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Selling Far OTM Options on Futures


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Selling Far OTM Options on Futures

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  #1 (permalink)
 ron99 
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In order to have a more focused thread on just selling far OTM options on futures, I am starting this thread.

Much of the discussion we had previously can be found early in this thread.

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Excession
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I guess the one question I have (that is not easily found anywhere on the web), is one of the points you make in your post: how to find a broker with favorable margin requirements when selling options!

I've been selling options for years but have always needed to maintain pretty high margin excess to avoid margin calls. I'd love to see a list of which brokers are the best in providing traders more margin room!

To make things worse, I'm Canadian so we have far fewer options than Americans. I've been with Questrade for years, but have recently moved to Interactive Brokers. Unfortunately, we are NOT allowed to use Portfolio Margin and are restricted to Reg-T accounts (I'm assuming Portfolio Margin is better for selling options?)

Any info around this area would be highly appreciated. For the time being, I'm going to keep using IB and keeping a careful eye on my Liquidity Excess.

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CafeGrande
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Excession View Post

To make things worse, I'm Canadian so we have far fewer options than Americans. I've been with Questrade for years, but have recently moved to Interactive Brokers. Unfortunately, we are NOT allowed to use Portfolio Margin and are restricted to Reg-T accounts (I'm assuming Portfolio Margin is better for selling options?)

The Reg-T and Portfolio margin structures are for equity options.

SPAN (it's an acronym) is for futures options.

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Forex37
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Hi all,

I `ve been writing options on equity and stock index futures (european exp.style) for quite some time - and survived despite of some black swans crossing my way. Ron99 mentioned that he doesn`t use indices anymore as underlyings, but other futures like CL for better ROI.

My question, which underlyings (neither equity nor indices) would be rewarding and comfortable for an experienced beginner?

Thanks a lot

Forex37

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SFbaddog
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I think there is a small error in the Quick Summary formula or example on when to exit.


Quoting 
When your (CURRENT IM + CURRENT PREMIUM - OPENING PREMIUM) > (3 * OPENING IM), you exit your trade

For example, if I sell an option for $100 and the margin required is $500, I will have $1000 excess.
If the margin increases to $900 and the premium is higher than $200 then the cash excess is gone and it is time to exit.

Filling in the formula with the exit example yields:

$900 [CURRENT IM] + $200 [CURRENT PREMIUM] - $100 [OPENING PREMIUM] > (3 * $500 [OPENING IM])

$1000 > $1500 ? which is false so the position should not be exited.

Perhaps the formula should be " > (2 * OPENING IM) exit trade" or the example given isn't correct?

Or am I reading something incorrectly?

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 ron99 
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SFbaddog View Post
I think there is a small error in the Quick Summary formula or example on when to exit.



Filling in the formula with the exit example yields:

$900 [CURRENT IM] + $200 [CURRENT PREMIUM] - $100 [OPENING PREMIUM] > (3 * $500 [OPENING IM])

$1000 > $1500 ? which is false so the position should not be exited.

Perhaps the formula should be " > (2 * OPENING IM) exit trade" or the example given isn't correct?

Or am I reading something incorrectly?

The example is wrong. Sorry I didn't check what the other person wrote. I'll fix it. Thanks.

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 ron99 
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Forex37 View Post
Hi all,

I `ve been writing options on equity and stock index futures (european exp.style) for quite some time - and survived despite of some black swans crossing my way. Ron99 mentioned that he doesn`t use indices anymore as underlyings, but other futures like CL for better ROI.

My question, which underlyings (neither equity nor indices) would be rewarding and comfortable for an experienced beginner?

Thanks a lot

Forex37

I still use indices. Their ROI is lower now. So I would not use as many.

It just depends if I can find other things with better ROIs and sufficient volumes or not how much of my portfolio includes indices. But indices always offer the best volume.

CL would be the first choice. Others have some risk but what doesn't? NG, KC, SB, Grains. Metals (GC, SI) have been low ROI but they just lowered margin.

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 ron99 
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For those of you who sold the Aug Milk (DA) 18.75 puts, they are trading at 0.01 now. I traded out of mine and made 8.3% monthly ROI on them.

If your costs aren't too high you may want to consider buying them back at 0.01 instead of waiting 52 more days for expiration. But if you want to ride to expiration that is OK because Aug futures will expire far higher than 18.75.

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 phantomtrader 
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I like FOTM credit spreads. I signed up at this website a while back and have done well so far. www.myweeklyoptiontrades.com

I'm looking at a few other low risk spread strategies as well to diversify, maybe looking at monthlies as well.

I like the indexes as opposed to stocks. Just doing some testing myself, stocks have more price spikes whereas the indexes seem to have less chance of spiking into the money at expiration. Margin requirements are relatively high, but at least you know your risk upfront. Stops are not practical on options so you really have to rely on good trade management to get yourself out of loser.

Overall though, I like the credit spreads. Have to look at some different indexes too.

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spreadhead
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Hi All:

I was reading Forex37 comments and have some comments of my own.

I assume this is a naked strategy for the selling? Now some words of wisdom and this is just my opinion.

You could be going along for months even years selling the low delta .03 and lower. However, if the Black Swan shows up then you have the risk of giving back those profits in a big loss. When that position gets a delta of about .15 - .25, you are going to start feeling some pain (loss). Depending on you expiration, you might get by for that month. However, if that position goes from .03 to .50 and then expires in the money you could have a great loss.


This type of loss can emotionally deflate you as all the time and profits can be lost.

My words of wisdom is make sure you have an exit plan for when the Delta's get too rich and option gets pricey.
Just stalling and not be proactive can hurt. Remember if your goal is to make money every month ensure you keep funds around to deploy again. I do not sell naked contracts, but respect people that do, but have been burned by not exiting when the Delta's exceeded my expectations. I just waited just to have the Deltas increase even more. So to make hundreds I gave back thousands. Ensure your plan covers this scenario.

Thanks,

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 meyer99 
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Is it possible to make any money using this strategy if one has to pay $6 fees roundtrip?
Can anyone show a recent example detailing fees expense?

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spreadhead
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Meyer99:

I do not think the expectation is to have a round trip just the sell transaction. The expectation is that the options will expire worthless. However, if you get stuck in a ditch and the position goes against you will have to make the round trip to get out.

I wonder with the recent sell off if anyone got stung with selling out of the money Put options? The VIX moved from about 12 to 16 pretty quickly and the increased implied volatility causes the Vega to increase and the Put options can get premium rich pretty fast.

For example, tonight I looked at some 174 Put options, OTM, on SPY for OCT. These are pretty far out of the money the these moved from .95 on 7/15 to 1.23 by 7/31. Why did I look at these? Reason being, I was researching when I think the VIX is too low what would be the impact to buy OTM options waiting to a volatility spike? If you look at the VIX you see it spike every 4 months or so.

Just some more thoughts,


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 ron99 
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spreadhead View Post
Meyer99:

I do not think the expectation is to have a round trip just the sell transaction. The expectation is that the options will expire worthless. However, if you get stuck in a ditch and the position goes against you will have to make the round trip to get out.

I wonder with the recent sell off if anyone got stung with selling out of the money Put options? The VIX moved from about 12 to 16 pretty quickly and the increased implied volatility causes the Vega to increase and the Put options can get premium rich pretty fast.

For example, tonight I looked at some 174 Put options, OTM, on SPY for OCT. These are pretty far out of the money the these moved from .95 on 7/15 to 1.23 by 7/31. Why did I look at these? Reason being, I was researching when I think the VIX is too low what would be the impact to buy OTM options waiting to a volatility spike? If you look at the VIX you see it spike every 4 months or so.

Just some more thoughts,

This thread is for options on futures.

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 meyer99 
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Ron or anyone else:

Do you know if ThinkorSwim will close the trade at market in case of a margin call?

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 ron99 
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meyer99 View Post
Ron or anyone else:

Do you know if ThinkorSwim will close the trade at market in case of a margin call?

I have never traded there so I don't know. Maybe someone else knows.

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200zz
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meyer99 View Post
Ron or anyone else:

Do you know if ThinkorSwim will close the trade at market in case of a margin call?


I don't think so.

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 meyer99 
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Now back to the SKEW vs. VIX. Why? Because the ratio between them is an indicator of the uncertainty premium. It is only an indicator, but it may be one that can be used to estimate the impact of the fog of war.

The ratio between the SKEW and VIX is a ratio of two different indices that measure option premiums. Those premiums give indications of market-based pricing of risk. When the SKEW-VIX ratio widens, it says that out-of-the-money options on American stocks are being bid up for the purposes of insuring against tail-risk events. Tail-risk events are higher-volatility swings, that is, swings that could be greater than one or maybe two standard deviations. History suggests that wide ratios between the SKEW and VIX result in market reactions that can be serious. That is why we watch the SKEW-VIX ratio. We give a hat tip to the analysts at BCA Research, who have discussed this in great detail in their work.

We have taken the SKEW-VIX ratio, plotted it against the S&P 500 Index, and put it on our website for readers to see. The data starts in 2008. The ratio and the performance of the US stock market for the entire period of the financial crisis and subsequent rally can be seen. Look at it and draw your own conclusions. Here is the link: https://www.cumber.com/content/misc/SKEW-VIX.pdf .

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 mu2pilot 
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I've only been selling deep OTM options for 9 months and have not run into this before...

I am short several HO calls expiring in October and November, 36 and 69 DTE, respectively. They have performed well and I am trying to buy them back in. I have a standing offer to buy the 3.40 and 3.45 Oct calls for $0.03 and the 3.60 Nov calls for $0.07. The weird thing is the 3.40 and 3.45 calls are closing well below what I am offering ($0.01 vs $0.03). I am surprised that my bids haven't been hit. The Bid/Ask on the Nov 3.6 option is .07/.10, but the settlement price today was $0.04.

Ron, have you seen this happen very often?

mu2pilot

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 ron99 
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mu2pilot View Post
I've only been selling deep OTM options for 9 months and have not run into this before...

I am short several HO calls expiring in October and November, 36 and 69 DTE, respectively. They have performed well and I am trying to buy them back in. I have a standing offer to buy the 3.40 and 3.45 Oct calls for $0.03 and the 3.60 Nov calls for $0.07. The weird thing is the 3.40 and 3.45 calls are closing well below what I am offering ($0.01 vs $0.03). I am surprised that my bids haven't been hit. The Bid/Ask on the Nov 3.6 option is .07/.10, but the settlement price today was $0.04.

Ron, have you seen this happen very often?

mu2pilot

It happens. Just have to be patient.

This is one of the downsides to trading low vol options. Just be glad you aren't trying to exit because market is going against you. That gets ugly.

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 mu2pilot 
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I have to tell a funny on myself as it relates to writing DOTM options. I occasionally see a dumb bid on an option I'm interested in and will oftentimes hit it. I've picked up some nice trades doing this. Sometimes the bid is above the previous settlement, even when the underlying is moving in a direction that should make the option cheaper than the previous settlement.

I was looking at HOX4 3.6 Calls and saw that the prev close (8/19) was $.05, but some idiot was bidding $.07. I thought, HEY!, I might want to add to my position if this guy is going to pay above settlement.

Fortunately, that thought sat on my brain for only about 5 seconds before I realized that the $.07 bid was MY BID!! I briefly forgot that I was trying to close out my trade and that the market was substantially below my bid!

Doh!

I didn't enter any trade, but I realize that that would have been a really dumb thing to do; do a trade with myself!

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 ron99 
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mu2pilot View Post
I have to tell a funny on myself as it relates to writing DOTM options. I occasionally see a dumb bid on an option I'm interested in and will oftentimes hit it. I've picked up some nice trades doing this. Sometimes the bid is above the previous settlement, even when the underlying is moving in a direction that should make the option cheaper than the previous settlement.

I was looking at HOX4 3.6 Calls and saw that the prev close (8/19) was $.05, but some idiot was bidding $.07. I thought, HEY!, I might want to add to my position if this guy is going to pay above settlement.

Fortunately, that thought sat on my brain for only about 5 seconds before I realized that the $.07 bid was MY BID!! I briefly forgot that I was trying to close out my trade and that the market was substantially below my bid!

Doh!

I didn't enter any trade, but I realize that that would have been a really dumb thing to do; do a trade with myself!

You needed one of these.


I know i have done some dumb things over the years. Worst is when you want to place a sell order and instead you place a buy order and you get filled.

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 meyer99 
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Ron,
Would you please check this chart against yours to see if they are close. Work in progress.

thinkorswim Sharing


Thank you,

Adrian

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 ron99 
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meyer99 View Post
Ron,
Would you please check this chart against yours to see if they are close. Work in progress.

thinkorswim Sharing


Thank you,

Adrian

What contract is it? OK I figured it out it is Oct CL.

Here's mine.


I use settlement prices. It looks like TOS uses last traded price on that day. I put the same price for the previous last traded day for weekends and holidays so different years chart correctly over each other.

I added an average line (white). I do leave abnormal outlier years out of the average. Like LC and LH this year. Or CL 2008.

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 jtrade 
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Thanks for these two threads, ron99, which I have in fact been loosely following since the outset. I did however miss your excellent & very professionally presented webinar from last December (just watched)... although I'd love you to make Part II !

About 10 years ago, I briefly traded an unusal strategy that sold YM option straddles on a monthly cycle, whilst trading the underlying into the strike areas such that any option loss was always fully covered. I stopped because of time constraints & I've often thought if there was just one strategy I should have stuck with, it was that one.

So I'm going to dip my toe in the water, starting with CL options only... and maybe trading CL futures as well to protect positions (maybe it's not necessary with this approach, but I'll literally start with one lots). Have to find my old MRCI Encyclopedia as a reference, but I think it only goes to 2005, so perhaps no longer of use.

Do you see any CL option trades on the horizon at present, please (I've noted your comment about typically looking 25 strikes out for Calls, 20 for Puts) ?

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 ron99 
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jtrade View Post
Thanks for these two threads, ron99, which I have in fact been loosely following since the outset. I did however miss your excellent & very professionally presented webinar from last December (just watched)... although I'd love you to make Part II !

About 10 years ago, I briefly traded an unusal strategy that sold YM option straddles on a monthly cycle, whilst trading the underlying into the strike areas such that any option loss was always fully covered. I stopped because of time constraints & I've often thought if there was just one strategy I should have stuck with, it was that one.

So I'm going to dip my toe in the water, starting with CL options only... and maybe trading CL futures as well to protect positions (maybe it's not necessary with this approach, but I'll literally start with one lots). Have to find my old MRCI Encyclopedia as a reference, but I think it only goes to 2005, so perhaps no longer of use.

Do you see any CL option trades on the horizon at present, please (I've noted your comment about typically looking 25 strikes out for Calls, 20 for Puts) ?

You're welcome.

Doing strangles should work.

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 jtrade 
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In gathering together various futures option writing tools I remembered I had copy of this, which does at least have some interesting commentary (although the authors are/were writing less FOTM options).

It's the "Free Option writing strategy and analysis spreadsheet" on this page :

URC Trading

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 ron99 
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Trade Alert.

Sell Oct Milk (DA) 20.50 puts for 0.03 ($60). IM is $229. 56 DTE. About 4.0% Monthly ROI depending on your commissions and fees.

Bid 133 times.

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dbh21
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ron99 View Post
What contract is it? OK I figured it out it is Oct CL.

Here's mine.


I use settlement prices. It looks like TOS uses last traded price on that day. I put the same price for the previous last traded day for weekends and holidays so different years chart correctly over each other.

I added an average line (white). I do leave abnormal outlier years out of the average. Like LC and LH this year. Or CL 2008.

Hi Ron. Thanks for the thread. This looks like excel. Where did you get your data for the chart? I've got 1.5 years of data from the SPAN ftp site, but thats it. Would like to add more to backtest (good results so far).

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 ron99 
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Hi Ron. Thanks for the thread. This looks like excel. Where did you get your data for the chart? I've got 1.5 years of data from the SPAN ftp site, but thats it. Would like to add more to backtest (good results so far).

I got the data from my trading platform, QST.

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 ron99 
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Normally ES rises the week of the Sep future contract expiration (this Friday). The next two weeks after that are usually down some.

So I wouldn't be selling any ES puts this week.

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Normally ES rises the week of the Sep future contract expiration (this Friday). The next two weeks after that are usually down some.

So I wouldn't be selling any ES puts this week.

Nice crystal ball gazing Ron. Based on the Friday close I make that +27 points up and +43 points down

Do you see the same tendency in December, March and June?

I usually look for an up day on the first trading day of each month, which is inside your Down window. Have you noticed this?


Thanks,

Chris

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 ron99 
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MGBRoadster View Post
Nice crystal ball gazing Ron. Based on the Friday close I make that +27 points up and +43 points down

Do you see the same tendency in December, March and June?

I usually look for an up day on the first trading day of each month, which is inside your Down window. Have you noticed this?


Thanks,

Chris

Actually for Dec & Mar it is higher to the end of the month. But June is the same as Sep. The June decrease is larger than it is in Sep. But this year there was no decrease in June.

I used to buy calls for the increase in price on first trading day of the month. But that quit working this year. ES this year is -79.00 on the first trading day of the month.

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MGBRoadster
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ron99 View Post
Actually for Dec & Mar it is higher to the end of the month. But June is the same as Sep. The June decrease is larger than it is in Sep. But this year there was no decrease in June.

I used to buy calls for the increase in price on first trading day of the month. But that quit working this year. ES this year is -79.00 on the first trading day of the month.

Thanks for that, I'll dust off the backtesting code.

I buy outright futures on the first of the month, -24.25 so far this year, but I suppose it depends on stop placement. Most of that loss was March, as far as I remember that was due to the Russian intervention in Crimea.

Sorry to sidetrack your selling options thread

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spreadhead
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Hi guys, I do a lot of studying and hands on trading many spreads just because at this time I want to be covered.

Couple of thoughts. If you are selling those way OTM options you are basically in a direction less trade and your profiting on time decay. With that being the case, one of the keys to your trading success is going to be your adjustments. When the price is no where close to your strike, then things are good. However, when price gets close you have to make a decision or that small gain can blow up to a big loss.

So here are some ideas. 1) Be prepared to make adjustments and add that to your plan. This could be to roll to the next month buying you more time. Additionally, keeping some money on the side to get into a bigger position when you roll, to offset the one month loss. 2) Review your delta position and either buy some calls or puts depending on direction to reduce your delta exposure as price gets close. If the markets are moving fast this might be preferred over rolling.

Why do I say this? Because with a nice adjustment strategy it does not matter what the market is doing, remember you are selling time, and you can trade month after month. However, many people do not have an adjustment strategy and that is where OTM or premium selling can break down.

Just some thoughts

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 ron99 
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ron99 View Post
Normally ES rises the week of the Sep future contract expiration (this Friday). The next two weeks after that are usually down some.

So I wouldn't be selling any ES puts this week.

The other thing that is interesting about this trend is that it usually reverses at 9:30 am ET on Friday of futures expiration day. That is the time that Sep futures quit trading. The Dec contract usually starts dropping at 9:30 am ET.

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 pbylina 
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Hi can you help. FB is at 74$. There are contracts that expire in 4 days. So I sell 10- 70 puts and 10- 78 calls for like 0.08 each. TOS says I would get 62$ for each. Margin is $11,000! So if the market doesn't get to 74 or 78 I make $120? What if market gets to 69 and the 70 put gets exercised? That means a buy order opens for me at 70? So that means I would be down 1,000$? Is there a way around this loss? I think you said once that you would close the position when market gets to 70?

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 ron99 
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pbylina View Post
Hi can you help. FB is at 74$. There are contracts that expire in 4 days. So I sell 10- 70 puts and 10- 78 calls for like 0.08 each. TOS says I would get 62$ for each. Margin is $11,000! So if the market doesn't get to 74 or 78 I make $120? What if market gets to 69 and the 70 put gets exercised? That means a buy order opens for me at 70? So that means I would be down 1,000$? Is there a way around this loss? I think you said once that you would close the position when market gets to 70?

I have never traded options on stocks. Try another more appropriate thread.

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 pbylina 
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Sorry. I have an example with ES. Market is at about 2015 and the 1900 put is going for 11.00. So it says the premium I would get is 550$. Now, do I get the $550 right away or do I have to wait for it to expire? If someone exercises, do I still get the $550?

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 ron99 
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pbylina View Post
Sorry. I have an example with ES. Market is at about 2015 and the 1900 put is going for 11.00. So it says the premium I would get is 550$. Now, do I get the $550 right away or do I have to wait for it to expire? If someone exercises, do I still get the $550?

You get the $550 right away BUT subtracted from that $550 is the current value of the option. So if the current price is 10.00 you have 550-500=50.

If someone exercises then you do get the 550 but you also get a short ES future at 1900.

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vmaiya73
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Sold to open 25 January 105 Calls. Credit received 0.03 per contract. Delta 0.01 DTE=41

any thoughts appreciated

V

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 ron99 
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vmaiya73 View Post
Sold to open 25 January 105 Calls. Credit received 0.03 per contract. Delta 0.01 DTE=41

any thoughts appreciated

V

Probably be OK. They will probably settle at 0.04 but nobody was buying 0.04s today.

Be careful about selling low premium calls because one bad week could wipe out a couple of years profit doing them.

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vmaiya73
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Ron,

Would what you have looked at ?

thanks

V

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 ron99 
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vmaiya73 View Post
Ron,

Would what you have looked at ?

thanks

V

Feb 105s? Sell at 0.07 or 0.08 and buy back at 0.02.

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vmaiya73
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Appreciate it; thanks. ill take a look, maybe try and roll them out

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 pbylina 
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If I sold at 3$ and today is expiration and the ask is 0.10, If I wait till the market gets to 0.00/expiration, do I still get the premium or do I have to close it now at 0.10 while there still is a market?

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 ron99 
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If I sold at 3$ and today is expiration and the ask is 0.10, If I wait till the market gets to 0.00/expiration, do I still get the premium or do I have to close it now at 0.10 while there still is a market?

What commodity + contract?

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ACstudio
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pbylina View Post
If I sold at 3$ and today is expiration and the ask is 0.10, If I wait till the market gets to 0.00/expiration, do I still get the premium or do I have to close it now at 0.10 while there still is a market?

What are you waiting for....you only have .03% left to make and it's pure gamma risk right now. And with a few hours left in the day you can take it off and re-establish the capital somewhere else to collect over the weekend. Surely you can find something that will yield more than .03% return for the next 3 days.

Unless it would cost you more to take it off than the .10 you get by letting it expire and you don't need the buying power I'm taking my profits and running like a thief in the night and moving on to something with more meat on the bone before the market closes.

For me I would have taken profits as soon as I could have bought it back for 1$ and taken a new position with more premium left and less gamma risk...but that's just they way I see capital use.

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 ron99 
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ACstudio View Post
What are you waiting for....you only have .03% left to make and it's pure gamma risk right now. And with a few hours left in the day you can take it off and re-establish the capital somewhere else to collect over the weekend. Surely you can find something that will yield more than .03% return for the next 3 days.

Unless it would cost you more to take it off than the .10 you get by letting it expire and you don't need the buying power I'm taking my profits and running like a thief in the night and moving on to something with more meat on the bone before the market closes.

For me I would have taken profits as soon as I could have bought it back for 1$ and taken a new position with more premium left and less gamma risk...but that's just they way I see capital use.

Why take it off? It expires today. The margin goes off tonight. Just have both positions on today.

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ACstudio
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ron99 View Post
Why take it off? It expires today. The margin goes off tonight. Just have both positions on today.

Because unless it's cheaper to let them expire worthless then I look to put the buying power to use now rather than wait until Monday....but I would have done that some time ago if it was profitable and my Gamma risk was spiking.

.10 isn't worth me waiting for. Buying it back now frees up the capital so I can put something else on today before the market closes. Like I said .....unless buying power is not an issue.

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 ron99 
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ACstudio View Post
Because unless it's cheaper to let them expire worthless then I look to put the buying power to use now rather than wait until Monday....but I would have done that some time ago if it was profitable and my Gamma risk was spiking.

.10 isn't worth me waiting for. Buying it back now frees up the capital so I can put something else on today before the market closes. Like I said .....unless buying power is not an issue.

If you are trading so tight that the tiny margin for options expiring today is preventing you from putting on new positions today then you are trading at considerable risk.

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ACstudio
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ron99 View Post
If you are trading so tight that the tiny margin for options expiring today is preventing you from putting on new positions today then you are trading at considerable risk.

I can't imagine that the buying power reduction is "tiny". If I were to sell the SPY 205 put right now for .01 it would be over 3k in buying power reduction. If I owned it why in the world would I tie up that capital for one minute when I can put it to better use? So maybe a better question would be.....if you didn't own it right now would you sell it right now to collect the .10....because by holding it that is basically what you are doing.

Your theta decay for the weekend on 3k worth something with 30 days to expiration will be more than enough to make up for the few pennies you are leaving on the table with 0 days to expiration.

In my opinion not taking advantage of efficient use of capital is trading at considerable risk.

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 ron99 
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ACstudio View Post
I can't imagine that the buying power reduction is "tiny". If I were to sell the SPY 205 put right now for .01 it would be over 3k in buying power reduction. If I owned it why in the world would I tie up that capital for one minute when I can put it to better use? So maybe a better question would be.....if you didn't own it right now would you sell it right now to collect the .10....because by holding it that is basically what you are doing.

Your theta decay for the weekend on 3k worth something with 30 days to expiration will be more than enough to make up for the few pennies you are leaving on the table with 0 days to expiration.

In my opinion not taking advantage of efficient use of capital is trading at considerable risk.

Dude, this thread is selling options on FUTURES. The margin for an ES option that is well OTM is $51.

Please delete your off subject responses from this thread. And i will do the same for my responses to you.

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 pbylina 
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ron99 View Post
What commodity + contract?

ES

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 ron99 
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pbylina View Post
ES

So yes you could have just let it expire and you would get all of the $3 you sold it for. As long as it is OTM you can let it expire.

Now I have found that exiting these options early, like when the premium drops by more than 50% and there are still many DTE, your monthly ROI will be higher than if you ride it to expiration.

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vmaiya73
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Ron, how far do you usually go out to sell you options ? I usually start at 45 days but wondering if i should start at 60 days or later ?

thanks for the help

V

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 myrrdin 
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vmaiya73 View Post
Ron, how far do you usually go out to sell you options ? I usually start at 45 days but wondering if i should start at 60 days or later ?

thanks for the help

V

I usually sell options with between 2 and 6 months to go, preferably 3 - 4 months. Main criterium is fundamentals (eg. seasonals).

Best regards, Myrrdin

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 ron99 
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vmaiya73 View Post
Ron, how far do you usually go out to sell you options ? I usually start at 45 days but wondering if i should start at 60 days or later ?

thanks for the help

V

I have found that if you sell higher DTE and further OTM that futures movement against you have less effect. The delta is less for options of the same price that are further out in time.

I have been selling at 90-120 DTE and then getting out when the premium has dropped by at least 50%. That gives you a higher ROI than if you ride to expiration.

For example, on CL a CLg5 p47.50 settled at 0.21 on 12/10 and the delta is 0.0483 and IM is 898 and 34 DTE.

But a CLj4 p40.00 settled at 0.21 on 12/10 and the delta is 0.0322 and IM is 358 and 96 DTE. Far less IM and lower strike and delta.

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 mdsvtr 
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I was reading through the newer revised " Selling Options on Futures " thread , and wanted to please ask you to explain the following sentence...
" Be careful about selling low premium calls because one bad week could wipe out a couple of years profit doing them "

I am new to the whole premise of selling OTM credits on the futures, and want to make sure that I avoid wiping out a chunk of my account by selling low premium Calls

I just purchased the Book " Selling Options on Futures "3rd edition
so hope to finish it by Christmas

Thanks so much Ron for your time and your help,
I always appreciate it - Michael

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 mdsvtr 
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from the CL example you just mentioned above....
" I have been selling at 90-120 DTE and then getting out when the premium has dropped by at least 50% "

Does this mean that you will exit the trade and Buy-Back the position, when/if at any point during the trade, you can buy to close out the trade and still keep 50% as profit, of the initial credit received when you first put on the trade ?


Thanks as always Ron, I and others on here really appreciate you sharing and starting the thread - Michael

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 ron99 
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mdsvtr View Post
I was reading through the newer revised " Selling Options on Futures " thread , and wanted to please ask you to explain the following sentence...
" Be careful about selling low premium calls because one bad week could wipe out a couple of years profit doing them "

I am new to the whole premise of selling OTM credits on the futures, and want to make sure that I avoid wiping out a chunk of my account by selling low premium Calls

I just purchased the Book " Selling Options on Futures "3rd edition
so hope to finish it by Christmas

Thanks so much Ron for your time and your help,
I always appreciate it - Michael

I said that because selling something as volatile as CL, for only 0.03, a bad trade could wipe out the little profit quickly. In some other commodities selling those might be OK if they aren't as volatile.

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 ron99 
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mdsvtr View Post
from the CL example you just mentioned above....
" I have been selling at 90-120 DTE and then getting out when the premium has dropped by at least 50% "

Does this mean that you will exit the trade and Buy-Back the position, when/if at any point during the trade, you can buy to close out the trade and still keep 50% as profit, of the initial credit received when you first put on the trade ?


Thanks as always Ron, I and others on here really appreciate you sharing and starting the thread - Michael

Yes buy back position after premium drops at least 50%. If fundamentals and futures trend are in my favor I will hold longer to capture more premium. Also the ROI has to be better than if I ride to expiration.

Late last week I had some ES puts I should have bought back but didn't. So when ES dropped this week I have to keep until futures rebound because IM increased and premium wasn't < 50% anymore and ROI was poor.

Now that ES is rebounding I don't have margin room to sell new options because I kept those I had on.

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 mdsvtr 
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Ron for the quick response(s)

I very much appreciate it

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vmaiya73
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Morning Ron,

Thinking with 50 DTE; selling /CL 85 call options; premium is roughly .9 per contract; thinking of selling now then covering when i get to 50% - 75 % of premium

your thoughts ?

thanks

V

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 ron99 
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vmaiya73 View Post
Morning Ron,

Thinking with 50 DTE; selling /CL 85 call options; premium is roughly .9 per contract; thinking of selling now then covering when i get to 50% - 75 % of premium

your thoughts ?

thanks

V

Sounds good.

Selling and holding during holidays is good because you get an extra day of time erosion with no trading. (Jan 1st)

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vmaiya73
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Morning Ron,

I was just wondering what other commodities you were in currently ? My goal is to have about 5 that I can monitor, and consistently sell options on.

Currently in ES (weeklies), /CL, and Euro futures.

also do you find the commission structure at DeCarly trading better than Optionsxpress?

thanks

Vijay

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 ron99 
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vmaiya73 View Post
Morning Ron,

I was just wondering what other commodities you were in currently ? My goal is to have about 5 that I can monitor, and consistently sell options on.

Currently in ES (weeklies), /CL, and Euro futures.

also do you find the commission structure at DeCarly trading better than Optionsxpress?

thanks

Vijay

Mainly March ES monthlies. KC calls. Some dairy futures. Nothing else.

Depends on what your commissions are at DeCarley. But DeCarley will get you exchange minimum margin. OX is sometimes higher.

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 ron99 
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Schork sent out a free energy newsletter. It is interesting reading.

https://www.schorkreport.com/newsletters/schork-TSR-20150105.pdf

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vmaiya73
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Ron im looking at the following trades and just wondering your opinion:

/KC March 265 call options

and

Euro March 1.27 Calls

thanks

Vijay

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 ron99 
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vmaiya73 View Post
Ron im looking at the following trades and just wondering your opinion:

/KC March 265 call options

and

Euro March 1.27 Calls

thanks

Vijay

I have never traded the Euro.

The March KC calls? Maybe OK?

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vmaiya73
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Morning Ron,

Just was wondering what you thought about the following trades ?

Selling OTM calls on Coffee expiring in April---looks like seasonality wise coffee starts to make a run in April into May but right now its in a major downtrend ?

Selling OTM puts on Gold ? Looks like April into may it goes up but then again with a stronger dollar its pressure on Gold and Oil ?

thanks

Vijay

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 ron99 
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At the top of this webpage https://www.theice.com/softs

is a pdf link to the free monthly soft commodities analysis by J Ganes Consulting.

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 ron99 
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vmaiya73 View Post
Morning Ron,

Just was wondering what you thought about the following trades ?

Selling OTM calls on Coffee expiring in April---looks like seasonality wise coffee starts to make a run in April into May but right now its in a major downtrend ?

Selling OTM puts on Gold ? Looks like April into may it goes up but then again with a stronger dollar its pressure on Gold and Oil ?

thanks

Vijay

The seasonal trend for May KC is down from now into expiration of the May options. What KC does after May option expiration (4/10) is irrelevant to the discussion of May options.

Yes selling those is a good idea. But it was a better idea a few hours ago before the futures crash today. Many times I have looked at doing something then I look at futures and saw that I was a little late thinking of doing that. There should be a bounce after today.

Seasonals in metals are not strong so I quit looking at them. GC has been in a 200 range lately so a strangle should work.

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vmaiya73
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Thanks Ron

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 ron99 
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Thanks Ron

Threads will be shorter if you use the Thanks button at the bottom right of my post instead of making a separate post saying thanks.

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 mdsvtr 
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of the " The Complete Guide to Option Selling " ( Fantastic Book ),
And I have also read through Ron99's Top notch thread covering the method of selling far OTM options on the Future market(s)

From just finishing the book, and from reading through the thread, I had a few question I would like to ask Ron and any other members who can add to the questions at hand please...

1. I use TorS as my platform , and they post a Daily initial Margin for each of the Future, which I am going to assume is as close to SPAN Margin as I can get , as far as the Margin requirements being accurate ?

Right now, I am showing ES at $5,060 initial margin
CL at $5,390 initial margin
GC at $4,400 initial
and ZC at $1,100 initial

Just giving some examples of what I'm currently showing , to see if it matches the " Actual " SPAN margin ?



2. As far as Limit Lock Up / Down is concerned..... it states in the book, that Options are Immune to Limit Up/Down days ..... so does that include selling both Naked and Credit Spreads ?


3. I know that when Implied Volatility is high, that this is not the main/sole reason to sell options for a credit..... But selling when any product is at high IV definitely makes the premiums juicy, and benefits the Option seller that much more... I.E. the more credit received for Selling

So given that high IV is a plus when selling Options, what is the best Indicator to use on the Charts, to " Tell us " when IV is at high / extreme levels....... Bollinger Bands ? Standard Deviation Regression Lines ( with 2 and 3 standard deviation levels plotted ) ?


4. Ron, I know that you mentioned , as well as it recommends in the book, that using each individual Future's " Seasonal " chart, and comparing it to that Future's actual chart , will help in showing us what the tendencies for ' Big " up and down moves have been over the course of say 15 years , and that this can really give us great insight, as to which direction to look to trade that Future... I.E. trade with it's Seasonal move's tendencies and not trade against it

Where do you find these Seasonal charts please ?



5. and lastly please, relating to Margin..... you mentioned the following:

" For example, if I sell an option for $100 and the margin required is $500, I will have $1000 excess.

If the margin increases to $1200 and the premium is higher than $400 then the cash excess is gone and it is time to exit. "

Regarding the margin increasing to $1,200 and the premium going higher than $400, this would mean an increase in required margin of 1.5 x the initial $500
AND
an increase of the credit you received when the trade was put on.... increasing to 4 x the amount you received ?

Are these hard set rules that you use on when to Exit a trade ?

Or is it based on other factors surrounding the trade itself ? What Future you're trading ?


Ron, thank you very much for starting this thread and for sharing all of your knowledge and experience from selling OTM options,
Really appreciate it - Michael

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 ron99 
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1. Link for CME Margins. Multiply Maint times 1.1 to get our non-member initial margin.

https://www.cmegroup.com/clearing/margins/

2. No limits on options. Period.

3. IV should be available from your data provider.

4. I make my own. You can buy them from MRCI or Seasonalgo.com.

5. Yes hard rule.

"Regarding the margin increasing to $1,200 and the premium going higher than $400, this would mean an increase in required margin of 1.5 x the initial $500 AND an increase of the credit you received when the trade was put on.... increasing to 4 x the amount you received ?"

Not quite.

If the IM was $500 when you put the option on and the IM increased to $1200 that is a $700 increase.

If the premium was $100 when you put it on and now the premium is $400 (meaning you are losing $300) then your $1000 cash excess you held when you entered the trade is gone ($1000 minus 700 minus 300) and it is time to exit.

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 mdsvtr 
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Thanks so much Ron for the explanation of how the Margin works and the way in which we determine when to Exit the trade for a Loss..... The calculation of how to compute this was throwing me off, but now thanks to you I understand it


One quick thing please,
What is the bare minimum you recommend someone start out trading this strategy?

I have an account with TorS , so I need to contact them and see what their minimum is to be able to sell these trades " Naked " VS covered..... I may just have to start out doing them as credit spreads, and move my strikes in a bit ( while still staying as close to the probability of finishing OTM as I can )

Thank you again for your help and for sharing and starting this thread - Michael

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 ron99 
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mdsvtr View Post
Thanks so much Ron for the explanation of how the Margin works and the way in which we determine when to Exit the trade for a Loss..... The calculation of how to compute this was throwing me off, but now thanks to you I understand it


One quick thing please,
What is the bare minimum you recommend someone start out trading this strategy?

I have an account with TorS , so I need to contact them and see what their minimum is to be able to sell these trades " Naked " VS covered..... I may just have to start out doing them as credit spreads, and move my strikes in a bit ( while still staying as close to the probability of finishing OTM as I can )

Thank you again for your help and for sharing and starting this thread - Michael

The more money you have the less critical it is to be correct on every trade. One bad trade can easily wipe out a small account. Even leaving you owing them money.

Only fund your account with money you can lose and not affect your daily living.

$10k minimum? Smaller than that is just too hard to trade.

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 ron99 
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One trade that has been working well for me is selling ES puts that are 80+ DTE and not higher than a delta of 2.00. I then trade out of the position when the premium drops to < 0.80. You can usually ride out a 150-200 move down in ES futures with the excess of my formula.

Monthly ROI averages about 3-4%. Or 40-60% per year.

This is my variation of Karen the Supertrader's strategy. I think this works better. It's simple. It's easy to do because of the volume available in ES puts. It's safer because you are further OTM than Karen is at 56 DTE. Also you are at a lower delta than her.

I have done 497 trades, 16,138 contracts, selling ES puts. Only one loser of 50 contracts in Sep 2011. None since.

Like all trades, watch the fundamentals and if a major drop might be happening because of a US gov shutdown or major problems in EU, China or elsewhere or something else (recession), tread lightly with these puts.

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 mdsvtr 
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Ron,
with this ES selling Put strategy.... will you sell these, even if your bias of the ES is Bearish vs Bullish ?
Since sell Puts is an overall Bullish strategy ?

And do you sell these around the 80 - 90 days till expiration " Mark " , because to get a decent premium ( due to selling so far OTM and with the low Deltas of .02 )
to get these jucier premiums, you have to sell the further out till expiration strikes ?


Thank you again for the replies,
Learning a lot from this thread and demoing , selling these types of trades

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Forex37
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ron99 View Post
One trade that has been working well for me is selling ES puts that are 80+ DTE and not higher than a delta of 2.00. I then trade out of the position when the premium drops to < 0.80. You can usually ride out a 150-200 move down in ES futures with the excess of my formula.

Monthly ROI averages about 3-4%. Or 40-60% per year.

This is my variation of Karen the Supertrader's strategy. I think this works better. It's simple. It's easy to do because of the volume available in ES puts. It's safer because you are further OTM than Karen is at 56 DTE. Also you are at a lower delta than her.

I have done 497 trades, 16,138 contracts, selling ES puts. Only one loser of 50 contracts in Sep 2011. None since.

Like all trades, watch the fundamentals and if a major drop might be happening because of a US gov shutdown or major problems in EU, China or elsewhere or something else (recession), tread lightly with these puts.

Ron thanks for the info. Just some more details please: Which contract / exchange would work with a $ 25k account? I assume you trade European style?

I trade the same methodology already with DAX (odax) and Eurostoxx50 options. Those are unavailable for US citizens, but many others might have a look at them (contract sizes are about $60k for the first and $40k for the latter).

So which instrument should I use for my first trades with SP500 options? If MM requests more than $25k, what would be reasonable?

Thanks

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 ron99 
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mdsvtr View Post
Ron,
with this ES selling Put strategy.... will you sell these, even if your bias of the ES is Bearish vs Bullish ?
Since sell Puts is an overall Bullish strategy ?

And do you sell these around the 80 - 90 days till expiration " Mark " , because to get a decent premium ( due to selling so far OTM and with the low Deltas of .02 )
to get these jucier premiums, you have to sell the further out till expiration strikes ?

I sell these no matter my bias. These are so far OTM that most of the time it won't matter.

What is "Mark"?

I sell that far DTE because you are further OTM for the same premium.

Also, and this is important, the time erosion of the premium is faster on these far OTM options than doing the same strikes with less DTE.

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 ron99 
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Forex37 View Post
Ron thanks for the info. Just some more details please: Which contract / exchange would work with a $ 25k account? I assume you trade European style?

I trade the same methodology already with DAX (odax) and Eurostoxx50 options. Those are unavailable for US citizens, but many others might have a look at them (contract sizes are about $60k for the first and $40k for the latter).

So which instrument should I use for my first trades with SP500 options? If MM requests more than $25k, what would be reasonable?

Thanks

I trade American style. These are options on futures not options on stocks. ES only trades at CME. Normally my initial margin is around $500 each for ES puts.

What is MM?

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 mdsvtr 
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What is "Mark"?

I was just trying to put emphasis on the 80 - 90 days till expiration


I sell that far DTE because you are further OTM for the same premium.

That is definitely a huge benefit, in that.... with selling Naked , you can close out the position when the trade goes in your favor at almost any point for a profit, But for a credit spread.... to get the most Profit by buying to close before expiration... you have to hold that credit spread a lot closer to its expiration

VS

a naked trade... you can close that trade out for 80 - 90 % of max credit received, with only say 10 days of time passing vs you would have to wait say, 30 days of time passing with the credit spread, in order to make the same 80 - 90% of credit received profit ?


Also, and this is important, the time erosion of the premium is faster on these far OTM options than doing the same strikes with less DTE.


This is Fantastic news
Thanks for sharing, I had no idea that this was the case

Ron, do you mind explaining how/ why this is so ?



Normally my initial margin is around $500 each for ES puts


Is this initial margin of $500 based on how Far OTM the strike we sell is
OR
is this $500 for initial margin, based on account size / your brokers Margin requirements?

And lastly please...

for Seasonal trading analysis, I looked at the 2 companies you recommended to purchase the reports from.....
I also looked at TorS, and found that they have a Chart Mode setting called " Seasonality "

You can pull up 20 years of historical data , calculating from a Daily timeframe
I pulled it up on ZC , and see that ZC peaks at the 470 - 480 price range from the months of April - June ( roughly )

So with this kind of information, would we look to sell Calls at 490 500 strikes ?
Is this how we use Seasonals and place trades knowing this kind of information ?



Thanks again, Really appreciate it

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 ron99 
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mdsvtr View Post
What is "Mark"?

I was just trying to put emphasis on the 80 - 90 days till expiration


I sell that far DTE because you are further OTM for the same premium.

That is definitely a huge benefit, in that.... with selling Naked , you can close out the position when the trade goes in your favor at almost any point for a profit, But for a credit spread.... to get the most Profit by buying to close before expiration... you have to hold that credit spread a lot closer to its expiration

VS

a naked trade... you can close that trade out for 80 - 90 % of max credit received, with only say 10 days of time passing vs you would have to wait say, 30 days of time passing with the credit spread, in order to make the same 80 - 90% of credit received profit ?

It's going to take a lot more than 10 days to get 80-90% of credit received.

Do some paper trades and watch what happens.


Also, and this is important, the time erosion of the premium is faster on these far OTM options than doing the same strikes with less DTE.

This is Fantastic news
Thanks for sharing, I had no idea that this was the case

Ron, do you mind explaining how/ why this is so ?

the strikes are further OTM so they are less risky and thus less premium for them as they get closer to expiration. That happens sooner than a higher strike.

Normally my initial margin is around $500 each for ES puts

Is this initial margin of $500 based on how Far OTM the strike we sell is
OR
is this $500 for initial margin, based on account size / your brokers Margin requirements?

Margin is set by the exchange. SPAN margin. Most brokers are at the SPAN minimum.

And lastly please...

for Seasonal trading analysis, I looked at the 2 companies you recommended to purchase the reports from.....
I also looked at TorS, and found that they have a Chart Mode setting called " Seasonality "

You can pull up 20 years of historical data , calculating from a Daily timeframe
I pulled it up on ZC , and see that ZC peaks at the 470 - 480 price range from the months of April - June ( roughly )

So with this kind of information, would we look to sell Calls at 490 500 strikes ?
Is this how we use Seasonals and place trades knowing this kind of information ?

Heck no. First of all you have to look at each contract separately. For example, July corn performs differently than Dec corn during the same calendar month.

Seasonals are far down the list of tools to use. They work sometimes if the fundamentals are right. And even then they may not work because of outside influences. Be careful using them.

Secondly you shouldn't sell calls that close.

I going to be brutally honest here. Based on the questions you ask, I am going to suggest you do a lot more research and do a lot of paper trading before you start trading live. You are no where near to being ready yet.

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luck
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I have had Interactive Brokers for years. I think it is time to move on. Could you guys recommend me a broker for option selling?

A couple of weeks ago, on one morning IB suddenly almost doubled my margin and liquidated my position, incurring loss. I asked IB customer service, and they said they just increased the margin due to some internal policy change (not due to market condition or my portfolio). I received no prior warning of any kind, and I was well above margin until IB just decided one morning.

I think it's time to switch. Any recommendation on broker is really appreciated. Margin lower than IB would be great. I looked around and people seem to use Thinkorswim? Are there any more recommendations?

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 myrrdin 
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luck View Post
I have had Interactive Brokers for years. I think it is time to move on. Could you guys recommend me a broker for option selling?

A couple of weeks ago, on one morning IB suddenly almost doubled my margin and liquidated my position, incurring loss. I asked IB customer service, and they said they just increased the margin due to some internal policy change (not due to market condition or my portfolio). I received no prior warning of any kind, and I was well above margin until IB just decided one morning.

I think it's time to switch. Any recommendation on broker is really appreciated. Margin lower than IB would be great. I looked around and people seem to use Thinkorswim? Are there any more recommendations?


I do a lot of option selling, and left IB for similar reasons some time ago.

I trade with DeCarley and RJO, and am satisfied with both of them. DeCarley offers the best service I ever received from a broker, and RJO offers good service and excellent free (for customers) information on fundamentals.

I prefer two brokers to reduce third party risk. Was customer of Man Financial some years ago, and fortunately moved to RJO before they went bancrupt.

Best regards, Myrrdin

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 ron99 
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luck View Post
I have had Interactive Brokers for years. I think it is time to move on. Could you guys recommend me a broker for option selling?

A couple of weeks ago, on one morning IB suddenly almost doubled my margin and liquidated my position, incurring loss. I asked IB customer service, and they said they just increased the margin due to some internal policy change (not due to market condition or my portfolio). I received no prior warning of any kind, and I was well above margin until IB just decided one morning.

I think it's time to switch. Any recommendation on broker is really appreciated. Margin lower than IB would be great. I looked around and people seem to use Thinkorswim? Are there any more recommendations?

TOS does not trade all options. Check to see if they trade what you want to trade.

I use DeCarley/Gain. Best broker service ever.

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Forex37
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myrrdin View Post
I do a lot of option selling, and left IB for similar reasons some time ago.

I trade with DeCarley and RJO, and am satisfied with both of them. DeCarley offers the best service I ever received from a broker, and RJO offers good service and excellent free (for customers) information on fundamentals.

I prefer two brokers to reduce third party risk. Was customer of Man Financial some years ago, and fortunately moved to RJO before they went bancrupt.

Best regards, Myrrdin


Hi Myrrdin,

I too was a customer of MAN...., What are the coditions with RJO (can you tell us?)? Is this RJO US or RJO UK via their KYTE setup?

Thanks

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 myrrdin 
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Forex37 View Post
Hi Myrrdin,

I too was a customer of MAN...., What are the coditions with RJO (can you tell us?)? Is this RJO US or RJO UK via their KYTE setup?

Thanks

I trade with RJO US. Conditions depend - as with most brokers - on the size of the account and on the number of trades per month. RJO is more expensive than IB and has similar prices as MAN Financial. For an option seller, conditions are ok. As a day trader I would prefer a cheaper broker.

Main advantage of RJO: They have excellent reports on fundamentals. Currently I do more trades with deCarley due to their excellent service. But I will keep the RJO account for their reports.

Generally I prefer working with (at least) two brokers to reduce the risk that almost would have hit me at MAN.

Best regards, Myrrdin

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