get involved because in general I think buying options is foolish and selling them is much more like the insurance business than trading from my perspective.
With that said it is really impressive that you navigated the crisis. I might have to look closer into this as you are basically selling insurance to customers that by their nature have to be extremely over insured..especially post crisis.

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  #12 (permalink)
 ron99 
Cleveland, OH
 
Experience: Advanced
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I like to look at my option selling like this. I am selling flood insurance. But I am not selling insurance to people next to the river. I am only selling to people near to the top of the hill. Those that have very little chance of flooding.

The percent of the options that I sold that expired worthless the last couple of years is over 90%.

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  #13 (permalink)
 meyer99 
Charlotte NC
 
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ron99 View Post
I like to look at my option selling like this. I am selling flood insurance. But I am not selling insurance to people next to the river. I am only selling to people near to the top of the hill. Those that have very little chance of flooding.

The percent of the options that I sold that expired worthless the last couple of years is over 90%.

Ron,
Good info. Thank you.
Which broker do you use?
Can you show an example with one of the liquid products? How do you determine how far OTM you sell?
Do you sell systematically or wait for pushes in IV?

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  #14 (permalink)
 RM99 
Austin, TX
 
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ron99 View Post
The book is probably discounted because there aren't many option on futures sellers. But it did get a second edition printing.

TA is used very little for option selling. I never use it.

Options are traded certain times of the day. It varies by commodity. For example the Sugar pit closes at 1:30pm ET. Oil and Gold trade electronically until 5:15pm ET and reopen at 6pm ET. But there is very little trading volume during night time in the US. Most options have moved to electronic trading. But there is pit trading still for all options. Check to see whether TOS is sending the orders to the pit or electronically.

Admittedly, the volume on options is not that great. You just have to keep trying. Certain strike prices have more volume than others. Usually the round numbers. For example in Gold, the $50 increment like 1350 or 1400 trade more than the strikes in between like 1360 or 1365. Check the open interest of the strikes to see where the trading is happening.

Also certain commodities have more volume than others. Obviously corn, oil and gold have a lot of volume. While copper has zero option volume. Medium volume for options is Sugar, Coffee, Silver, Soybeans, Wheat, Nat Gas. Unleaded Gas (RBOB), Heating Oil, Cocoa, and Cotton are on the low side of volume.

Never, ever place a market order on options on commodities. Always limit orders.

You indicated earlier that you usually let the option expire...how exactly does that work?

"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
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  #15 (permalink)
 Ralph07 
London UK
 
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Hello all,

very interesting thread! I am beginning to trade options all together with futures since a few weeks. I've read the following book : Joe Ross - trading optures and futions.

I am also convinced that there is a lot money to do by selling options... I just sold my first last week...

I am ready to share here in this thread and talk about interessant positions...

See ya.

Raphael

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  #16 (permalink)
 ron99 
Cleveland, OH
 
Experience: Advanced
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Sorry but I don't know what IV is.

I mainly use OptionsXpress (OX). I use Open E Cry for certain electronic options like coffee and milk that OX only sends the orders to the pit.

I usually sell options that have <100 days till expiration.

Oil (CL) is one commodity that I sell. I usually try to stay at options that have about a 0.03 Delta or lower. So an Oct 73 put would be the highest I would go for a strike price for Oct puts. This option expires 9/15/11. 48 days. The Initial margin is $1019. The premium is 0.20 or $200.

Is oil going below 73 in the next 48 days? I doubt it. But it doesn't have to go that low to cause you to lose money and bail on the contract. Because if oil were to drop to less than 90 today the premium would rise dramatically (loss to the seller) and the margin would increase. That is why I keep 2/3 of my money in cash to ride out the market going against me.

So 1019 margin, 2038 cash, $200 option premium, minus fees, equals a 6.4% return in 48 days.

The biggest thing about selling options is you are not trying to predict where prices are going. You are trying to predict where they are not going.

So if oil stays flat at 97 for the next 48 days, you make money. If oil falls slowly to 85 you still make money. The risk is a huge change in price in a short period of time. That is why you need plenty of cash to ride out the large price movement. The vast majority of options I sell never go into the money. You just have to have enough cash to hang on.

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  #17 (permalink)
 Lornz 
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gladwell dot com - blowing up

It works until you blow up. Naked selling of options is lunacy in my book....

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  #18 (permalink)
 ron99 
Cleveland, OH
 
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RM99 View Post
You indicated earlier that you usually let the option expire...how exactly does that work?

If you sell an Oct 73 oil put and on the options expiration day of 9/15/11 the Oct oil futures contract settles above 73, the option expires worthless. You don't have to trade out of it. You keep all of the premium you sold it for.

Just like if you sold flood insurance and the person buying it doesn't have a flood before the next payment is due, you keep the premium he paid.

If oil settles below 73 on 9/15 your short put will then turn into a long Oct oil future. Then you will need to trade out of the future. But I have never allowed that to happen.

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  #19 (permalink)
 ron99 
Cleveland, OH
 
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Trading: Options on Futures
 
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Lornz View Post
gladwell dot com - blowing up

It works until you blow up. Naked selling of options is lunacy in my book....

Only if you don't trade smartly.

You don't have to sell naked. You can sell covered options.

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  #20 (permalink)
 RM99 
Austin, TX
 
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ron99 View Post
If you sell an Oct 73 oil put and on the options expiration day of 9/15/11 the Oct oil futures contract settles above 73, the option expires worthless. You don't have to trade out of it. You keep all of the premium you sold it for.

Just like if you sold flood insurance and the person buying it doesn't have a flood before the next payment is due, you keep the premium he paid.

If oil settles below 73 on 9/15 your short put will then turn into a long Oct oil future. Then you will need to trade out of the future. But I have never allowed that to happen.

What if the price of Oct dips below 73 before the expiration (but then rallies to above 73 before expiration) does the buyer have the option of placing you into a long during that point?

"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
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