What strategies do you guys use?
- Thread starter klurby
- Start date
I am not an expert. However a few of the people who responded to your posts are. However the risks of selling OTM naked options is usually covered up front in the good option books - it's like Options 101. a number of years ago I sold a bunch of equity strangles. I made a lot of money. But looking back on the trade when I closed it out at the time, I realized it was luck. i just got out at the right time. if I held on to them a few more days, it would have been my financial ruin - no exaggeration. so since then I have avoided this kind of trade. so it was this experience and knowing what can happen with short OTM because I came ...that close to being killed and when I start posting again I again become vocal on the issue, because a number of people seem not to realize this is one of the riskiest strategies one can do - selling OTM options. It can work 99 times and kill you on the 100th.
This subject of selling out of the money options, comes up again and again in this forum over the years. there are a number of threads just like this one.
butterflies, calendars primarily is what the options I trade. sometimes directional broken wing butterflies. sometimes weekly spy puts and calls ton hedge an es position (but not often). I don't do as many option trades as I used to and when I do it's mainly SPY. mainly I trade long or short SPY and/ or es underlying day or swing trades.
This subject of selling out of the money options, comes up again and again in this forum over the years. there are a number of threads just like this one.
butterflies, calendars primarily is what the options I trade. sometimes directional broken wing butterflies. sometimes weekly spy puts and calls ton hedge an es position (but not often). I don't do as many option trades as I used to and when I do it's mainly SPY. mainly I trade long or short SPY and/ or es underlying day or swing trades.
Thanks for the heads up. I have been pummeled before buying stock options and the pummeling didn't come from being wrong the market. It came from volatility plummeting. The VIX was in the high $20's and fell to the mean ~$20. I lost a quarter my total capital. I stopped right then and there. Trying out this futures options strategy has given me the impression that I have found another niche in regards to different strategies. Maybe I'll be proven wrong when I get hit by an unforeseen loss. But I reckon it's like that with any strategy you do so I am really not too deterred. Our investment group knows we're all in it together and know the risks involved in derivatives speculation.
except for the es (often it's SPY instead) I dont trade futures as a rule, so i don't know what kinds of vols you are dealing with on your future options. SPY vol seems fairly low. Maybe a good time to buy wings on not too far otm index options. I hesitate to mention this as it is so unsophisticated. 
I can see that there are actually a lot of kind-hearted people on this forum. when they see someone is about to hit a wall, they try to warn him. here is some food for thought:
- how come everyone else here are saying something against this strategy???? there is obviously no supporter here for this strategy. Is everyone else wrong and you're right, or the other way round??
- what is the volume of the options you sell??? if selling far OTM option is a profitable strategy over a long period of time, a lot of people should be selling them, i.e. you should see a very high turnover for the options you sell. if this strategy is worth pursuing, people should allocate some capital to write far OTM option to get at least 1-2% return a month. how come there is virtually no one advising for such allocation????
- it can be misleading by simply looking at how far the option is OTM. if an option is 30% OTM, it doesn't mean the underlying has to move 30% to get you. the underlying only needs to move 5-10% to hurt you deeply, which is not "uncommon" for commodities.
- for example, back in Mar, when the Japan stock market plunged after the earthquake. Nikkei OTM put option IV exploded to 100%. I could sell 30~40% OTM put option while still getting meaningful amount of premium. At that moment, the Nikkei index has dropped 20% already, and how likely for it to drop 30% further?? not likely, right? but those far OTM option could still double without much change in the underlying, which means, according to your risk management rule, you would have to buy back the option when it's still 30% OTM.
- another problem is margin call. this is the worst nightmare an option seller could face. you mentioned that you're only using 30% of capital for margin. but the margin requirement will change when the underlying move. If the option premium inflate and the margin requirement increase, the margin call will just force you to buy back the option at the worst moment, even if the option is still far OTM.
The only alpha I see is the implied put written by the bankruptcy courts, the clearing system, and the 0 bound of net worth...
They are American style.
Beta, you're going to do what you're going to do(and honestly I appreciate someone selling those options,) but do yourself a favor - research some of these topics: gamma of the gamma, discontinuous prices, and lock-limits. Then study the price action during 9-11, the fed surprise rate cut pre-market during the crisis(can't remember the exact date), some of the moves in short-term rate / rate expectation markets during the crisis, any number of multi-day lock-limit moves in AGs, the flash crash etc etc etc....
I wouldn't say anyone is wrong. The thought of uncapped risk is troubling to anyone.
It's not a very well known thing to do. Selling far OTM futures options. Most people don't even know what futures options are. The people utilizing such securities are usually institutions, hedge funds, market-makers, and very very few retail investors. I would also say again the thought of having uncapped risk keeps many away from doing this.
My risk management strategy dictates I get out before being ITM because as you said, the losses pile up before it goes ITM. The far OTM strike does however, give you a lot more room to breathe than selling ATM. The delta being 0.01 for far OTM compared to delta 0.50 for ATM demonstrates this.
Black swan events like that are just things I have to stomach. Just more reason enough for me to be watching my positions 24/7, to the annoyance of my girlfriend
I make sure I have 50% of my capital as margin and so far that level has worked very well.
The lesson to take away from your "food for thought" is that it isn't how much premium you get in such in such time for winnings. It's what one does with a losing position.
Trust me, your concerns and of some of the others, have made me think more about my risk management strategy and its importance, and for that, I thank you very much. Every trader finds his niche. I can't trade stock options for crap. But I find I am good at this futures option selling stuff
Quote from Betapeg:
I wouldn't say anyone is wrong. The thought of uncapped risk is troubling to anyone.
It's not a very well known thing to do. Selling far OTM futures options. Most people don't even know what futures options are. The people utilizing such securities are usually institutions, hedge funds, market-makers, and very very few retail investors. I would also say again the thought of having uncapped risk keeps many away from doing this.
My risk management strategy dictates I get out before being ITM because as you said, the losses pile up before it goes ITM. The far OTM strike does however, give you a lot more room to breathe than selling ATM. The delta being 0.01 for far OTM compared to delta 0.50 for ATM demonstrates this.
Black swan events like that are just things I have to stomach. Just more reason enough for me to be watching my positions 24/7, to the annoyance of my girlfriend
I make sure I have 50% of my capital as margin and so far that level has worked very well.
The lesson to take away from your "food for thought" is that it isn't how much premium you get in such in such time for winnings. It's what one does with a losing position.
Trust me, your concerns and of some of the others, have made me think more about my risk management strategy and its importance, and for that, I thank you very much. Every trader finds his niche. I can't trade stock options for crap. But I find I am good at this futures option selling stuff
Can I ask you a question? Do you honestly feel like you have discovered something that everyone on this message board, and really, anyone who has ever traded futures over the last 100 years has not discovered?
Second question, do you know who Phibro is? Do you know who Glencore is? Well, you should, since you are swimming in their pool. They are multi-billion dollar commodity funds. What makes you think you know something they don't? They have 100,000 times the capital you have. If it's such easy money, why are they not selling them? Don't say because they don't understand futures. They ARE the futures market.
Last word from me on the matter: Be careful man.
Quote from Betapeg:
I wouldn't say anyone is wrong. The thought of uncapped risk is troubling to anyone.
It's not a very well known thing to do. Selling far OTM futures options. Most people don't even know what futures options are. The people utilizing such securities are usually institutions, hedge funds, market-makers, and very very few retail investors. I would also say again the thought of having uncapped risk keeps many away from doing this.
My risk management strategy dictates I get out before being ITM because as you said, the losses pile up before it goes ITM. The far OTM strike does however, give you a lot more room to breathe than selling ATM. The delta being 0.01 for far OTM compared to delta 0.50 for ATM demonstrates this.
Black swan events like that are just things I have to stomach. Just more reason enough for me to be watching my positions 24/7, to the annoyance of my girlfriend
I make sure I have 50% of my capital as margin and so far that level has worked very well.
The lesson to take away from your "food for thought" is that it isn't how much premium you get in such in such time for winnings. It's what one does with a losing position.
Trust me, your concerns and of some of the others, have made me think more about my risk management strategy and its importance, and for that, I thank you very much. Every trader finds his niche. I can't trade stock options for crap. But I find I am good at this futures option selling stuff
I have stated I have found a strategy that I personally like to employ. If you or somebody else doesn't, then that's fine. I never claimed to find the holy grail of finance. I always made clear a proper risk management strategy will make or break any trader/investor no matter what strategy they choose to employ.
Then we should all liquidate our accounts because there is always a bigger, better, faster guy out there. I have no clue what they are trading. For all I know, they sell futures options too. But by this logic, none of us should be trading ANYTHING. There is always a bigger, better, faster guy trading stocks, options, futures, whatever. That's not a reason to quit.
Listen, if you don't like what I'm doing, that's fine. You do you, and I'll do me. My only purpose was to detail what I was doing. It just turned into a flame fest on myself
===========================================
Anyways, enough about me. What do you guys do????