ES mini futures Options liquidity problem far OTM

[Erick Gomez]

Hi everyone, thank you in advance I need your help. I am learning to do intraday trading with 1 minute directional trading. I have seen a problem if I want to use far OTM with the liquidity on the weeklies. I am not sure why? I have incur to only go long on puts or calls base on my directional strategy, buying ATM. However my risk/reward gets out of wack. Do you have any advice ?

1) Have anyone done this successfully if so how you calculate how far OTM to pick?
2) Is there an easy way to calculate a the stop loss if I am in a resistance level for the underlying? Right now I am just doing an arbitrary 10% of the option price

Thanks,
EG

 

[Handle123]

Have you considered doing debit spreads, buy ATM and sell strikes away. If it goes your way, you make some coin, and if it goes against you, get out of the long but keep the shorts and try to make up losses of the long. I use the ES options mostly to hedge long term trades, I see little point in buying them outright as better to trade the futures. I use them more in credit spreads expecting retracements against overall trends.

 

[rmorse]

Hi everyone, thank you in advance I need your help. I am learning to do intraday trading with 1 minute directional trading. I have seen a problem if I want to use far OTM with the liquidity on the weeklies. I am not sure why? I have incur to only go long on puts or calls base on my directional strategy, buying ATM. However my risk/reward gets out of wack. Do you have any advice ?

1) Have anyone done this successfully if so how you calculate how far OTM to pick?
2) Is there an easy way to calculate a the stop loss if I am in a resistance level for the underlying? Right now I am just doing an arbitrary 10% of the option price

Thanks,
EG

Because the future is trading at around 1940, all the listed markets are wide. It would be that way with any high priced underlying. They are mostly electronic market makers with a few customer limit orders. You have to find liquidity by working your orders. Stop orders and market orders are very dangerous in these types of markets because the MM can go 5 or 10 points wide in times of stress with little or no paper on the book. You have to keep this in mind when you enter and exit a position.

Bob

 

[Erick Gomez]

Have you considered doing debit spreads, buy ATM and sell strikes away. If it goes your way, you make some coin, and if it goes against you, get out of the long but keep the shorts and try to make up losses of the long. I use the ES options mostly to hedge long term trades, I see little point in buying them outright as better to trade the futures. I use them more in credit spreads expecting retracements against overall trends.

Yes I have been doing spreads before however I know traders that buy OTM and do the risk base on the option purchase instead of having a both legs. I was trying to replicate what they were doing.

 

[Erick Gomez]

Because the future is trading at around 1940, all the listed markets are wide. It would be that way with any high priced underlying. They are mostly electronic market makers with a few customer limit orders. You have to find liquidity by working your orders. Stop orders and market orders are very dangerous in these types of markets because the MM can go 5 or 10 points wide in times of stress with little or no paper on the book. You have to keep this in mind when you enter and exit a position.

Bob

Yep Agree, Could you elaborate what do you mean by "You have to find liquidity by working your orders" ?

Thanks
EG

 

[rmorse]

IMO, you should enter a trade at the value that you choose. If you can't find the other side to the trade, you have a lost opportunity, but not a loss. When you want to exit a trade, you often need to be more aggressive. You have to be willing to give up some edge to get out. What I like to do is "walk an order" up or down. If the the market in the options is 1.00/1.90, as an example, and you need to sell 10 options, I would start with a sell order of 10 at 1.80. Then wait a period of time, and lower the offer by 0.05 to 1.75. Then wait 30 or 60 seconds, and drop it again, until I get an execution. At some point you will find a buyer. I would also have a limit in mind so I don't have to hit the bid. You can't assume the midpoint is "fair value" in these options as wide markets make it too easy to change the midpoint.

It is just the way I like to work an order to find liquidity. There are many automated traders looking for edge. At some point, you will find one.

 

[Erick Gomez]

IMO, you should enter a trade at the value that you choose. If you can't find the other side to the trade, you have a lost opportunity, but not a loss. When you want to exit a trade, you often need to be more aggressive. You have to be willing to give up some edge to get out. What I like to do is "walk an order" up or down. If the the market in the options is 1.00/1.90, as an example, and you need to sell 10 options, I would start with a sell order of 10 at 1.80. Then wait a period of time, and lower the offer by 0.05 to 1.75. Then wait 30 or 60 seconds, and drop it again, until I get an execution. At some point you will find a buyer. I would also have a limit in mind so I don't have to hit the bid. You can't assume the midpoint is "fair value" in these options as wide markets make it too easy to change the midpoint.

It is just the way I like to work an order to find liquidity. There are many automated traders looking for edge. At some point, you will find one.

OK Yes sometimes I do that. Thanks for the explanation.

EG

 

[OTM-Options]

Have you considered doing debit spreads, buy ATM and sell strikes away. If it goes your way, you make some coin, and if it goes against you, get out of the long but keep the shorts and try to make up losses of the long.

PROS

• N/A

CONS

• The margin required for the short option.
• The risk of the short option.
• Small premium.
• Could be the next ET Margin debt negotiations type of thread.

 

[Erick Gomez]

Agree with OTM-Options. I use to short options. But there is a beauty also been in the long side. I am learning how to trade intraday.

@OTM-Options do you have any advise how to decide how far to go while buying OTM options? Do you base it on volatility, liquidity or other methods?
Look at the option Chain for ES weeklies. I have been long closer to ATM because I do trades in the range of minutes close to 20~30mins max 1hour depending of my signals exit. But I have problems when i go further deep OTM.

 

[OTM-Options]

@OTM-Options do you have any advise how to decide how far to go while buying OTM options? Do you base it on volatility, liquidity or other methods?

100% on where you think the underlying will trade at. Then purchase the strike that should give you the most bang for your buck.