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Diversified Option Selling Portfolio


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Diversified Option Selling Portfolio

  #1431 (permalink)
Sagal
Strasbourg, France
 
Posts: 126 since Mar 2019
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Maybe it was not clear from my strategy but I do at least 75% of vertical spread (quite conservative). That is also why I do not shy so much to go to a vertical spread for lean hogs in August with a part above 110. My maximum risk is known as well as my gain and the ratio between gain and loss is more than 30% due to the current volatility as well above 30% (while the one from live cattle is around 14%)

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  #1432 (permalink)
zxcv64
London, UK
 
Posts: 74 since Jan 2018
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From the recent discussion on HEQ19, and based on Myrrdin's post mentioning that the outcome of the Trump-China trade deal may see HEQ either rise a lot or fall to 70 etc, I wanted to see if there was a potential options-only trade. So I had a quick look at 2 possibilities. During times of high volatility, I am not a fan of buying options, so ruled out long straddles/strangles.

1) Long Iron Condor. Buy Aug 120-130 C and 80-70 P options for around 2.6. Max profit is 10-2.6=7.4 if HEQ is above 130 or below 70 in the next 128 days.

2) Iron Butterfly. Buy a 100-120 C spread and buy a 100-80 P spread for around 13.250. Max profit is 6.750 and occurs if HEQ is above 120 or below 80.

With HEQ being 100 at the moment a 20 point move till Aug is quite possible. The danger of course, is a fall in volatility and a trade deal which is neither here nor there.

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  #1433 (permalink)
 myrrdin 
Linz Austria
 
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Sagal View Post
Maybe it was not clear from my strategy but I do at least 75% of vertical spread (quite conservative). That is also why I do not shy so much to go to a vertical spread for lean hogs in August with a part above 110. My maximum risk is known as well as my gain and the ratio between gain and loss is more than 30% due to the current volatility as well above 30% (while the one from live cattle is around 14%)

1. I expect a alrge move of the price of HEQ.
2. In my opinion it is more probable that this move is upwards than it is downwards.

when I expect a larg move I prefer entering trades via futures or via long options. Because of the high option prices, I decided for going long futures and future spreads.

Best regards, Myrrdin

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  #1434 (permalink)
 myrrdin 
Linz Austria
 
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zxcv64 View Post
From the recent discussion on HEQ19, and based on Myrrdin's post mentioning that the outcome of the Trump-China trade deal may see HEQ either rise a lot or fall to 70 etc, I wanted to see if there was a potential options-only trade. So I had a quick look at 2 possibilities. During times of high volatility, I am not a fan of buying options, so ruled out long straddles/strangles.

1) Long Iron Condor. Buy Aug 120-130 C and 80-70 P options for around 2.6. Max profit is 10-2.6=7.4 if HEQ is above 130 or below 70 in the next 128 days.

2) Iron Butterfly. Buy a 100-120 C spread and buy a 100-80 P spread for around 13.250. Max profit is 6.750 and occurs if HEQ is above 120 or below 80.

With HEQ being 100 at the moment a 20 point move till Aug is quite possible. The danger of course, is a fall in volatility and a trade deal which is neither here nor there.

I consider the main danger of these trades in kicking the can down the road. The Chinese might be interested in negotiating with Mr. Trump closer to the US elections, which would set him under pressure.

This is one reason why I am interested in the LHG20 future.

Best regards, Myrrdin

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  #1435 (permalink)
Sagal
Strasbourg, France
 
Posts: 126 since Mar 2019
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I have noticed that the price of the call option I would be interested in for live cattle is -27% less than the theoretical price. Using the same model and approximately same expiry the difference for lean hogs and natural gas are -10% Do you have any explanation on that?

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  #1436 (permalink)
 myrrdin 
Linz Austria
 
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Sagal View Post
I have noticed that the price of the call option I would be interested in for live cattle is -27% less than the theoretical price. Using the same model and approximately same expiry the difference for lean hogs and natural gas are -10% Do you have any explanation on that?

No, I do not work with theoretical models. I am only interested in the price of the option that I get paid. And evaluate if it is worth the risk.

Keep it simple and stupid.

Best regards, Myrrdin

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  #1437 (permalink)
 
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 SMCJB 
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Sagal View Post
I have noticed that the price of the call option I would be interested in for live cattle is -27% less than the theoretical price. Using the same model and approximately same expiry the difference for lean hogs and natural gas are -10% Do you have any explanation on that?

Lower implied volatility

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  #1438 (permalink)
Harvard16
Singapore
 
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Sagal View Post
I have noticed that the price of the call option I would be interested in for live cattle is -27% less than the theoretical price. Using the same model and approximately same expiry the difference for lean hogs and natural gas are -10% Do you have any explanation on that?

Additionally, futures are at a smaller discount to cash than the norm, for instance June futures are at a $4 discount to cash, when the average for this time of year is usually $12.80, last year the discount was $15.35 (this is as per hightower comments), coupled with a seasonally weak period for cash market, might mean traders see limited further upside for cattle futures and therefore the calls are priced accordingly.

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  #1439 (permalink)
MGGer
Hannover Germany
 
Posts: 10 since Aug 2018
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myrrdin View Post
I sold the KCN P1 options near the lows, and also bought some outright futures. The options to make profit on a more or less sidewards move, the futures for the case that there are severe weather issues in the next couple of months.

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

Best regards, Myrrdin

Hi Myrrdin,

well, finally I got my futures delivered and rolled KCN to KCK.

Unfortunately, (I read due to expected high levels of harvesting) these days rolling over is quite costly, almost 1k per contract. I sold my covered calls one strike up and received not quite 1k for writing them. So, in case KC would finally start moving up everything will be fine (as for some other small speculators when I look @CoT data).

Neverthless drawdown is not nice and KC going up soon doesn´t seem as likely as it did. May I ask how long are you prepared to "wait" (due to more than 15% contango costs p.a.), or did you change your plans/positions? Thx in advance, MG

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  #1440 (permalink)
 myrrdin 
Linz Austria
 
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MGGer View Post
Hi Myrrdin,

well, finally I got my futures delivered and rolled KCN to KCK.

Unfortunately, (I read due to expected high levels of harvesting) these days rolling over is quite costly, almost 1k per contract. I sold my covered calls one strike up and received not quite 1k for writing them. So, in case KC would finally start moving up everything will be fine (as for some other small speculators when I look @CoT data).

Neverthless drawdown is not nice and KC going up soon doesn´t seem as likely as it did. May I ask how long are you prepared to "wait" (due to more than 15% contango costs p.a.), or did you change your plans/positions? Thx in advance, MG

I sold my outright futures some time ago, and intend to buy them back on a clear turnaround. I still hold the short KCU P1.00 .

In case there is no move upwards within the next couple of weeks, I intend to roll the position into December (Z).

I expect coffee price to move upwards at latest in August / September before the blooming period in Brazil.

This trade shows how important it is to keep positions at a moderate size.

Best regards, Myrrdin

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Last Updated on May 26, 2022


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