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No, I do not like this kind of trade for several reasons:
1. I succeed more often than not in predicting what happens medium- and longterm to commoditiy prices, using seasonal charts, COT data or S&D data. I am not successful in predicting short-term movements of commodity prices.
2. Premium for options two weeks out are small compared to the risk.
3. Your suggestion to protect loosing trades has two major risks: Your protective stop might be filled, and the price moves back lower (for short calls). You might loose much more than you gain with the short options. Or the price of the commodity gaps far beyond your stop at the open - another way you loose significant money.
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals, U308 and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,060 since Dec 2013
Thanks Given: 4,410
Thanks Received: 10,230
@ron99 and others have shown that 'optimal time decay' involves selling option with a greater time to expiry that that, and to close position at a 50-60% profit rather than wait to expire.
My secret indulgence: I sometimes like to wait for the options to expire.
The last week is very nice, when it loses value so fast, often even if the underling goes against you.
I do it only with small positions though.
But: this is a low reward/high risk behaviour. The risk that a sudden move can make a loser out of a winner is real, and almost happened to me several times.
If anything, it just shows my lack of professionalism.
I'm the opposite; I am better at shorter-term prediction than longer-term. Hence the option strategy being what it is.
As for the risk mgmt method, example: I would only be short futures (for a short-put option position) when the market is below the strike. Strikes are chosen carefully to miminize the odds of the scenario you described, as well as other unfavorable scenarios such as multi-day balancing at the strike, seeing that price trade many times & constantly hopping in and out of the short futures position. Strikes are 'hot prices' the mkt has shown excess at, traded away from, and perhaps even tried to unsuccessfully retake days later before rejecting again.
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals, U308 and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,060 since Dec 2013
Thanks Given: 4,410
Thanks Received: 10,230
I'll repeat that @ron99 and others have shown that 'optimal time decay' involves selling option with a greater time to expiry that that, and to close position at a 50-60% profit rather than wait to expire. This is not a 'longer term trading strategy' as the hold times will be almost identical, it's just a trading startegy that has the same goals as what you are proposing but with a better risk/reward.
My personal advice would be to exit on a stop before you ever get into a situation where you are having to cover the underlying to protect your now at the money option. It can get ugly very quickly doing what you are proposing.
Eric, the thing is that as an optionsseller you make money by selling theta (time value), and you assume the risk of the buyer.
Youre proposal will generate little income, unless you take a considerable risk.
Even if it works often, one or two bad trades will wipe you out.
intriguing 'exit at 50%' strategy, will look at that. Do you have a current example I could view?
Example of a trade is one I'm currently in on the sim acct. Short two ES end-of-month puts, strike 2320, entered at 13.25 a few days ago. Options expire at the end of this month.
I have updated my backtest of the ES short 5 delta put with 2 long puts that are 1.50 delta. Sold at 90+ DTE and exited at 50% drop in net premium. Uses 6x IM. Excel spreadsheet is attached.
The study now covers 4 years. 2013 to 2016. If you started …
But I doubt that would work for selling options for last 14 days till expiration.
Selling options 90+DTE usually the first 50% drop happens faster than the last 50%.
I exited this trade at 1.10 today. MROI is 3.9%. 14 days held.
I exited this trade at 1.10 today. MROI is 1.7% 35 days held.
I am thinking about waiting until reentering. I don't like possible government shutdown this week. Or I may reenter just some positions tomorrow. Not my full amount.