Futures-options guys, does this work in the real world?

[justincase_86]

I have been paper trading a strategy lately with futures options. I do realize that paper trading and trading with real money and orders are two totally different worlds.

I have found that selling options on futures seems to be a simple yet profitable strategy. Such as selling DOTM puts during an uptrend or DOTM calls during a downtrend.

For example, with the current uptrend, I would sell say -2 /ES JUN 1060 Puts @ 1.55 which is about 63 days out for $155 in premium. As for exit, I have been buying them back at $0.20 therefore, I wouldn't normally hold the contracts until expiry.

As for an adjustment strategy, which I have not been able to test due to low volatility, I would simply turn it into a long put spread to either limit my risk and possibly still eek out a profit if market were to continue to fall.

Products I have been studying are: /ES, /CL, /6E, /NG and /ZN. I would like to know if there is actually liquidity on DOTM strikes that would make it possible to even get orders filled?

 

[NetTecture]

The problem with our puts is that you hold long term, so you need full exchange margin. That makes the puts quite - ah - tricky in terms of return. That is 4375 USD per ES at the moment.

It may be better to use spreads and buy other options to offset - that can seriously limit your margin, thus allowing you to carry more position.

Also execution is tricky. You HAVE to enter using limit orders, the order book will be dead thin.

 

[swag]

Quote from justincase_86:


As for an adjustment strategy, which I have not been able to test due to low volatility, I would simply turn it into a long put spread to either limit my risk and possibly still eek out a profit if market were to continue to fall.

This is all you actually need to worry about, the profits are meaningless.

Don't think you can 'simply' turn it into a vertical, a couple of factors go into that. At what point and/or drawdown do you turn it into a vertical, note that because you are already selling DOTM and already facing an unrealized loss at that point in time, the risk:reward of that new vertical will be ugly. The earlier you turn it into a vertical, better R:R, but you are venturing further into market timing, which you are probably trying to avoid in the first place. If you wait too long to convert into the vertical, the short premium has shot through the roof and all adjustments look bad. If there is a rebound in the market, your losses will be amplified compared to the gains you have already made.

Do the work on the adjustment strategy first before you go live, backtest in different situations (definitely July/August last year during the credit rating headlines).

Selling premium, you earn your keep in market whipsaw and trend change. If you don't have a backtested plan for adjusting, just don't.