ajk1 

Legendary thread here, and lots of great information. Thank you all There seems to be a lot focus on selling OTM options.. so an OTM put if I am bullish.. Do any of you selling ATM options ? (perhaps if you have a feel your market timing is good) There is a larger credit to collect, but less room for error..

Selling ATM options in current market? No way. Way too risky.

ajk1 

Legendary thread here, and lots of great information. Thank you all There seems to be a lot focus on selling OTM options.. so an OTM put if I am bullish.. Do any of you selling ATM options ? (perhaps if you have a feel your market timing is good) There is a larger credit to collect, but less room for error..

Yes, once in a while I sell ATM options.

But whereas selling FOTM options is a trade that is supposed to work independently of the move of the underlying, selling ATM options only works in case you are correct on the direction of the move of the underlying.

I am currently short LHJ P62-52 and P64-54.

Best regards, Myrrdin

Let me start by saying this is not intended to advocate shorting vol to collect the premium, but again I would point out there is both risk and reward. For example from Friday......

SMCJB 

Looking at next week, EW2 expiring Fri 13th, the same 2875/3050 strangle is only 87/89 (ES @ 2967) so over 20% cheaper than last week with a I believe a similar underlying level!

Thankfully I didn't sell this on Friday - as I felt the risk was greater than the previous week and the reward being offered was considerably less. But even if I had, and even with the market down 6.8% (2764) the strangle is only 140.5/143.5, which is a loss of 54 or just over 60%. So even if you closed it now and wrote it off as a bad trade....

• if you normally close your trades with a 50% win... you only offset 1.2 of your winning trades and as an option seller I suspect your win rate is significantly higher than 55% needed to cover this.
• If I had sold it and closed it now, then it would only be 54% of my gain from the previous week. Net net on the two trades about +46.

Noted and thanks for the analysis.

Issue is what if this was your first trade without having been a winner earlier.. or worse still this is your second trade and the first one was bad timing and you struggled to come out a winner...????..

Is it worth the reward trying to put these on in this volatile environment where it might be just easier to pick levels and enter with limited stops?

After having gone through this for the last few weeks, not sure this is the worth the emotional aggravation

Just my point of view

jokertrader 

Issue is what if this was your first trade without having been a winner earlier.. or worse still this is your second trade and the first one was bad timing and you struggled to come out a winner...????..

But that's the case with all trading. Even with a 65% win rate you have 12.25% chance of both your first two trades being losers, so for one in eight traders that will happen. (Of course most new traders probably don't have a 65% win rate so it is in reality even higher.!) This is the beauty of Monte Carlo simulations. Not only do your expected distributions give estimated payout and strategy volatility numbers, but they also give you 'Risk of Ruin' numbers. I'd go on to say that the 'Risk of Ruin' of many strategies are probably considerably higher than people think. Maybe not just because of price risk but because of excessive size and leverage and also liquidity risk. Because when things go really really wrong - the liquidity often isn't there to get out in an orderly manner if you have size on.

jokertrader 

Is it worth the reward trying to put these on in this volatile environment where it might be just easier to pick levels and enter with limited stops?

For professional traders selling vol isn't about picking levels it's about expected risk vs expected reward. But yes if your trying to sell options as a directional trade, maybe picking levels and managing stops is a better way to do it. Your really using different tools, in different ways, to try and achieve the same result.

jokertrader 

After having gone through this for the last few weeks, not sure this is the worth the emotional aggravation

Ha I hear you. Short vol rarely is fun when markets get interesting! I wish I could say it doesn't bother me at all but in reality I'm so busy juggling so many things I rarely have the time to worry about any one position.

On Jan 9, 2020 front month ES future initial margin for non-members was $6,930. On March 11 it will be $9,185. That's a 33% increase.

When you sell options you need to remember that the exchange raising margin affects your excess and your profit.

ron99 

When you sell options you need to remember that the exchange raising margin affects your excess and your profit.

That's an excellent point Ron and not just specific to options. It's also something very difficult to plan for. I've seen several occasions in Natural Gas where a significant increase in margins has forced liquidations which have in turn moved the market.

SMCJB 

That's an excellent point Ron and not just specific to options. It's also something very difficult to plan for. I've seen several occasions in Natural Gas where a significant increase in margins has forced liquidations which have in turn moved the market.

Arent a lot of the 'increase in margin notions' more relevant to naked options?
If I am selling a defined risk vertical spread.... either far OTM, or closer ATM - isnt the 'increase in margin' problem somewhat less relevant ?

ajk1 

Arent a lot of the 'increase in margin notions' more relevant to naked options? If I am selling a defined risk vertical spread.... either far OTM, or closer ATM - isnt the 'increase in margin' problem somewhat less relevant ?

Yes, if you're trading limited risk spreads, the increased margins aren't going to have nearly as much an effect on you as someone selling naked options.... in theory. Some brokers will increase margins even more (on top of the SPAN increase), and ignore the fact that your spread risk is limited.

Mike Murphy - Director of Trading

ajk1 

Arent a lot of the 'increase in margin notions' more relevant to naked options? If I am selling a defined risk vertical spread.... either far OTM, or closer ATM - isnt the 'increase in margin' problem somewhat less relevant ?

SPAN Margining is very complicated especially when you take into account the portfolio effect of multiple positions. Simplified the SPAN system shocks your position in multiple ways by moving price and volatility to predefined extremes and the worst case scenario is the margin requirement. For a simple option spread the margin requirement for a spread between A and B is I believe just (A-B). Hence if A and B both increase by x% then (A-B) also increases by x%. In reality it's no not that simple, and it's non linear so there isn't an easy rule of thumb. But answering your question, I believe in its simplest form, in an absolute dollars it will be less but in percentage terms I believe it will be similar.

Ironbeam 

Yes, if you're trading limited risk spreads, the increased margins aren't going to have nearly as much an effect on you as someone selling naked options....

Again, on a relative basis I respectively disagree. If you have an argument as to why I may be wrong I would be interested to hear it.

I did run several scenario's on the lastest margin increase (March 4th) to try and provide supporting data for my case but the results are hard to interpret which isn't surprising given the underlying price and volatility change.