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Selling Options on Futures?

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  #1 (permalink)
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I have been selling options on futures for years. But it is rare to find others doing it. I was wondering if there are others here doing it.

I have been doing it for 5 years. Learned it from James Cordier's book.

I have sold energy, grain, softs and metal options. Far out of the money. Usually less than 90 days from expiration.

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  #3 (permalink)
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I guess I am on a deserted island. Anybody know a place that discusses selling options on futures?

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  #4 (permalink)
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@ron99, I know there are stocks options traders here, but maybe not a lot of futures options traders. I tried myself, but found that a more scary and less liquid than stocks options.
But if you start to talk about how you trade them, you may find people interested in it .

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I sometimes buy futures options....

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ron99 View Post
I have been selling options on futures for years. But it is rare to find others doing it. I was wondering if there are others here doing it.

I have been doing it for 5 years. Learned it from James Cordier's book.

I have sold energy, grain, softs and metal options. Far out of the money. Usually less than 90 days from expiration.

I trade options very actively. How have you performed?

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I've been reading the book. There's a new edition out which sells heavily discounted on book resellers. Don't know
if that's a good sign or not. But the book is a nice read. I'd already been shorting puts on stocks for a while, so not much new to me except
it seems some fundamentals is involved in predicting commodities price range according to the book. Or should I just stick to TA.

Ron, I was trying to do some demo futures option trades, but ThinkOrSwim usually says "not traded". Are there only certain times one can buy or short options on futures?

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  #8 (permalink)
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Arpeggi View Post
I trade options very actively. How have you performed?

I was up 48% in 2010. I am up 78% in 2011. Probably 60% of my gain is buying options and 40% is selling options.

Selling options is a safer and more consistent gain. Buying options for me is riskier, but there is potential for more gain.

None of my option trading is day trading. When I sell options I usually keep them to expiration.

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Cloudy View Post
I've been reading the book. There's a new edition out which sells heavily discounted on book resellers. Don't know
if that's a good sign or not. But the book is a nice read. I'd already been shorting puts on stocks for a while, so not much new to me except
it seems some fundamentals is involved in predicting commodities price range according to the book. Or should I just stick to TA.

Ron, I was trying to do some demo futures option trades, but ThinkOrSwim usually says "not traded". Are there only certain times one can buy or short options on futures?

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.

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Thanks for the info about which commodities have more option volume Ron. Yes, I was talking about the 2nd edition book. I ordered a discounted copy of it too.

Very nice profit stats on your trading. I wish I could say similar on my trading options on equities for the last three years..(mostly selling puts)

I'll continue to read the book and check with TOS about times commodities options are available to sell or buy.

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  #11 (permalink)
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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)
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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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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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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?

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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)
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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)
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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)
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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)
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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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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?

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  #21 (permalink)
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RM99 View Post
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?

Yes. The buyer of the option is exercising the option.

I haven't had an option exercised since 2002. I sold 4000+ options last year for myself.

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I'm very green when it comes to options, so bear with me.

In the "covered" scenario, you enter a position (long or short) in the underlying month and sell a call/put in that same month? Would that be correct?

That way, if the price of crude went up (above strike) and the option was called, you lose money on the option, but make money on your long position.

Reverse for a short position (if the price dips below strike, and is exercised, you lose money on the option, but make money on the short contract position)

Is that accurate?

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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%.

Hi Ron:

Thanks for starting this thread. I sell options in volume on futures. I have some excellent months but one bad month can wipe out the good ones and more. You say u sell OTM far, well, may be I am bit greedy since I sell them not too far and expiring in 30 days, so the delta is high and can explode with the High volatility on Ags, FX, silver...

If you sell far out of the money, how do u end up with high ROI? Controlling risk and adjusting positions on days where euro ranging 200 pips can be difficult. Add to that they are traded 3 sessions and each session has its trend, I end up with hundreds of dollars on commissions on some days.

Well, would like to know more how you control risk, do u use tools like OV?

Hope all is well in OH.


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  #24 (permalink)
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Another point is that I am usually in at least 5 or more commodities. I also try to sell calls in some commodities and sell puts in others. If all of the markets were to move in the same direction then you aren't losing money on every position.

In flat market I will sell both puts and calls in the same commodity, a strangle. Profits on those are much better because margin is less for a strangle than if you held the positions separately. Sometimes it allows you to put one side of the strangle on for very little or free.

Right now if you have on a Sep 1800 Gold call, you can add a 1350 put for $57 of additional margin. Whereas a 1350 put by itself is 385 margin.

You must also watch seasonal tendencies of markets. Gold tends to increase in the fall, so I usually don't sell gold calls for the fall. Oil usually goes up in the spring.

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RM99 View Post
I'm very green when it comes to options, so bear with me.

In the "covered" scenario, you enter a position (long or short) in the underlying month and sell a call/put in that same month? Would that be correct?

That way, if the price of crude went up (above strike) and the option was called, you lose money on the option, but make money on your long position.

Reverse for a short position (if the price dips below strike, and is exercised, you lose money on the option, but make money on the short contract position)

Is that accurate?

If you sold a Oct 73 oil put and then bought a lower strike like 70 put , that is a covered put. The 73 yesterday settled at .18 and the 70 at .11. So .07 or $70 is the max profit minus fees. Your maximum risk is 73-70 or 3,000 minus $70 = $2930 vs almost unlimited on the 73 naked.

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  #26 (permalink)
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Hi Sam,

sam1197 View Post
I have some excellent months but one bad month can wipe out the good ones and more.

Been there done that. But a lot less lately than when I started.


sam1197 View Post
You say u sell OTM far, well, may be I am bit greedy since I sell them not too far and expiring in 30 days, so the delta is high and can explode with the High volatility on Ags, FX, silver...

If you sell far out of the money, how do u end up with high ROI? Controlling risk and adjusting positions on days where euro ranging 200 pips can be difficult. Add to that they are traded 3 sessions and each session has its trend, I end up with hundreds of dollars on commissions on some days.

Well, would like to know more how you control risk, do u use tools like OV?

Hope all is well in OH.


You get the high ROI because the margin on the far OTM options is much lower than closer to ITM options. And after you put them on the closer they get to expiration the margin drops further so you can add more positions.

I mostly put on positions and leave them on. I never daily adjust them. That is what the excess cash is for.

One risk control I use is to stay away from commodities that are currently volatile. Like grains right now. But I will sell options in grains in the northern winter. But mostly it is staying far OTM.

What is OV?

Send some cool Canadian air down here. We're baking.

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ron99 View Post
If you sold a Oct 73 oil put and then bought a lower strike like 70 put , that is a covered put. The 73 yesterday settled at .18 and the 70 at .11. So .07 or $70 is the max profit minus fees. Your maximum risk is 73-70 or 3,000 minus $70 = $2930 vs almost unlimited on the 73 naked.

So your maximum upside for a covered transaction is on the order of $60 and the maximum downside is on the order of $2930?

That means you'd have to have an expectancy of better than 98%?

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  #28 (permalink)
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RM99 View Post
So your maximum upside for a covered transaction is on the order of $60 and the maximum downside is on the order of $2930?

That means you'd have to have an expectancy of better than 98%?

Since I never hit the maximum downside then it would be a lower number than that. I trade out of a long position before I would let it go to maximum loss.

How many times in history has oil dropped more than $27 in 48 days? And if it is doing that, then you get out long before it drops that much.

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I have never sold options on futures myself, but there's a professional trader named Max Ansbacher who used to sell options on the S&P in a managed account / hedge fund type of vehicle.I'm not sure if he's still managing money. If I recall correctly, he would sell OTM puts and calls, taking a directional bias based on his analysis of the market. He would usually sell them with 5-6 weeks left to go, right before the time decay really starts kicks in. He would ride them all the way down to expiration. I know he's written books about this many years ago (20-30 years ago).

The returns I remember from his program were steady but he got nailed a couple of times for bigger losses (in the area of 10% to 20% in a single month). Like I said I don't know whether he's still managing money or whether he got blown out but he had been selling options for many, many years.

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  #30 (permalink)
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The margin for a 1000 Sep ES put is $624. Yesterday's settlement was 1.90 or $95. That's a ROI of 4.8%.

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ron99 View Post
Only if you don't trade smartly.

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

I don't mean to critique your trading, my statement was more general. There might be a lot of beginning (options) traders reading this, and they might be enticed to sell options. After some success they think they have it down and before they know it, the bank forecloses on them....

Your example of a naked short put on CL is quite hazardous. The markets are quite shaky now, and CL might take a massive dive. The limited upside, and unlimited downside, is not appealing to me. I've actually made some money purchasing such options, so it's not something you do without a solid approach. You can easily have a win rate > 90%, only to blow up...

Again, I don't mean to be critical of your trading, you seem to be doing quite well. But selling options, aside from being a part of a sound strategy, is something to be treated with respect...

That being said, I welcome more posts about options on this board. They should be a part of every serious trader's arsenal!

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  #32 (permalink)
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Oh I agree that options are not easy money. You have to be careful. I'm sorry if I wasn't strong enough in my posts about being careful.

Got a few of the dreaded margin calls many years ago. Not fun.

That's the main reason why I have been sitting on my hands the last two weeks waiting for the increase in the debt limit. Definitely no oil puts and no metal calls.

Actually if I was smart I would have bought Gold calls at the start of this month. You had to figure they would go down to the last minute and that gold would be rising the whole time.

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I've been trying to trade short puts on various stocks for the last three years. Needless to say, it's very hazardous. Even if the short put makes it to expiration and it's successful in that it's in the money when the option goes to zero(or close enough), it's not really worth the roller coaster emotions of the dips and gains into profitability or into massive drawdown. And if you do a basket of them, the losers most always outweigh the winners. Perhaps trading this way on equities it's better to take partial profits on every major gain then set a stop to p/l breakeven. Then repeat..often. But being positional any gap down can always run the option stop into massive drawdown. Stocks can recover, maybe after years.. Selling options, if by expiration it's a massive loser, can not recover.

That said, selling options on futures with a way far off strike point I'm so far open minded to, if the risk can be managed successfully and if it's easier to manage than short puts on stocks. Here, I did a ThinkOrSwim "ondemand" historical trade on a short put on May 31st on Soybeans, strike point 1240 on a OCT 11 Short put.

As you can see on the 1st .jpg , /ZS had dipped to 1290, resistance level from the previous May low, but it successfully bounced off. So for two weeks or so it had dipped into negative p/l and immediately after the putting the trade on. (What would the stop be in this "heat"?) So some basic TA seemed to apply. Since the beginning of the year soybeans had entered the 1250 to 1400 range and tapped the 1400 level about 5 times. Last year, soybeans was in the 900 to 1200 range in general. So the shift up to this year's range is more due to fundamental or seasonal reasons? The 2nd .jpg shows /ZSX1 currently in a profit (Jul 28th) in the +1 day after expiration analysis graph on TOS. The 3rd .jpg shows where the profit area of the short put option lies. You can see how price has to be in between to the two yellow lines , and the strike price level at 1240. By expiration on Oct. 21th ,2011, if price has not dipped below 1240, the odds of a fully profitable trade are much higher. The "margin" required by TOS for selling 10 contracts of /ZS was about $5k.

Unfortunately I asked ThinkOrSwim support about their offering of selling options on futures and it turns out TOS only offers options on the following futures: /6E, /ZC, /ZS, /ZW, /NQ, /ES, /CL, /NG
So Ron99, optionsexpress has a much wider offering of options on futures? Thanks.

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  #34 (permalink)
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Hi Cloudy,
Yes, optionsXpress offers options on just about all commodities.

Beans are higher this year because of fundamentals. Corn taking bean acres. Poor weather delayed planting. Flooding wiped out some acres.

Are you sure you are talking about an Oct 1240 put and not a Nov 1240 put? Nov options expire on Oct 21st.

Assuming you mean Nov puts, you are too close to being ITM. Way too much risk. I have the Delta at .1712. It is asking for trouble to be that close. I like to trade options with a delta less than .0400, which for Nov puts is 1120 or less.

I don't understand this statement "The 3rd .jpg shows where the profit area of the short put option lies. You can see how price has to be in between to the two yellow lines". Why does the price have to be in between two lines? If the futures price is above 1240 you profit fully.

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Thanks Ron99.

I'm not sure. I usually go by what TOS lists in option chains for equities. Maybe it's different for futures options, or something I don't know? I posted the options chains TOS lists for /ZS.
First .jpg shows it only lists OCT11 and only OCT11, APR12, and JUN13 are tradeable. So not much selection there even for one of the few futures TOS has options for.

Then 2nd and 3rd .jpg shows options available for /ZS OCT11. As you can see there are gaps where no bid or ask price is listed. So on 3rd .jpg options are shown with delta less than |-.04| ; Even more dearth of bids and asks. I'll try another option with delta less than .04 Maybe TOS is not going to work for options on futures?

4th .jpg; I re-edited to show the 3rd .jpg from last post. What I mean about the two yellow lines is that it shows the profit area progressing day by day as the option expires. So depending on price, there are times where the option could be not profitable or profitable on a certain day. It's always profitable if it stays above the lower yellow line. By expiration, the bottom yellow line intersects with the 1240 level.

Thanks for the interesting info about the fundamentals of beans of the past year!

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1st jpg. Yes those are the Nov options. I have no idea why TOS calls them Oct. Oct options are different.

You reminded me why I didn't trade at TOS. Their option program is very poor.

2nd jpg. Those missing bids and asks are well in the money calls. Nobody wants to trade them.

3rd jpg Yes when you get to a .01 and below delta the bids disappear. There is just a narrow band where I trade. Look at Gold or oil. there is more volume there. Beans quit trading at 2:15pm ET.

4th jpg The price of a Nov 1240 on 5/31 was 32.50. It was only losing money for five days the end of June. Today's price is 13.875. The bottom yellow line is not quite accurate. Option settlement depends on the futures, volatility, and days to expiration. It's not a straight line or even a predictable line because volatility can change the relation of the option premium vs the futures price.

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Just a suggestion...

The ABCs Of Option Volatility

Suggested reading:


The "bible" on vol:

Option Volatility & Pric​ing
by Sheldon Natenberg (Hardcover)

The best contemporary book on vol:

The Volatility Edge in Options Trading
by Jeffrey Augen (Hardcover)

The best contemporary book on options trading:

Options Trading: The Hidden Reality
by Charles M Cottle (Hardcover)

The "bible" on options trading:
Options as a Strategic Investment by Lawrence G. McMillan

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Thanks for the comments Ron99 and tigertrader. Yes, I'm aware those chains show far ITM and OTM for both puts and calls. My questioning has been more specific about options on futures especially the way that's being suggested, selling far OTM and whether TOS supports this kind of trading adequately which thanks to answers to my questions, it seems like it doesn't. Most of the time selling options on equities, you can't go that far OTM where the profit vs. risk/margin quickly becomes undesirable. Not to mention buying options or option spreads usually involve strikes close to ATM. But it seems a little different for options on futures. I know the p/l can vary with volatility. My yellow line is a rough guideline I plotted since TOS doesn't generate it on it's own. Still price could dip faster than the rate of decay of the short put option requiring "heat" periods before the option goes to a p/l again. And TOS doesn't seem to be accurate in their graphs on options for futures. (Nov instead of Oct) . I'll have to see if I can practice on OX after signing up.

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I don't sell any ITM options. I don't know why you would.

I wish there were more books about options on futures. 99% of the books are about stock options. Which IMO are very different than options on futures. Or if they do mention options on futures it is a very small part of the book.

I look at my trading this way, if it ain't broke don't fix it.

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Sorry, I meant selling far OTM on both call and put sides. I usually sell puts and forget about thinking about what it's called in reverse on the call side. I fixed that in my post. I don't mean to say your method is broke or anything. In fact I'm very interested. I'm just asking questions about the risk and broker support on this type of trading and it's new to me. Thanks. I just got the free intro package info mail from libertytradinggroup.com. I saw Cordier's video. Interesting. They do a basket of like 7-10 futures options. If one goes south, he mentions selling half of the contracts. The paper says they only now accept 250k starting accounts instead of 100k now. He also mentioned the firm manages 25 mil.

I think I know why my option graph varies from yours now. Looking back, I see my test option was 15.37 while your was 32.50. At 15.37, the option p/l stayed negative for far longer than at 32.50 priced option like you said. Now going back and trying again, I'm seeing the price at 27.75. So I seem to be getting wrong and varying info on options prices anyways on TOS ondemand historical. I'll have to find some other platform tool to find correct and complete historical prices for futures options..
(example: attachment on May31st.)

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Cloudy, this is why forums are so hard to convey your intent. Especially for me who did not do well in English classes growing up but excelled in math classes. I took no offense in what you said. I am glad to answer your questions.

I have an account at Liberty. He is up 152% in 2.5 years in my account.

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ron99 View Post
I don't sell any ITM options. I don't know why you would.

I wish there were more books about options on futures. 99% of the books are about stock options. Which IMO are very different than options on futures. Or if they do mention options on futures it is a very small part of the book.

I look at my trading this way, if it ain't broke don't fix it.


The principles for trading Equity Options and Options on Futures are the same. There may be advantages to trading Futures Options vs. Equity options due to the greater volatility in futures options, i.e., they are more expensive, and therefore might be a "better" sale, but the general principles are the same.

Options Strategy Network - Home

John F. Summa (Author), Jonathan W. Lubow (Author)



IMO, never be satisfied with your trading and never get complacent about your trading. You can always learn more, you can always trade better, and you can always make more money.

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Thanks tigertrader for the links.

"IMO, never be satisfied with your trading and never get complacent about your trading. You can always learn more, you can always trade better, and you can always make more money."

I'm a fundamental seller of options. I have never used TA. I don't see a reason to complicate my trading and make my day harder to earn money I really don't need.

I have made well into 7 figures trading in 13 years. Sold my company 11 years ago. Told my wife a few years ago to quit her job. We built a nice house in the woods in the country. I watch deer and wild turkeys from my desk while trading.

I am more satisfied and less stressed out than anytime in my life.

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Here is the latest from Liberty.

Link

"As far as commodities markets in general, options held through expiration will expire worthless better than 80% of the time. Congressional showdowns don't change that. And default or not, the Brazilian Coffee harvest will continue unabated. In addition, people aren't going to stop drinking coffee (or for that matter, eating cornflakes or filling their cars with gasoline) simply because some politicians in Washington can't agree.

This crisis will end, sooner or later. In the meantime, there are excellent premiums available in these out-of-the-headline markets where price discovery comes primarily from underlying fundamentals. While the commonplace investor worries, you can be taking advantage of them."

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Thanks Ron, no problem. I appreciate the great help and intro to this. I've been reading the book and just starting part ii now. I also have trial access to the liberty newsletter. I'm going to pick out 5-7 futures options shorts and demo it for 2 months. I'm getting the pricing through OX, and then simulating the p/l and expiration graphs on TOS as TOS updates current prices fine, if not historical.

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ron99 View Post
Thanks tigertrader for the links.

"IMO, never be satisfied with your trading and never get complacent about your trading. You can always learn more, you can always trade better, and you can always make more money."

I'm a fundamental seller of options. I have never used TA. I don't see a reason to complicate my trading and make my day harder to earn money I really don't need.

I have made well into 7 figures trading in 13 years. Sold my company 11 years ago. Told my wife a few years ago to quit her job. We built a nice house in the woods in the country. I watch deer and wild turkeys from my desk while trading.

I am more satisfied and less stressed out than anytime in my life.

Now that sounds idyllic! I live in Philly. I watch the crack dealers and hookers, from my desk while trading.

Got room for another desk?

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Lornz View Post
I don't mean to critique your trading, my statement was more general. There might be a lot of beginning (options) traders reading this, and they might be enticed to sell options. After some success they think they have it down and before they know it, the bank forecloses on them....

Your example of a naked short put on CL is quite hazardous. The markets are quite shaky now, and CL might take a massive dive. The limited upside, and unlimited downside, is not appealing to me. I've actually made some money purchasing such options, so it's not something you do without a solid approach. You can easily have a win rate > 90%, only to blow up...

Again, I don't mean to be critical of your trading, you seem to be doing quite well. But selling options, aside from being a part of a sound strategy, is something to be treated with respect...

That being said, I welcome more posts about options on this board. They should be a part of every serious trader's arsenal!

I am VERY new in options, and please correct me if I am wrong, but can't you limit your downside potential via stop losses just like in futures?

That way, isn't the risk of "blowing up" theoretically identical to holding futures position?

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ron99 View Post
You reminded me why I didn't trade at TOS. Their option program is very poor.

Very interesting. I've always heard that TOS was one of the best platforms for trading options, as that is what the platform was originally designed to do.

Mike

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Shirak View Post
I am VERY new in options, and please correct me if I am wrong, but can't you limit your downside potential via stop losses just like in futures?

That way, isn't the risk of "blowing up" theoretically identical to holding futures position?

I don't really have time to go through Options 101 now, but just to clarify:

When you buy an option, you have the right (but not the obligation) to buy (calls) or sell (puts) an instrument at a specific price at a specific time (European) or within a certain period of time (American). You can never lose more than what you paid for the option.

When you sell options, you are on the opposite side. This means that you will have to buy an option (opposite to the one you sold) to offset your position. When you sell an option, you collect premium. Depending on the movement of the underlying, your loss can be limitless (in theory)...

Of course, you can combine buying and selling to limit risk exposure etc... But that is another discussion...

The exchanges has some beginner courses in options, they might be a good place to start:

CBOE - Options Learning Center

Options

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Big Mike View Post
Very interesting. I've always heard that TOS was one of the best platforms for trading options, as that is what the platform was originally designed to do.

Mike

I agree Mike. They are the best at options on equities imo. OX's "Xtend" java gui is still a light year or so behind TOS's platform and features. I was surprised to find out there were hardly any options on futures (besides ES and NQ) supported even though they show them. You just can't trade them. All "red lettered" out. (Even though one can trade any of the regular futures contracts of most any type. Lots of mini futures offered. Just not great for 1min scalping due to filtering and sluggishness, and higher commissions on average.) With TOS now part of TD Ameritrade , I'm not sure if that will help in that area either. If TOS had OX's offerings on options on futures that would be perfect..


(update: I tried to go through each futures listed option chain. Here are the only ones that did not give
a pop-up message box "This instrument is not traded." A little bit different from what's currently on the TOS website..Example, options on NG (natural gas) futures not tradeable):

TOS tradeable options on futures:

/ES E-mini
/NQ mini-Nasdq

/ZB (30yr TBond)
/ZF (5 yr TNote)
/ZN (10 yr TNote)
/ZT (2 yr TNote)

/CL Crude
/ZC Corn
/ZS Soybeans
/ZW Wheat

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ron99 View Post
Only if you don't trade smartly.

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


I would like to hear about some losing trades on selling puts during the crisis and how those went down.

Blowing up is what everyone is going to be afraid of but that is going to largely be from larger funds taking illiquid positions. I assume when things start to look bad you have no trouble getting out?

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  #52 (permalink)
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For learning about options Natenburg's book is more like a novel on volatility that is really hard to put down than a boring ass trading book.

Baird's Option Market Making is also considered standard, especially by volatility quants on nuclear phynance. I like it but not as much as Natenburg.

Options as a Strategic Investment I think is the most overrated trading book ever made. It is just terrible writing.

I guess overall I view options as you want to sell overpriced theta to the herd and only buy extremely under priced vega from the herd.

I think TOS will always get high marks on reviews because of how it lays out the greeks but I'm pretty sure if most option traders understood greeks better they wouldn't trade options.

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Shirak View Post
I am VERY new in options, and please correct me if I am wrong, but can't you limit your downside potential via stop losses just like in futures?

That way, isn't the risk of "blowing up" theoretically identical to holding futures position?

With options, you can't count on your stops getting filled reliably in a crisis situation. Options are a much thinner market than futures and the times when you really want to be able to get out in a hurry (such as a big market crash) are the same times when your stop loss order won't be able to find liquidity to execute at the price you expect.

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dutchbookmaker View Post
I would like to hear about some losing trades on selling puts during the crisis and how those went down.

Blowing up is what everyone is going to be afraid of but that is going to largely be from larger funds taking illiquid positions. I assume when things start to look bad you have no trouble getting out?

I can attest to this. During the last crisis I lost a bundle on selling puts on equities. Currently I've been trying calendars with initial good IV skew. With the current "crisis" I lost all my profits on my current trades and wasted a month and a half just waiting for these to pan out, only to come up with a loss.

And that's right about stops not working on options. On TOS, there are only stops on options based on option price only. And during a giant move up or down, the option price can gap anytime. TOS sure as heck isn't going to honor an untriggered stop loss due to an overnight gap.

I'm thinking of getting out of positional options on equities completely. One needs a lot more capital to profit from IC's and calendars anyways , perhaps at least 300k starting. (And just do it simu for a few more years or so until I prove to myself it can't really be done). That's why this thread interests me. Selling options on futures may be a different kind of game than selling options on equities entirely. Can't hurt to explore other "options", pun intended, at least on demo.

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GoldStandard View Post
With options, you can't count on your stops getting filled reliably in a crisis situation. Options are a much thinner market than futures and the times when you really want to be able to get out in a hurry (such as a big market crash) are the same times when your stop loss order won't be able to find liquidity to execute at the price you expect.

Thank you for your answer Gold, much appreciated.

But say that really happens, couldn't you just hedge it via the underlying futures?

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Shirak View Post
I am VERY new in options, and please correct me if I am wrong, but can't you limit your downside potential via stop losses just like in futures?

That way, isn't the risk of "blowing up" theoretically identical to holding futures position?


GoldStandard View Post
With options, you can't count on your stops getting filled reliably in a crisis situation. Options are a much thinner market than futures and the times when you really want to be able to get out in a hurry (such as a big market crash) are the same times when your stop loss order won't be able to find liquidity to execute at the price you expect.



Shirak View Post
Thank you for your answer Gold, much appreciated.

But say that really happens, couldn't you just hedge it via the underlying futures?

You can use various combinations of options and the underlying to limit risk, and also to maximize profits, for that matter... It can get complex fairly quickly, though... But, for me at least, that's the allure of options. You get so many more options (pun intended), and they offer good mental exercise..

I see my answer eluded you in my last post, so I'll try again:

You can not use stop-losses like with futures when selling options. When you have sold an option, that means someone else owns it, and you can't take it back. You can, of course, buy another option to offset your position. If you've sold a put, you can buy a put with the same strike & expiry, and they will cancel each other out.

Also, as @GoldStandard stated, the nature of the options market does not inspire active trading like with futures. The limited liquidity and bid/offer spreads, are not enticing. Do not use market orders, unless you absolutely have to (which you shouldn't!). You are often better off using the underlying and/or other options to balance your position, rather than selling your inventory outright.

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do you guys build/scale into a position for options or you simple wait for a certain price had enter an entire position?

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Lornz View Post
If you sell a put, you can buy a call with the same strike & expiry, and they will cancel each other out.

That is not correct. Buying a call does not offset a short put. Both would lose money if the futures drop.

To offset a short put you would buy the same put and get out of the position.

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tigertrader View Post
Now that sounds idyllic! I live in Philly. I watch the crack dealers and hookers, from my desk while trading.

Got room for another desk?

LOL I don't think the wife would go for that.

Hmm but that could be a way to make money. Rent out office rooms for people who want to get away from city life. De-stress. Sort of a trading resort.

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Shirak View Post
I am VERY new in options, and please correct me if I am wrong, but can't you limit your downside potential via stop losses just like in futures?

That way, isn't the risk of "blowing up" theoretically identical to holding futures position?

The only futures' option with enough volume to place a stop loss, IMO, is ES.

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ron99 View Post
That is not correct. Buying a call does not offset a short put. Both would lose money if the futures drop.

To offset a short put you would buy the same put and get out of the position.

Thank you for catching that, I need to start to read through what I am writing. I've unknowingly uttered several odd statements over the past few weeks, maybe I have a tumor causing abnormal typos?

As with everything else in life, if you want something you sold back, you buy it back....

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dutchbookmaker View Post
I would like to hear about some losing trades on selling puts during the crisis and how those went down.

Blowing up is what everyone is going to be afraid of but that is going to largely be from larger funds taking illiquid positions. I assume when things start to look bad you have no trouble getting out?

Which crisis do you want to know about? 2008? The last 2 weeks? Or some other time.

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Shirak View Post
Thank you for your answer Gold, much appreciated.

But say that really happens, couldn't you just hedge it via the underlying futures?

Very, very risky but possible. I have never done it. The risk is that the futures whipsaws the opposite way and you are losing more money on it than you were on the option.

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jonc View Post
do you guys build/scale into a position for options or you simple wait for a certain price had enter an entire position?

Both here. Sometimes the availability of bids limits what strikes and quantity you can do.

If they don't raise margin then I will be looking at doing more ES options because the ROI is better now. Plus plenty of quantity.

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I went back and added up my recent trading.

In the last 2.5 years I sold 8,524 options.
7,713 of them I kept to expiration and they expired worthless or OTM. 90% (none were ITM)
8,099 of them expired net profitable. 95%

Net profit 300,000+.

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ron99 View Post
Both here. Sometimes the availability of bids limits what strikes and quantity you can do.

If they don't raise margin then I will be looking at doing more ES options because the ROI is better now. Plus plenty of quantity.


ron, had you traded options using CFD providers?

They don't seem to have a ask/bid volume and they provide options on many indices

The market had been crashing big time for the past week, I would be interested to know what kind of positions are you taking now? Selling puts?

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jonc View Post
ron, had you traded options using CFD providers?

They don't seem to have a ask/bid volume and they provide options on many indices

The market had been crashing big time for the past week, I would be interested to know what kind of positions are you taking now? Selling puts?

What is a CFD provider?

Right now I am sitting on my hands and riding out the positions I currently have on. I have decided that you don't have to trade every day. That it's better to be safe than sorry. I will let the markets calm down before I put on new positions.

Right now my Sep GC puts, Sep & Oct NG calls and Sep KC strangles (expire Friday) are OK. My Sep 65 crude puts are feeling a little heat, but they expire in 9 days. My Sep RB 2.20 puts are feeling some heat.

My 1800 Sep GC calls are feeling the most heat. Will GC go close to 1800 in 18 days? I doubt it, but to be safe I will probably dump them. I only have 10.

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ron99 View Post
What is a CFD provider?

Right now I am sitting on my hands and riding out the positions I currently have on. I have decided that you don't have to trade every day. That it's better to be safe than sorry. I will let the markets calm down before I put on new positions.

Right now my Sep GC puts, Sep & Oct NG calls and Sep KC strangles (expire Friday) are OK. My Sep 65 crude puts are feeling a little heat, but they expire in 9 days. My Sep RB 2.20 puts are feeling some heat.

My 1800 Sep GC calls are feeling the most heat. Will GC go close to 1800 in 18 days? I doubt it, but to be safe I will probably dump them. I only have 10.


CFD - contract for difference. notable cfd providers are cmc markets, ig markets.

Does it make sense to buy volatility now? The markets are making huge swings.

GC now look possible to break 1800 anytime but it is something I did not expect would happen in summer time

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jonc View Post
CFD - contract for difference. notable cfd providers are cmc markets, ig markets.

Does it make sense to buy volatility now? The markets are making huge swings.

GC now look possible to break 1800 anytime but it is something I did not expect would happen in summer time

I don't trade on volatility. I sell options based on where I don't think the market is likely to go. That way I don't need the market to move a certain direction. Just not move to much against my position.

For example to others reading this thread, I could have sold 1300 gold puts when the market was at 1500. As long as the market stayed above 1400 I was fine. Of course violent moves against my position can cause problems.

It's easier to predict where the market isn't going with a cushion than to predict which way it is going with no cushion.

Yes gold is a surprise. I expected 1750-1800 this fall but not now. That is why I didn't put on many gold calls.

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ron99 View Post
Right now my Sep GC puts, Sep & Oct NG calls and Sep KC strangles (expire Friday) are OK. My Sep 65 crude puts are feeling a little heat, but they expire in 9 days. My Sep RB 2.20 puts are feeling some heat.

My 1800 Sep GC calls are feeling the most heat. Will GC go close to 1800 in 18 days? I doubt it, but to be safe I will probably dump them. I only have 10.

I had to dump my Sep 65 crude puts, my Sep 2.20 RB puts and my 1800 gold calls yesterday. Lost some money but still up 62% for the year. I was up 76%.

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  #71 (permalink)
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Ron99,

Those results are certainly impressive, even with yesterday's hiccough.

How has the transition to electronic trading of options on futures affected how you trade? From what I understand, there is still a pretty good market in the open outcry pits, depending on the market - do you use a broker in the pit to work your options trades or do you do it yourself from the screens?

-- Fury

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ron99 View Post
I had to dump my Sep 65 crude puts, my Sep 2.20 RB puts and my 1800 gold calls yesterday. Lost some money but still up 62% for the year. I was up 76%.

I don't know for crude and RB, but for gold that was the right thing to do.
I assume that was paintful, but no doubts, good decision.

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furytrader View Post
Ron99,

Those results are certainly impressive, even with yesterday's hiccough.

How has the transition to electronic trading of options on futures affected how you trade? From what I understand, there is still a pretty good market in the open outcry pits, depending on the market - do you use a broker in the pit to work your options trades or do you do it yourself from the screens?

-- Fury

The vast majority of my options trades are electronic. Only ICE Softs still have a decent amount of pit trading. But even those are getting more and more electronic. I always use electronic for Sugar and sometimes for Coffee. Grains, ES, metals and energies are always electronic.

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sam028 View Post
I don't know for crude and RB, but for gold that was the right thing to do.
I assume that was paintful, but no doubts, good decision.

The margin on the 65 CL went from ~$100 to $2,234 each. The 220 RB went to $3,319 each. I had to dump them. I had 81 of the 65 CLs. Plus I thought that there would be more longs bailing today. We'll see.

Lost $9,200 on the gold. I didn't get out early enough. My bad.

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ron99 View Post
The margin on the 65 CL went from ~$100 to $2,234 each. The 220 RB went to $3,319 each. I had to dump them. I had 81 of the 65 CLs. Plus I thought that there would be more longs bailing today. We'll see.

Lost $9,200 on the gold. I didn't get out early enough. My bad.


What is your money management method when you trade options?

Over these many years of trading options has the options behavior changed in anyway?

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jonc View Post
What is your money management method when you trade options?

Over these many years of trading options has the options behavior changed in anyway?

I keep 67% of the money in my account in cash. I never put on new positions if my account is under that.

I used to have only 50%. But I found out that that wasn't enough.

Just about every position I put on never ends up ITM. So I just need enough cash to ride out the times when the market goes against me. That is even tougher now with the wild swings common lately.

I also look at why the market is moving against me and where I think it is going. I combine that with days to expiration to decide whether to try to ride out a position or not. Also changes in margin required (like gold margins going up 22% tonight) have affected me more lately than in the past.

It took about 5 years of options trading to get a decent handle on those variables.

In reply to your 2nd question. Markets are much more volatile now than 5 years ago. Margins on options are higher. But there is also a lot more volume in options now.

Electronic options have been a huge benefit. That has also greatly reduced my commission costs.

But overall I would say it is harder to trade options now than in the past because of the larger market swings. I have moved my strikes farther out of the money than I had them 3-5 years ago.

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I'm looking into a possible scenario:

- use OptionVue on PFG
- use the PFG data feed into ninja
- write a strategy for ninja to sell the options

I haven't started to test this yet, but wondered if you had gone down this road already.

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I haven't used any of those products.

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I did a lot of research today - talked to Liberty Trading Group, OptionVue and PFGBest. The sales gal at OptionVue was pretty clueless. I got a 30 day demo.

For straight futures, the predominant configuration is ninja and zen-fire (mirus or amp broker). They each require $2500 or so to open an account. This account will get you the data feed with enough margin to trade. If you want a demo data feed, no such luck. You need a real account to get the live data.

For futures options, it is similar but different. PFG has the option data feed. If you hook ninja to PFG, you only get futures data, no options. They have their own platform, Best Direct 8 which is a free tool to monitor your account, look at option chains and trade. There is no option analysis.

If you want option analysis, either OptionVue or Trade Navigator is reqd. They are both about $80/mo. The deal with OptionVue is the software is $1,000 outright. If you buy it, you will then end up paying $80/mo for 5 different exchanges (CME, CBOT, NYMEX, ICE, COMEX) so $400/mo just in exchange fees (so the sales gal told me). They also have their own data feed and they charge that.

If you license the software from OptionVue for $80/mo, you get all updates for free and the exchange fees are waived. I don't remember why we don't get hit with big exchange fees with Mirus. On TradeStation you have to pay the fees too. The exchanges are getting tougher about charging. That is why we lost the ability to get demo accounts through zen-fire.

I got a 30 day trial data feed from PFG. This will give me live futures and futures options data feed. The OptionVue trial only gives you Quote View equity and equity options data. The sales gal didn't even know that I could get a trial of PFG data. She was telling me to open an account to get the data, which then would have triggered me to pay $79/mo right away to lease the software.

One interesting thing about PFG is that they don't have any minimum requirements. They told me I need to follow what my broker is telling me. Which broker? They must be one step up the food chain, as a clearing house. OptionVue is an Introducing Broker, so the sales gal told me I could use $100 to open a PFG account to get the data feed. If this is the case, I could open an account directly with PFG for $20 and then use Best Direct to look at all the option info. I could also use the data feed to power ninja and get a futures feed for basically free. This sounds like a good way to setup a demo-type account until I'm ready to go live. Then just put enough money into the PFG account to handle the margin requirement. I think requires a different license for ninja. But if I'm running demo anyway, the sim license allows you to run any connection into ninja.

None of the tools for viewing options has any kind of programming language. So my idea of writing strategies to handle option buy/sell is dead. You could still use ninja to do analysis on the base future, helping to determine direction, etc. But the buy/sell of the option itself is probably best handled through Best Direct.

OptionVue can talk to the order desk at PFG, but it doesn't talk to the account itself. You have to manually enter your account balance into OptionVue and it keeps track of it standalone. There is a feature for placing orders, but I think it is stronger for the analysis. This is unlike ninja, where you can programmatically get your account info. This is needed for strategies so you can tell how much daily profit/loss you are at and stop trading.

Given that the style of Liberty is to short deep out of the money puts/calls, I don't see a whole lot of analysis behind that. It is mostly determining market direction and staying far away from price. I don't think the fancy analysis of OptionVue is going to add a lot to it. I'm not doing any iron condors or other option combinations. It would probably help in the education department.

Liberty looks like it has 2 types of account management control - a block account, where it pulls from everybodys account at once, and individual control where they are accessing just your account. Ron99 maybe you could comment on that.

PFG recommended having 2 accounts - one for Liberty and then a personal one I can trade on my own so that I don't mess up the margin for the Liberty one. This makes sense. You can use Best Direct to monitor the trades that Liberty makes and see account balance info.

As an aside, PFG futures data feed powers a lot of platforms. The list is long and includes all the industry heavyweights, like esignal, ninja, TT, Multicharts and Sierra Charts.

I had considered standardizing around esignal at one point because it was powering esignal Adv GET, MetaStock, 4x Made Easy and MT Predictor. I also had QCollector to download the data and build a database of price history for any other use, mostly for MT Predictor standalone.

Since then it seemed like zen-fire took over. I stopped using MetaStock and MT Predictor can also read IQFeed. Kinetic is powered by IQFeed and is cheaper, so that looked like a good alternative.

Now it looks like PFG is yet another mulipurpose solution. I don't know about the quality or speed of their feed, but for futures option data, there isn't much other choice. So it could power ninja and I can keep on writing strategies, it powers MultiChart so I could keep writing EasyLanguage, and it can power OptionVue if I wanted to get into more option analysis.

I just looked at Welcome to IQFeed! - Fast, Reliable, Affordable. Datafeeds and API. and they have a list of the platforms and brokers that allow for the CME Group fee waiver. So ninja and multichart qualify and mirus/amp/global/openecry/pfgbest all qualify. So that means using ninja/pfgbest combo will waive a majority of the $80/mo fee for exchange fees. If you want a symbol on an exchange not in the waiver, then you have to pay.

This is a lot of stuff. I didn't know how much I had figured out until I wrote it down. Hopefully this will help you if you are trying to put together different configurations.

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  #80 (permalink)
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A couple of points. The CME waiver only applies to the CME products like grains and livestock. It does not apply to NYMEX or COMEX.

The clearinghouse for PFG is Jefferies. They did and may still have a lot of sovereign debt. Do some research on them before you send PFG any money. You don't want to get caught up in a MF Global situation.

Exchange fee prices vary. Check around. eSignal charges $78.

Liberty just got their CTA license, I believe, last year. So that would be the block account. I was in the individual account because that was all they had when I started.

Are they still charging $69 per contract? That is too much. It comes to about 30% of your profit when they are doing well. It is a higher % of your profit when they aren't doing well.

For the 3 years I was there, my account made $100,000 gross profit. Their fees totaled $49,800! Almost half.

I don't do any technical analysis. Mainly fundamental and some seasonal.

If you want just free data, including free exchanges, and low commission rates check out Open E Cry. Futures Trading Platform, Futures Trading Demo, Electronic Trading System - OEC They don't do any option charting.

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Just for an FYI. I did have an account at Liberty Trading. They did very well for me in 2009 (+99%)and 2010 (+25%). But in 2011 they didn't adjust to the changing market conditions. They lost 28% for me in 2011. I closed my account. They also change too much for having an account there. Over 30% of your profit. More when they are losing money in your account.

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Hi Ron,
I am just starting out and would love to replicate what you have been able to achieve, in addition to James Cordier's book - what other books do you recommend that i should read before becoming active in the market of options on futures...
Any advice would be very welcome.
Regards
Scott

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spj77 View Post
Hi Ron,
I am just starting out and would love to replicate what you have been able to achieve, in addition to James Cordier's book - what other books do you recommend that i should read before becoming active in the market of options on futures...
Any advice would be very welcome.
Regards
Scott

I'm neither Ron nor an active options trader, but the consensus, it seems, is that the following books are good reads for beginners:

Amazon.com: Option Volatility & Pricing: Advanced Trading Strategies and Techniques (9781557384867): Sheldon Natenberg: Books

Amazon.com: Options as a Strategic Investment (9780735201972): Lawrence G. McMillan: Books

Amazon.com: Options Trading: The Hidden Reality ("Options: Perception and Deception" & "Coulda Woulda Shoulda" revised & expanded, Printed in Color) ("Options: Perception and Deception" & "Coulda Woulda Shoulda" revised & expanded, Printed in Color)

You should also use the free resources made available by the exchanges:
CBOE - Options Learning Center

The Options Industry Council (OIC)

My feeling is that one should have good understanding of both futures and options before one should attempt to trade those, especially combined. However, I am not interested in a low return with high margin requirements, which, to me at least, seems too risky to be worth it. To each his own, I guess...

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  #84 (permalink)
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ron99 View Post
Just for an FYI. I did have an account at Liberty Trading. They did very well for me in 2009 (+99%)and 2010 (+25%). But in 2011 they didn't adjust to the changing market conditions. They lost 28% for me in 2011. I closed my account. They also change too much for having an account there. Over 30% of your profit. More when they are losing money in your account.

When I typed "They also change too much for having an account there." I meant to type "They also charge too much for having an account there.

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  #85 (permalink)
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Hi Ron,
I am just starting out and would love to replicate what you have been able to achieve, in addition to James Cordier's book - what other books do you recommend that i should read before becoming active in the market of options on futures...
Any advice would be very welcome.
Regards
Scott

Scott, that is the only book I have read on that subject. Elsewhere in this thread are other recommendations on books. I have not checked them out.
Ron

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  #86 (permalink)
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Thanks Ron
Well i hope i can emulate your success!!

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  #87 (permalink)
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Hi Lornz,
Thanks for taking the time to reply, it is much appreciated - i just ordered 5 books from traders press so it looks like i have a months worth of reading to do, and then the paper trading begins!!!
Wish me luck!!
Scott

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  #88 (permalink)
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Hi Ron,

I am starting out and would be very interested in some type of mentor relationship so i do not make silly mistakes and end up with the dreaded margin call. I am quite happy with a steady as she goes type approach you have had success with.

I have read and re-read this thread and have the following guidelines committed to memory:
- Sell based on where price is very unlikely to go, far OTM
- Less than 90days to expiration
- Delta less than .0400
- Always have 2/3 of account in cash for increased margin requirements / ride out positions if move towards strike over time
- Always always place limit order, never ever market
- Be mindful of seasonal tendencies
o Gold increase in fall, oil increase in spring, summer tops in grains
- Consider adding to positions as OTM options get closer to expiry and margin drops (subject to having 67% of account in cash)
- Avoid volatile commodities
Would you be interested in being a guiding figure as I start out in this venture? I am not thinking anything remotely intensive, but merely me just sending you a quick email before I commit to a trade for your second opinion to hopefully prevent me missing something that may lead to my (and my familyís) ruin??
Kind Regards
Scott

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  #89 (permalink)
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Hi Scott,

Yes I am willing to help.

Your list is very good. One thing I would change is to lower the Delta number to < .0200. Above that is risky unless you have a very flat market. And there aren't too many of those around lately.

I would be careful with grain calls this year because of the low inventory and carry over. Any little weather scare could send them spiraling.

Also watch out for the "sell in May and go away". ES and CL have been hit hard with them the last 2 years. I suspect this year won't be as bad, but who knows.

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Hi Ron,
Thank you so so much, it was a step big and swallowing of pride to put myself out there ask someone to be my mentor, especially when the world tells us that at 35 I should have it all together and not need any assistance.
But the way I look at it, is that it is surely wiser to swallow pride and seek guidance so that you are headed in the right direction than to make costly mistakes and blow an account out of ignorance, stubborness or pride.
I will send you a private message with my work email address and a little bit about myself and where I am at if you donít mind (as I donít really want to open my life to just anybody on an open forum site).
I am very happy and am looking forward to a mutually beneficial friendship.
Kind Regards
Scott

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  #91 (permalink)
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Hi Ron,

I have just opened an account at IB - do you use or have had any experience them??

Regards
Scott

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  #92 (permalink)
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I am not sure you want to be trading at IB. I checked them out a couple of years ago and they were not friendly to option sellers.

Number one, when I called and asked about margin required, it was far higher than exchange minimum. They were the highest of any that I checked out. By far. Some FCMs do that. Some charge a little extra. Some don't charge any extra. That will severely cut ROI.

Since you already have an account there can you check on that? Pick a couple of options and find out the margin required. I have the PC-SPAN program that all exchanges use to calculate the minimum. We can then compare.

Number two, and this is a big one. I believe that if you get to the dreaded margin call that IB will automatically trade you out of the position (auto-liquidation) with a market order. You do not want that to happen. Huge unnecessary losses could result.

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Hi Ron,

I just checked IB margins on the following contracts:

July Corn 5.00 put 1323
July Crude 75 put 1338
June ES 1000 put 1464
July KC 250 CALL 919
June GC 1300 put 3535

Are you able to check them against your broker?

Also, I just confirmed with IB by phone that you are 100% correct with the auto liquidation of your position instead of issuing a margin call....that's not good at all.

Regards
Scott


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  #94 (permalink)
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Initial Margin for Apr 16, 2012.
............................PC_SPAN..OX........IB
July Corn 5.00 put 343.00 411.48 1323
July Crude 75 put 323.00 354.92 1338
June ES 1000 put 341.25 341.25 1464
July KC 250 CALL 228.00 228.00 919
June GC 1300 put 564.00 564.30 3535

I see that IB is a lot higher than PC-SPAN (the minimum) and OX. Almost 7 times higher in gold!

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  #95 (permalink)
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Ron,

Thank you for answering my recent questions in the private message section and as you requested, I will now continue our previous conversation in the open forum for all to enjoy and hopefully learn from.

I previously mentioned that I bought my first option in the silver market. You asked what lead me to that purchase.....it is one of the financial astrologers that I am currently testing out right now that has predicted $42.00 silver by the end of May....so we shall see! I agree with your comment otherwise, the margin requirements in that market are relatively high that I, too, avoid selling there as it seems to bring down the returns.

I mentioned that I have my account with PFG Best. You are correct, they do not charge a fee for options expiring. With my comission structure of $15 each way per contract, I prefer to sell the options and try to let them expire as it takes a much smaller chuck out of my profits....its like turning the commission structure in to $7.50 each way.

Here is one question and response I am having a little trouble understanding from our private message post:

"You mentioned you try to make 3% ROI on a 30 day basis.
How do you calculate this with selling options?
Are you looking at the amount of premium you will receive in relation to the amount of margin you need to put up for that option?

I take premium of the option minus fees divided by (margin required plus the excess cash I keep on hand for that position). But that ROI is low because as the margin decreases I am reinvesting that unneeded margin and selling new positions. The 3% assumes that I am keeping the same margin and excess until expiration, which isn't true. But I don't know any other way to calculate it. But it does give me a way to compare options and pick the ones to sell."

I understand the "premium of the option minus fees divided by margin" part, but how do you determine what exactly is the amount of excess cash that you will keep on hand for that position?

Do you revert back to the 66% cash reserve? Could you give me a simple example...using some arbitrary numbers? Maybe $115 in premium with $15 in fees and comminssion and $1,000 in margin to keep things simple.....

When you continue to add postions in this example, do you generally add at the same strike price or do you start you evaluation all over again?

Thanks again for your input!!!!

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Hi,

I was also thinking about a hurdle for ROI and the way i was planning on approaching it is with using a minimum 40% annualised rate:


Margin1200.00Cash Buffer2400.00 (Marginx2)3600.00Premium Recd132.00Fees-15.00Net Received117.00Days to expiry30Annualised Return40% (hurdle of 40%)

This way, whether the position is held for 90days, 43 days or any other timeframe, it still roughly meets the 3% ROI per month compounded rate:

Margin1200.00Cash Buffer2400.00 (Marginx2)3600.00Premium Recd380.00Fees-15.00Net Received365.00Days to expiry90Annualised Return41% (hurdle of 40%)

Example for 17 days (eg, if then using excess margin closer to expiry):


Margin1200.00Cash Buffer2400.00 (Marginx2)3600.00Premium Recd82.00Fees-15.00Net Received67.00Days to expiry17Annualised Return40% (hurdle of 40%)

The annualised formula, for the last case, is: (67/3600)/17days x 365 days



What do you think??? Am keen to hear your thoughts.


Regards
Scott

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  #97 (permalink)
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That didn't come out too well - have a look at the file instead!

Attached Files
Register to download File Type: xls Annualised Return.xls (21.5 KB, 135 views)
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Its Magic View Post
"You mentioned you try to make 3% ROI on a 30 day basis.
How do you calculate this with selling options?
Are you looking at the amount of premium you will receive in relation to the amount of margin you need to put up for that option?

I take premium of the option minus fees divided by (margin required plus the excess cash I keep on hand for that position). But that ROI is low because as the margin decreases I am reinvesting that unneeded margin and selling new positions. The 3% assumes that I am keeping the same margin and excess until expiration, which isn't true. But I don't know any other way to calculate it. But it does give me a way to compare options and pick the ones to sell."

I understand the "premium of the option minus fees divided by margin" part, but how do you determine what exactly is the amount of excess cash that you will keep on hand for that position?

Do you revert back to the 66% cash reserve? Could you give me a simple example...using some arbitrary numbers? Maybe $115 in premium with $15 in fees and comminssion and $1,000 in margin to keep things simple.....
Yes 66% cash reserve or 2X the margin required for cash. For some more volatile contracts, I may use 3 or 4 times for cash.

For example, the margin required for a June NG 3.00 call is $332 (Apr 18 trading). I put $664 for cash excess. So $996 to cover the trade. $40 premium minus $15 for fees leaves $25 possible profit. $25 divided by $996 equals 2.5% ROI in 38 days. Converted to a 30 day basis that is 2.0% ROI.

A 2% monthly ROI is 26.8% yearly when compounded monthly. I bet a lot of people will take that.

But in reality the returns are even higher. When the option gets closer to expiration and if the market isn't going severely against you, or if the exchange doesn't raise margin rates, then you will have some of that $996 to reinvest in another option. The 2% ROI would be if you kept $996 to cover it until it expired. Which rarely happens.


When you continue to add postions in this example, do you generally add at the same strike price or do you start you evaluation all over again?

Most times a new strike. But if bids are there and the return is good I will add more contracts at the same strike.

Thanks again for your input!!!!

You're welcome.
Ron

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  #99 (permalink)
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Yes Scott, that is exactly how I calculate it. I have been using a spreadsheet with those calculations for years.

One thing I would caution is that you can't set a minimum or hurdle and strictly stick to it. You have to go with what the market gives you.

Sometimes the market will only give you 1-2% monthly ROI. Other times 5-6%. You just never know when. Don't try force to trades. Don't make trades to just have something on. Sitting on your hands is sometimes the best thing to do. And revenge trading (trying to force trades to get back money you lost) is always bad.

I have made all of these mistakes. Hopefully you won't have to learn the hard way too.

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ron99 View Post
I have been selling options on futures for years. But it is rare to find others doing it. I was wondering if there are others here doing it.

I have been doing it for 5 years. Learned it from James Cordier's book.

I have sold energy, grain, softs and metal options. Far out of the money. Usually less than 90 days from expiration.

Hi Ron, I am new here and wanted to know where can I see your trades? Do you show them any where in this forum?

Thanks,
Alfredo E.

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