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DeCarley Trading's Carley Garner (Senior Strategist/Broker) - Ask Me Anything (AMA)
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DeCarley Trading's Carley Garner (Senior Strategist/Broker) - Ask Me Anything (AMA)

  #11 (permalink)
Site Administrator
Manta, Ecuador
 
Futures Experience: Advanced
Platform: My own custom solution
Favorite Futures: E-mini ES S&P 500
 
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decarleytrading View Post
@Big Mike There are a lot of advantages to trading options on futures, relative to options on stocks...and SPAN margin for all accounts regardless of size or trader experience is one of them.

But isn't this margin level different depending on your broker? So for example at your brokerage you say you are offering SPAN margin, but it would seem many other brokers do not or use multiples of SPAN margin. Even big guys like optionsXpress and Interactive Brokers, as an example.

I've seen discussions in that thread I linked to by @ron99 that indicate a general "nervousness" or even an unwillingness to extend competitive margin to option sellers. How or why is it that you treat this differently?

I know that when you look at regular overnight futures margins set by CME for instance, and then look at the intraday margins quoted by some brokers (ie: $500 on ES), it is ridiculous amounts of leverage. Too much leverage. No one should be trading 1 contract on ES with just $500 of margin. I am trying to figure out how to apply this to the options world.

For regular futures trading, I would know my maximum risk on any given trade is for example 2% of my account size. Let's keep it simple and say $10k account so 2% = $200 risk maximum per trade. So if the market dictates I need to trade with a 10 tick stop, that's $125.00 + commission for my risk and therefore within my 2%. But it also means my maximum position size is 1 lot, if I wanted to trade 2 lots I would exceed my 2% threshold.

Still working this out as to how to apply the same to short options.

Please excuse the newbie questions, you know I am still wet behind the ears when it comes to options, but I am trying to learn

Mike

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  #12 (permalink)
 Vendor: www.decarleytrading.com 
Las Vegas NV United States
 
Futures Experience: Advanced
Platform: QST, Zaner360, ONYX, NinjaTrader, Rithmic, CTS
Broker/Data: RCG, Crossland, Gain Capital, ADMIS, Dorman, many feeds and platforms.
Favorite Futures: options
 
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Posts: 28 since Mar 2013
Thanks: 1 given, 64 received

Not all brokers charge SPAN, and some refuse to allow option selling

Yes, many brokerage firms charge higher margin than the SPAN minimum. SPAN is the exchange required margin; no broker has the authority to offer margin rates at a discount to SPAN but they have the freedom to charge rates in excess of SPAN...and many do. Also, many brokerage firms take it a step further by simply forbidding option selling.

It is the view of many brokerage firms, particularly discount brokers, that option selling clients are too much risk for the expected minimal reward. Option sellers trade far less volume (which equates to less revenue to the broker) than a typical futures trader, yet they are facing the same theoretically unlimited risk. Similarly, option selling accounts are much more difficult to monitor for risk than futures trading accounts are. This is because options aren't liquid during off hours, stop orders aren't accepted on options, and because options trade far less than futures it can be more time consuming to determine accurate account balances for option traders. Simply put, many brokers believe the risk and manpower outweigh the reward for offering service to this type of trading account.

We look at things differently than most brokerage firms. Because we like the long-term prospects of an option selling strategy, we cater to this group. In our opinion, option selling accounts have the potential to be trading with us several years down the road, whereas futures traders are less likely to be doing so. Also, because I've been a broker specializing in options since the spring of 2004, I'm comfortable in our ability to manage the risk our clients pose to us.

With an option selling account, it is probably necessary to give your trades a little more room than 2% of the account balance. This is because with option selling, the odds of success on any given trade are much higher than they are on futures. Statistically (but not guaranteed), short option traders should make money on somewhere between 70 to 90% of their trades. Accordingly, they can afford to risk 5 to 10% on a particular option selling venture. However, the danger in this is letting the losers get out of hand.

It is not possible to place stop orders on options on futures, so you must place mental stops and be quick to adjust or react. A rule of thumb is to at least adjust a position once you have lost as much as you originally collected for the option. For instance, if you sell an option for $500, and it is now worth $1000, it is probably a good time to admit defeat. This doesn't necessarily mean you should pull the plug entirely, but you should probably reduce risk by adjusting the trade.

*There is substantial risk of loss in trading futures and options.

If you have any questions about the products or services provided by DeCarleyTrading, please send me a Private Message or use the futures.io "Ask Me Anything" thread.
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  #13 (permalink)
Site Administrator
Manta, Ecuador
 
Futures Experience: Advanced
Platform: My own custom solution
Favorite Futures: E-mini ES S&P 500
 
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Posts: 46,237 since Jun 2009
Thanks: 29,350 given, 83,155 received


@decarleytrading,

A question came in today in another AMA that you would be better served to answer (the other trader is not an options trader):

Robert asked:

"What is the best way to enter an iron condor? Should I enter each leg separately asking halfway between bid/ask? If entering as a spread and my credit while evaluating the trade is 3.00, should I do a limit order of 3.00? I am confused as to how to enter an iron condor the best way"

Mike

Due to time constraints, please do not PM me if your question can be resolved or answered on the forum.

Need help?
1) Stop changing things. No new indicators, charts, or methods. Be consistent with what is in front of you first.
2) Start a journal and post to it daily with the trades you made to show your strengths and weaknesses.
3) Set goals for yourself to reach daily. Make them about how you trade, not how much money you make.
4) Accept responsibility for your actions. Stop looking elsewhere to explain away poor performance.
5) Where to start as a trader? Watch this webinar and read this thread for hundreds of questions and answers.
6)
Help using the forum? Watch this video to learn general tips on using the site.

If you want
to support our community, become an Elite Member.

Reply With Quote
 
  #14 (permalink)
 Vendor: www.decarleytrading.com 
Las Vegas NV United States
 
Futures Experience: Advanced
Platform: QST, Zaner360, ONYX, NinjaTrader, Rithmic, CTS
Broker/Data: RCG, Crossland, Gain Capital, ADMIS, Dorman, many feeds and platforms.
Favorite Futures: options
 
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Posts: 28 since Mar 2013
Thanks: 1 given, 64 received

Iron Condor Placement

@Big Mike When trading Iron Condors traders are dealing with multiple "legs" to a trade which are ideally executed simultaneously. Whether or not it is best to enter the order as a package on a single ticket, or each leg individually, really depends on the market. In less liquid markets, it is usually a good idea to work a limit order on the condor as a package. This way you don't have the stress, risk and cost associated with not getting parts of the trade filled. However, spread tickets are a little more work for market makers to fill so in liquid markets you might actually have worse fill quality than you would have if you simply placed orders for each leg individually. This is because there is typically a much deeper market for individual strikes than their is spreads. After all, there are thousands of option spread possibilities so it is unlikely that many other retail traders will be trading the exact same spread...thus, leaving you to deal solely with the market makers.

*There is substantial risk of loss in trading futures and options.

If you have any questions about the products or services provided by DeCarleyTrading, please send me a Private Message or use the futures.io "Ask Me Anything" thread.
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  #15 (permalink)
Elite Member
The Moon
 
Futures Experience: Beginner
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Hi Carley,

I never traded options on futures. Would like to ask you about trading short calendar spreads, when we sell back month and buy front month. Is there a big margin requirement because a back month short option is naked? I know that in equities the margin is huge for such spreads.

For example if CL price is at 97 and we sell May 97 put and buy Apr 97 put, what will be the profit and margin requirement for this spread? And how the margin would change if the price goes down deeper in the money (e.g. to 87), taking into account we have a front month long option.

As you know in short calendar we want the price to move away somewhere from the current strike. So it works better with volatile markets, I am not sure if CL is a good choice or not and how wide are the breakeven points in this spread, because my account does not support futures options I cannot test it.

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  #16 (permalink)
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@decarleytrading,

Does your firm allow options selling with an IRA account? Thanks.

Edward

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  #17 (permalink)
Elite Member
Tel Aviv
 
Futures Experience: Advanced
Platform: Thinkorswim
Broker/Data: TD Ameritrade
Favorite Futures: Options
 
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Thanks: 1 given, 1 received

Calculate position rik

Carley, how do you approach calculating risk in an open credit position (open option writes) Is ther any recommended tool out there? Thanks

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  #18 (permalink)
 Vendor: www.decarleytrading.com 
Las Vegas NV United States
 
Futures Experience: Advanced
Platform: QST, Zaner360, ONYX, NinjaTrader, Rithmic, CTS
Broker/Data: RCG, Crossland, Gain Capital, ADMIS, Dorman, many feeds and platforms.
Favorite Futures: options
 
decarleytrading's Avatar
 
Posts: 28 since Mar 2013
Thanks: 1 given, 64 received


Chipmunk View Post
Hi Carley,

I never traded options on futures. Would like to ask you about trading short calendar spreads, when we sell back month and buy front month. Is there a big margin requirement because a back month short option is naked? I know that in equities the margin is huge for such spreads.

For example if CL price is at 97 and we sell May 97 put and buy Apr 97 put, what will be the profit and margin requirement for this spread? And how the margin would change if the price goes down deeper in the money (e.g. to 87), taking into account we have a front month long option.

As you know in short calendar we want the price to move away somewhere from the current strike. So it works better with volatile markets, I am not sure if CL is a good choice or not and how wide are the breakeven points in this spread, because my account does not support futures options I cannot test it.

@Chipmunk

The margin on short futures options strategies tends to be much lighter than that of stocks. However, options on futures margin is rather complicated and somewhat mysterious. The margin requirements are constantly changing with price and volatility, so it isn't a black and white figure; instead there are plenty of gray areas.

There is a significant margin discount when buying the front month and selling the distant month. The current futures margin in crude oil is approximately $5,000; my guess is that a spread such as the one mentioned would carry a margin charge of about $1,400 (but again, it would all depend on market volatility, etc). It is likely even be less, but I'd rather high ball it than the opposite.

This strategy is quite a bit different than what we typically do. I'm not saying that it is better or worse, just that we don't have a lot of hands on experience with this exact strategy. We have more experience with similar strategies using out-of-the-money options. In the case of OTM options, it is fair to say that you should be prepared to bare the brunt of any spike in volatility (the front month won't keep up), so you will have the best prospects when expecting volatility to decrease. Also, the front month option will erode more quickly in a quiet market. So it can be tricky.

*There is substantial risk of loss in trading futures and options.

If you have any questions about the products or services provided by DeCarleyTrading, please send me a Private Message or use the futures.io "Ask Me Anything" thread.
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  #19 (permalink)
 Vendor: www.decarleytrading.com 
Las Vegas NV United States
 
Futures Experience: Advanced
Platform: QST, Zaner360, ONYX, NinjaTrader, Rithmic, CTS
Broker/Data: RCG, Crossland, Gain Capital, ADMIS, Dorman, many feeds and platforms.
Favorite Futures: options
 
decarleytrading's Avatar
 
Posts: 28 since Mar 2013
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Trading options on futures in an IRA


eudamonia View Post
@decarleytrading,

Does your firm allow options selling with an IRA account? Thanks.

Edward

@eudamonia

We certainly allow clients to trade futures, and options on futures, in an IRA account. Doing so requires the use of a custodian (which isn't any different than any other retirement account). There is slightly more paperwork required relative to a traditional individual account, but once it is open there are no additional trading restrictions. You are free to sell options at exchange minimum margin requirements.

If you would like additional information/details, please send me a private message

*There is substantial risk of loss in trading futures and options.

If you have any questions about the products or services provided by DeCarleyTrading, please send me a Private Message or use the futures.io "Ask Me Anything" thread.
Reply With Quote
The following user says Thank You to decarleytrading for this post:
 
  #20 (permalink)
 Vendor: www.decarleytrading.com 
Las Vegas NV United States
 
Futures Experience: Advanced
Platform: QST, Zaner360, ONYX, NinjaTrader, Rithmic, CTS
Broker/Data: RCG, Crossland, Gain Capital, ADMIS, Dorman, many feeds and platforms.
Favorite Futures: options
 
decarleytrading's Avatar
 
Posts: 28 since Mar 2013
Thanks: 1 given, 64 received

Risk of Naked Option Selling



Mozart View Post
Carley, how do you approach calculating risk in an open credit position (open option writes) Is ther any recommended tool out there? Thanks

@Mozarrt

When selling options "naked" or "open" the risk of the trade AT EXPIRATION can be easily calculated by simply adding or subtracting the total premium collected to the strike price of the option. For instance, the equations below can r be used for short calls and puts, respectively.

Break Even = Short Call Strike + Total Premium Collected

Break Even = Short Put Strike - Total Premium Collected

Unfortunately, the risk and reward that occurs at any point BEFORE expiration cannot be accurately predicted. This is because before expiration, the value of the options are still dependent on time and volatility. As we all know, we can't predict the future actions of humans (volatility), nor can we determine with absolute certainty the timing of these actions.

You can always estimate the value of your profit and loss by looking at the option delta each night...but the delta is dynamic (not static), so this too won't yield perfect figures. Nonetheless, it will give you a good idea of "what if" scenarios in the short run.

*There is substantial risk of loss in trading futures and options.

If you have any questions about the products or services provided by DeCarleyTrading, please send me a Private Message or use the futures.io "Ask Me Anything" thread.
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