Options writers and currency futures

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nravo

I know there is the subset of pro investor/traders/CTAs out there who mainly look to collect premium -- Ansbacher types -- by writing options, generally on the SP (S&P 500) futures options, and sometimes on ZN (10-year Treasury) futures options. (Other option writing strategies, such as on equities and even indexes, tie up more margin than futures, generally. They also -- covered calls are an exception -- can't get utilized as much in IRAs.)

Question: Why more of this ilk don't also employ option writing strategies on currency futures? The margins are low, premiums high, easy to hedge, spread and stop. Is there a technical reason? Are more options writers looking at this area?
 
Great thread. Carry trades are de facto short premium strats. The yen trade for instance is just a short yen call when it gets right down to it.

IMO writers would rather sell cheap vol in markets that rarely have unhedgable moves than sell high vols in markets (like ags) that can open limit up on a report. I personally know of an option seller who blew out in LC on the Mad Cow thing a few years back. Cattle were limit for like 3 days and even though OTM's were trading (they weren't limit) they reflected LC down 5 cents immediately.
Quote from nravo:

I know there is the subset of pro investor/traders/CTAs out there who mainly look to collect premium -- Ansbacher types -- by writing options, generally on the SP (S&P 500) futures options, and sometimes on ZN (10-year Treasury) futures options. (Other option writing strategies, such as on equities and even indexes, tie up more margin than futures, generally. They also -- covered calls are an exception -- can't get utilized as much in IRAs.)

Question: Why more of this ilk don't also employ option writing strategies on currency futures? The margins are low, premiums high, easy to hedge, spread and stop. Is there a technical reason? Are more options writers looking at this area?
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Yes you are, in a way, right about carry trade having similar characteristics to writing calls on the yen. But it's not something that CTAs or others whose main strategy is options writing do as a substitute.
 
Quote from Pa(b)st Prime:

Great thread. Carry trades are de facto short premium strats. The yen trade for instance is just a short yen call when it gets right down to it.

IMO writers would rather sell cheap vol in markets that rarely have unhedgable moves than sell high vols in markets (like ags) that can open limit up on a report. I personally know of an option seller who blew out in LC on the Mad Cow thing a few years back. Cattle were limit for like 3 days and even though OTM's were trading (they weren't limit) they reflected LC down 5 cents immediately.
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I agree with you vol/risk assessment, but I'm not sure it is counter-intuative, as you seem to imply, as cheap vols often get cheaper, as stock traders have seen over the past couple years, and high vols can go even higher. So behaviorally it is indeed what many seem to do, but whether that is automatically the wrong thing to do, I'm not so sure.

Agree on Ags and stay away from them totally, except to buy a flier.

But to get back to my original question: currency futures options. Are the traders who are mainly option writers looking at them nowadays?
 
Quote from nravo:


But to get back to my original question: currency futures options. Are the traders who are mainly option writers looking at them nowadays?
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I write options, but the EuroFx (CME futures contract) has had the IV sucked out of it and so I've been sitting on the sidelines. Bonds were even worse--4% annual IV when 1% daily moves were frequent.
 
Quote from FullyArticulate:

I write options, but the EuroFx (CME futures contract) has had the IV sucked out of it and so I've been sitting on the sidelines. Bonds were even worse--4% annual IV when 1% daily moves were frequent.
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True, the vols are low, save for the yen recently, and even then; apologies for the doggerel. But, and tell me where I am wrong, on a per contract basis and premium collected versus initial margin, currency options have it all over cash-settled index options, S&P futures options, the ES at least. On a per contract basis you can get collect 10 percent of the margin in a month -- and that's OTM a few cents. So, even with the lower vols -- which is always somethng to watch out for -- am I missing something of a rsk/rward nature on, say GBP, JPY, even EUR options on the CME?
 
Quote from nravo:

True, the vols are low, save for the yen recently, and even then; apologies for the doggerel. But, and tell me where I am wrong, on a per contract basis and premium collected versus initial margin, currency options have it all over cash-settled index options, S&P futures options, the ES at least. On a per contract basis you can get collect 10 percent of the margin in a month -- and that's OTM a few cents. So, even with the lower vols -- which is always somethng to watch out for -- am I missing something of a rsk/rward nature on, say GBP, JPY, even EUR options on the CME?
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Why are you comparing based on margins? Indices have artificially high margins (as mandated by the SEC) compared to any other futures market. It's not because indices have higher risk or volatility. There's funds who sell premo in every futures market. Actually that's the only way to do it. Spread out hopefully uncorrelated outlier risks. (although it won't work out that way) I've seen the Yen move 500 points in a day, beans open -$1.05 synthetically, Cattle by a nickel, bonds 10pts the night after the crash ect. Any one of those can blow you out. it's absolutely IMPOSSIBLE to assess on a case by case basis which market is the "best" when best merely means which market has the least chance of a black swan.
 
Quote from Pa(b)st Prime:

Why are you comparing based on margins? Indices have artificially high margins (as mandated by the SEC) compared to any other futures market. It's not because indices have higher risk or volatility. There's funds who sell premo in every futures market. Actually that's the only way to do it. Spread out hopefully uncorrelated outlier risks. (although it won't work out that way) I've seen the Yen move 500 points in a day, beans open -$1.05 synthetically, Cattle by a nickel, bonds 10pts the night after the crash ect. Any one of those can blow you out. it's absolutely IMPOSSIBLE to assess on a case by case basis which market is the "best" when best merely means which market has the least chance of a black swan.
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Of course, black swans happen, and options writers are aware of that and take the risks. But if you decide to take fat-tail risk is it really better to spread your bets and increase the possibility that one will blow up? Wouldn't it be more prudent to only use a small portion of your trading capital say up to 25 percent for initial margin on option writing. And once you decide to do that wouldn't you look for the most premium for that margin, OTM by 2 SDs or so, taking into consdieration the price of theoretical price of the option, volatility history, etc.? To be honest, I didn't mean to open up the whole writing options and risk debate. I was just wondering why currency futures options with deltas of <10 have what seem to be richer premiums than, say, ES options with similar probabilities of landing ITM.
 
Quote from nravo:

But if you decide to take fat-tail risk is it really better to spread your bets and increase the possibility that one will blow up?
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I do, and it's worked well for me. Wheat last fall hurt, but bonds and ES worked out great. If I had just been trading Wheat (which had great IVs, but then when limit up for several days in a row), I'd have ended the year down.

Still, I risk a *very* small portion of my trading account on this stuff. I'm certainly not looking at the effectiveness of my margin but rather what I can stand to lose. I won't sell more options than I would hold contracts on the underlying. The argument that "black swan events can blow you out" is irrelevant. I can't possibly lose more than if I were on the wrong side of an outright trade, and if I were willing to accept that risk, then it's just the cost of doing business (and being wrong occasionally).
 
How do the various kinds of spreads (ie. double diagonal, calendar, vertical, etc) come out on Forex options as opposed to ETF or index options. It seems to me that there are a lot more strikes in FOREX options and it's easier to adjust a position in general. For example, say I'm short an April 1.330 EUR/DOllar call and long May 1.335 EUR/Dollar call (classical double diagonal, one of my favorit strategies). If the spot gets too close to my short strike, I have many more possibilities than I have with other kinds of options. I could buy a closer Mary strike to protect my short, I could move my short strike up to 1.331 or 1.332, etc. Am I missing something, or am I correct that these options are a lot more flexible in choosing a date and strike and therefore, it's much easier to manage risk, and perhaps have a shot at making profits. I realize that this whole option game may be a 0 sum game, but if selling premium (nothing naked) is my strategy, is it easier on Forex Vanilla options because of the flexibility?
 
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