Options on Futures

Quote from rwk:

That's the way I see it. If I have to choose, I'll take the occasional spike over the slow bleed. I don't have a strategy for the slow bleed, and I'm not smart enough to read the future.

I wasn't trading options in 2008, so I can't say for sure how I would have fared. I think I would have lost money, but I also think I could have survived it.
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It is not clear to me that selling options even has a positive expectation overall.

I would like it to do so, but I have to be skeptical.

Two books that found, using empirical testing, that selling did not even have a positive expectation, at least without adding filters, or only a minimal one, are:

Woodard http://www.amazon.com/dp/B004U7ML0Q

and

Gallacher http://www.amazon.com/The-Options-Edge-Winning-Volatility/dp/0070382964

Some people say it does have a positive expectation but just saying without firm empirical evidence is not enough.
 
Quote from comintel:
Two books that found, using empirical testing, that selling did not even have a positive expectation, at least without adding filters, or only a minimal one, are: Woodard http://www.amazon.com/dp/B004U7ML0Q and Gallacher http://www.amazon.com/The-Options-Edge-Winning-Volatility/dp/0070382964
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I got the impression from Gallacher and others that option strategies are very hard to test empirically. I prefer thorough testing, but I am condemned to live in the real world.
 
Hi rwk,if you have some mid level programming knowlege you can use Amibroker to simulate option returns. It is the kinda programming used by pair traders to create a virtual stock comprised of two stocks. In the same vein, you could have your buy/sell triggers for the stock ex. 5day moving avg> x then buy, BUT set the payoff to an option strategy. So macro code would look something like

If Ma> x then buy
exit after 10 days.


Buyprice=10
If exitpr-buyprice =a then pnl=-5
else exitpr -buyprice=b then pnl=0
else ........

It is not perfect since the payoff depends on a certain vol so you have to run x simulations for x iv levels but it certainly is a great tool.
 
Another major thing to keep in mind is that when market makers sell options, they continually delta hedge their positions.

Let's assume for now that market makers are profitable on the options they sell.

But this profitability may be only with the benefit of delta-hedging, in their case.

If we sell options without continually delta hedging our open positions, this is a completely different trade and may have completely different results (which could be better or worse).

If we sell options without continually delta hedging our open positions, we are betting not only on a decline in implied volatility, but also on mean reversion.

This may work out great for people in many markets. I hope it does.

I am just addressing the oft-repeated argument that since option sellers are likely making money, we will too on average. This argument is fully valid only if we delta-hedge like they do. Otherwise we may be wiped out by large trend moves, while other sellers, who delta hedge, may do just fine.

By the way, did you know that if a large trend move is steady, the same amount up every day for a long period, the realized daily volatility will be counted as close to zero by some standard volatility measures such as standard deviation of log return? Gallacher points this out. So one has to be extremely careful with volatility computations, many of which give wildly inconsistent results in different types of markets.

I do not want to give the impression that I am against selling volatility. I am trying to make it work too. I am just mentioning some things that sometimes go unmentioned.
 
Why would anyone trade at OptionsXpress for futures options? Aren’t they $3.50 plus fees? Normally you should pay .50 to maybe a dollar or so plus fees.
 
Quote from opt789:

Why would anyone trade at OptionsXpress for futures options? Aren’t they $3.50 plus fees? Normally you should pay .50 to maybe a dollar or so plus fees.
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They shouldn't, if they're experienced, active, have a decent-sized account and that's the best deal they can get from OX.

On the other hand, it's OK as a place to get your feet wet. And if you trade physical commodity futures/FOPs and incorporate fundamental analysis, they give you free access to the Hightower Report. That's worth something - maybe not the approx $80/mo cost at retail, but I think it's worth $50 or so. For a beginner who trades infrequently, that offsets the cost of a few expensive commissions per month.
 
Quote from Brighton:

They shouldn't, if they're experienced, active, have a decent-sized account and that's the best deal they can get from OX.

On the other hand, it's OK as a place to get your feet wet. And if you trade physical commodity futures/FOPs and incorporate fundamental analysis, they give you free access to the Hightower Report. That's worth something - maybe not the approx $80/mo cost at retail, but I think it's worth $50 or so. For a beginner who trades infrequently, that offsets the cost of a few expensive commissions per month.
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Yes, you are right....I place less than 100 trades a year, so I guess that makes me an 'infrequent trader'. I like OX because the user interface is very intuitive and is easy for me to understand. I am not a math wiz and have no idea what the greeks are and don't use them. So, their trade calculator tool is very easy for me to use and place trades, since the greeks and other pieces of data don't 'clutter' the screen.

Thanks for your replies!!
 
Quote from SellingNaked:

Yes, you are right....I place less than 100 trades a year, so I guess that makes me an 'infrequent trader'. I like OX because the user interface is very intuitive and is easy for me to understand. I am not a math wiz and have no idea what the greeks are and don't use them. So, their trade calculator tool is very easy for me to use and place trades, since the greeks and other pieces of data don't 'clutter' the screen.

Thanks for your replies!!
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Just curious, do you mean 100 trades or 100 futures options contracts total? A 10 lot trader with 100 round trips per year is 2000 contracts, and overpaying by $3 per contract is an unnecessary expense of $6,000.
 
Quote from SellingNaked:

Yes, you are right....I place less than 100 trades a year, so I guess that makes me an 'infrequent trader'. I like OX because the user interface is very intuitive and is easy for me to understand. I am not a math wiz and have no idea what the greeks are and don't use them. So, their trade calculator tool is very easy for me to use and place trades, since the greeks and other pieces of data don't 'clutter' the screen.

Thanks for your replies!!
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wow..NO idea of the greeks and don't use them? You won't survive..so don't worry about where to put that $500K you won't be making! Seriously trading options without understanding and being aware of what those greeks are doing to you is like taking a black diamond run on a ski slope on your first day of skiing...some of them start out very smooth and mild......:eek:
 
Quote from opt789:

Just curious, do you mean 100 trades or 100 futures options contracts total? A 10 lot trader with 100 round trips per year is 2000 contracts, and overpaying by $3 per contract is an unnecessary expense of $6,000.
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Hi opt789,

I meant less than a 100 round trips per year. Yes you are right that I am paying more than I should be.
 
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