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How much margin do you use generally when selling options on commodities?
I have 70.000 EUR account, started selling CL options a few months ago, sold some NG calls at the top when prices were ridiculous etc and did pretty well. Then after reading more and more and some horror stories I decided it is time to start doing it more carefully. I sold very far OTM strangles, iron condors, naked puts and calls. Selling them for 0.02 (yes, I know, stupid) to 0.06.. But it worked out fine, was lucky not to experience any dramatic event..
I sold strangles at 64 with 74 and 51 strikes one month out just before the last mini crash from 65 to 58.. My 0.05 sold put was worth 0.35 one day But I held my trade because 51 strike was still well below this and I kinda knew that fall from 65 to 58 was already big enough so some buyers will soon step in. And they did and a week later I exited with a small gain.. I sold some more calls on the way down from 65 to 58 to keep my delta more neutral and was also ready to buy my 51 puts back when CL reaches 54 and sell more 45 puts, to recover my position. This was all one month out so I was never expecting crude to fall from 65 to 44 in one month, although I know, nothing is impossible in options..
My goal is to be able to live off of about 150.000 EUR which I will have in a few years.. I come from Slovenia so I could live quite ok with 1.500 EUR monthly. My goal is about 1.5 to 2k monthly, targeting about 12-15 % yearly return.
Just yesterday I opened another CL position - 110 days out. This time selling 20 puts and calls and buying 30 puts and calls few strikes higher. I have an account with IB and for the whole position requires only 2.200 EUR margin.. So i am using only 3.5 % of my margin and yearly ROI if I would be using 10 % would be 22 %.. This is not bad I think and 10 % margin use seems quite ok.
I was thinking of doing other commodities too, but for now CL offers very good returns and volatility of CL now in the middle of the multi years range seems quite ok.. Fall from 140 to 25 was pretty dramatic and then some quick bounces, but now I think CL should be steady between 45 and 75 for some time. We will see
Oh back to question. So how much margin do you typically use on the whole portfolio level?
I typically use approx. 50 % of the account size as margin, trading a diversified Portfolio.(I would consider 50 % as much too high for a portfolio only trading CL.
I do not trade very cheap options, as they can be hurt severely on a major move. It seems to be ok in case you only use 3.5 % of the account value as margin.
You might be interested in reading through the thread "Diversified Options Selling Portfolio". Here I describe m procedure in Detail.
/CL is one of the largest contracts out there, you are underestimating your margin use. To give you an idea, the Feb shakeup caused the margin requirements to expand about 7x. Exchanges simply say 'fuck it, 100% margin until shit blows over'.
Guess what, you will be liquidated simply on solvency, not enough cash to keep things flowing into the next day.
I will read the whole thread, thanks. Can you tell me what are your yearly returns approx? With 50 % margin use across the portfolio and being diversified, I would say 20%+ ?
It is big, that I know. My MAX loss on currently open position is 140.000 EUR. But still, I use only 3.4 % margin. Even if it expands 7x, this should still be at 25 %.. Is it really that bad?
That means you can realistically run 2 short option contracts across portfolio. I want you to be mindful of that. Option spreads and future calendars will help control the BPR and risk. Don't forget that SPAN margin is not cheaper, it is merely more efficient at reflecting current risk, and changes very dynamically. Most popular future contracts provide 6-7x leverage, and short options can grow teeth, big time.
Just make sure you run appropriate strategies for your account size, and not a $5MM portfolio.
IB are notorious for making NO margin calls, i.e. your account doesn't go negative, but rather they liquidate before close at market prices. Even if you are able to wire more money, or if the volatility contracts overnight. For that reason, many commodity traders avoid IB like plague.
There are a few brokers offering good commissions on FUT, but once you throw in FOPs and naked short FOPs, it comes down to 2-3 choices only.