I have been selling OTM puts on the ES for about three years. When volatility was low, I just sat on the puts until they expired. In 2007, volatility began to increase; so I began [delta} hedging my short puts with short ES futures. In addition, I exited my puts at a predetermined point and exited the hedge as well. When a loss occurred, it was about equal or less than the premium received. When I had a gain, it was typically a little less than the premium received, for I had to exit the hedge when delta became so low. Sometimes, when the ES reached my strike price, I simply covered instead of exiting. I was very uncomfortable with this strategy and won't repeat it. Now, with high volatility, I sell fewer contracts at higher premiums and hedge with ES futures. I still use a predetermined exit for the puts as well as the hedge. I still find this better than any spread strategy for monthly income. I am seeking comments to this current strategy. Here is an example of one bad trade I experienced this year using this method: I sold 10 P1265 ESH8 at 12.00. I hedged it with 2 ESH8. I added another ESH8 when the ES dropped 1%. So, at this point, I am short 10 P1265 and short 3 ES FUT. I am well hedged. Now, the market rebounds. I have buy stops 10 points above each entry point for my FUT hedges. All of the FUT hedges are taken out. So, instead of a potential profit of $6,000.00 from premiums, I am down to $4500.00. The market for the options moves down to a price of 3.00. If I closed out the short options at this point, I would have a profit of $3,000.00. Of course, my goal is to allow the options to expire. And of course, the markets drops to where the price of the puts is 8.25. So, here is my dilemma. Do I exit the trade and take the miniscule profit or do I keep the short options and just start hedging again as before? There is still three weeks to expiration. Again, your comments are appreciated.
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Selling OTM puts on ES
- Thread starter jwcapital
- Start date
I use the ODDS cone, developed by www.donfishback.com , in metastock. Set to two standard deviations and backtest. Does the index close below the cone?
If you decide to short esh8 again as hedge with a 10 point stop loss, you have to monitor very carefully as it gets closer to the fed meeting this month which is before the expiration. I think it's pretty certain fed will cut rate which could result in a rally taking out your stops again.
I just started researching into optons on futures index, a few questions if you dont mind.
1) Just curious why is your stop loss for the underlying esh8 not linked to the options? Ie: if your underlying hit the stop, you would cover both the underlying and the option. Otherwise you are naked, given the current volatility it could go up take out the stops on the underlying then drop right back down again hurting the now naked puts.
2) Why do you not write further otm strikes? is the premium/risk ratio worse than the strike you picked?
3) How do you deal with the HUGGGEEEE gap between bid and ask? I looked at both options on es and sp, the bid/ask gap is just insane. Do you just set a limit and let it get filled over time when writing the options?
thanks
I just started researching into optons on futures index, a few questions if you dont mind.
1) Just curious why is your stop loss for the underlying esh8 not linked to the options? Ie: if your underlying hit the stop, you would cover both the underlying and the option. Otherwise you are naked, given the current volatility it could go up take out the stops on the underlying then drop right back down again hurting the now naked puts.
2) Why do you not write further otm strikes? is the premium/risk ratio worse than the strike you picked?
3) How do you deal with the HUGGGEEEE gap between bid and ask? I looked at both options on es and sp, the bid/ask gap is just insane. Do you just set a limit and let it get filled over time when writing the options?
thanks
Quote from newguy05:
If you decide to short esh8 again as hedge with a 10 point stop loss, you have to monitor very carefully as it gets closer to the fed meeting this month which is before the expiration. I think it's pretty certain fed will cut rate which could result in a rally taking out your stops again.
I AGREE.
I just started researching into optons on futures index, a few questions if you dont mind.
1) Just curious why is your stop loss for the underlying esh8 not linked to the options? Ie: if your underlying hit the stop, you would cover both the underlying and the option. Otherwise you are naked, given the current volatility it could go up take out the stops on the underlying then drop right back down again hurting the now naked puts.
THIS HAS HAPPENED. I DO REENTER MY HEDGES AT ORIGINAL ENTRY POINTS, SO I AM ALWAYS DELTA HEDGED WHEN THE ES DROPS. THE KEY IS THE TIME DECAY WHEN DELTA HEDGED. WHEN ES MOVES UP, THE PREMIUMS OF THE PUTS REALLY DROP OFF. AS TIME GOES ON, THE DROP IN THE ES DOESN'T CAUSE THE PUTS TO DROP AS MUCH. MY BIGGEST PROBLEM IS HAVING TO ENTER AND EXIT MY HEDGES
2) Why do you not write further otm strikes? is the premium/risk ratio worse than the strike you picked?
YES. ALSO HAVE TO WRITE MORE OPTIONS AND THE MARGIN REQUIREMENTS ARE MUCH HIGHER. CLOSER, OTM HAS LOWER OPTION REQUIREMENTS AND THEY ARE LESS VOLATILE. I USED TO TRY TO GET 1 POINT OF PREMIUM PER WEEK REMAINING BEFORE EXPIRATION, AND I DIDN'T NEED TO HEDGE. NOW THAT MARGIN REQUIREMENTS HAVE INCREASED DRAMATICALLY, I CAN WRITE HALF THE CONTRACTS FOR TWO TO THREE TIMES THE PREMIUM FOR LESS MARGIN AND HIGHER PROFIT POTENTIAL. THE RISK:REWARD IS STILL CLOSE TO 1:2 OR BETTER.
3) How do you deal with the HUGGGEEEE gap between bid and ask? I looked at both options on es and sp, the bid/ask gap is just insane. Do you just set a limit and let it get filled over time when writing the options?
I HAVE TRIED TO PLACE LIMIT BIDS BETWEEN THE BID AND ASK. SOMETIMES I GET FILLED; MOST OF TIME I DIDN'T GET FILLED UNTIL THE MARKET MOVED. SO I JUST HIT THE BID BECAUSE IT IS BETTER TO JUST BE "IN," THAN TO WAIT FOR THE IDEAL PRICE.
thanks
Quote from nazzdack:
Would you sleep better if you did "credit spreads" or "bull put spreads" instead of being at risk for whipsawing with a futures hedge?
I TRADE FOR A LIVING AND I CAN'T SELL/BUY ENOUGH CONTRACT TO MAKE THE SPREAD WORTH WHILE. FOR INSTANCE, LET'S LOOK AT TODAY'S BEAR CALL SPREAD FOR ESH8 OPTIONS. THE BEST SPREAD IS ATM. CURRENTLY, 9:30 AM ET, THE ESH8 IS AT 1328. THE C1330 IS AT 23.00 AND THE C1335 IS AT 20.75 FOR A SPREAD OF 2.25. SO IF THE MARKET FINISHED BELOW AT EXPIRATION (OR EVEN AT NEXT FRIDAY'S CLOSE) I COULD BE LOOKING AT AROUND A $112.50 PER CONTRACT PROFIT AND IF IT FINISHES HIGHER I COULD BE LOOKING AT A LOSS OF AROUND 3.50 PER CONTRACT. THE RISK:REWARD IS TOO HIGH. AS I MOVE FURTHER OTM, THE SPREAD IS SMALLER. YES THE CHANCES OF SUCCESS ARE GREATER, BUT I WOULD HAVE TO WRITE A TON OF CONTRACTS TO MAKE A LIVING. TODAY'S ATM BULL PUT SPREAD: P1320 @23.75 AND THE P1315@21.25 FOR A DEBIT SPREAD OF 2.50. POSSIBLE GAIN IS AROUND 2.50. BETTER RISK:REWARD RATIO, BUT AGAIN I WOULD HAVE TO WRITE A TON OF CONTRACTS. THANKS FOR THE SUGGESTION, THOUGH
JW,
Kudos to you for putting forth a dynamic thread on an option technique that's being used real time and sparking creative discussions on how to modify or revamp the given technique. Perhaps you can consider the following tactics, especially for f/t earning power:
(1) Sell OTM strangle options on ES; if/when market moves against the given leg, then consider rolling when the premium doubles; if it continues to move against you after rolling, then cover the positions at risk by going long/short on the futures; if the at risk positions retrace after covering with the futures, then close out (stop loss) the futures when it looses an amount equivalent to the premium received.
(2) long put straddles on the ES; for the leg that is OTM, acquire a futures position in that given direction. This limits your loss, but hedges for a material gain.
(3) In lieu of selling OTM strangles, you could enter into a call ratio spread & a put ratio spread, both being backed by a debit spread. The exit strategy for the losing leg would be similar to that explained in item (1).
(4) Of course, you can consider an iron condor combined with a calendar spread.
Walt
Kudos to you for putting forth a dynamic thread on an option technique that's being used real time and sparking creative discussions on how to modify or revamp the given technique. Perhaps you can consider the following tactics, especially for f/t earning power:
(1) Sell OTM strangle options on ES; if/when market moves against the given leg, then consider rolling when the premium doubles; if it continues to move against you after rolling, then cover the positions at risk by going long/short on the futures; if the at risk positions retrace after covering with the futures, then close out (stop loss) the futures when it looses an amount equivalent to the premium received.
(2) long put straddles on the ES; for the leg that is OTM, acquire a futures position in that given direction. This limits your loss, but hedges for a material gain.
(3) In lieu of selling OTM strangles, you could enter into a call ratio spread & a put ratio spread, both being backed by a debit spread. The exit strategy for the losing leg would be similar to that explained in item (1).
(4) Of course, you can consider an iron condor combined with a calendar spread.
Walt
Quote from jones247:
JW,
Kudos to you for putting forth a dynamic thread on an option technique that's being used real time and sparking creative discussions on how to modify or revamp the given technique. Perhaps you can consider the following tactics, especially for f/t earning power:
(1) Sell OTM strangle options on ES; if/when market moves against the given leg, then consider rolling when the premium doubles; if it continues to move against you after rolling, then cover the positions at risk by going long/short on the futures; if the at risk positions retrace after covering with the futures, then close out (stop loss) the futures when it looses an amount equivalent to the premium received.
I THOUGHT ABOUT THIS. EVEN CONSIDERED CASHING OUT THE WINNING SIDE AND REBALANCING. MACMILLIAN SUGGESTED REBALANCING AFTER ONE SIDE'S PREMIUM DOUBLES. THE PROBLEM WITH OTM STRANGLES IS THE CALL SIDE. IT JUST DOESN'T REACT TO MOVES LIKE THE PUT SIDE. IN ADDITION, THE PREMIUMS ARE VERY DIFFERENT WHEN THE STRIKES ARE EQUIDISTANT FROM THE CURRENT ES PRICE. THIS TECHNIQUE JUST GETS KILLED IN A VOLATILE BEAR MARKET.
(2) long put straddles on the ES; for the leg that is OTM, acquire a futures position in that given direction. This limits your loss, but hedges for a material gain.
DO YOU MEAN LONG PUT/CALL STRADDLE? DO YOU ALSO MEAN THAT FOR THE LEG ITM (LET'S SAY THE CALL) YOU WANT ME TO BUY A FUT POSITION? OR SHOULDN'T I ACQUIRE A SHORT POSITION (OPPOSITE IF THE PUT IS ITM)? ALSO AT WHAT POINT ITM SHOULD I ACQUIRE A FUT POSITION?. I SEE OTHER PROBLEMS IF THE MARKET SWINGS UP AND DOWN OVER THE ENTRY STRIKE.
(3) In lieu of selling OTM strangles, you could enter into a call ratio spread & a put ratio spread, both being backed by a debit spread. The exit strategy for the losing leg would be similar to that explained in item (1). LET SAY I BELIEVE THE MARKET I HEADING DOWN (DUH). I CAN BUY TWO ATM OR OTM PUTS AND SELL ONE PUT ONE STRIKE BELOW. IF DITM BY THE FRIDAY BEFORE EXPIRATION, I CAN EITHER CLOSE THE SHORT PUT ONLY OR CLOSE THE WHOLE SPREAD. GUESS I CAN DO THE SAME WITH CALLS: SELLING TWO ATM OR OTM CALLS AND BUYING ONE CALL ONE STRIKE OTM (CREDIT)
(4) Of course, you can consider an iron condor combined with a calendar spread.
NOT ENOUGH PROFIT HERE FOR ME AS INDICATED WITH THE EXAMPLES OF THE OTHER LEGS OF THESE SPREADS. OR I MAY AS WELL LEARN TO TRADE THE ES OUTRIGHT.
Walt