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I trade a diversified option selling portfolio for many years. Different than other concepts to sell options, I strive for diversification (I strive for holding 8 – 15 options), and, thus, spend a lot of time studying fundamentals of various commodities. I do not spend a lot of time optimizing delta or DTE. (But contributions to this topics are highly welcome – I simply do not have enough time.)
Main criteria for the selection of options include:
Fundamental data, eg. Supply & Demand, Seasonals, COT Data.
Days to expiry: 90 – 180
Option price: $200 – $500
Delta: 0.02 – 0.2
Selection of commodities: Mainly Grains & Beans, Energies, Softs, sometimes Metals, Currencies, and Indices (mainly ES puts, selected according to Ron’s strategy, which I adapted to my concept).
Normal position size: 3 % of portfolio. Sometimes I sell double positions (6 % of portfolio), rarely triple positions.
Exit criteria: If profitable, I exit at 10 – 50 % of the entry price. Otherwise, I exit at approx. double the entry price. Usually I choose a chart criteria for the underlying future which is close to this condition (or closer, eg. at 120 % or 150 %). I also exit if fundamentals have changed significantly. After exiting, I sometimes „roll“ the trade to a new option. But only after careful study of the fundamentals.
I am a discretionary trader, and evaluate each trade on its own. Once in a while I go beyond my defined criteria.
Currently I hold the following positions:
LCV P132-P120
LCZ P136
LHZ C74 & C76
CLZ C60-C75
NGZ P2.25
NGZ C4.3
Additionally, I hold future positions in commodities that do not have enough open interest in the options, and spreads. (Currently: RRX, OZ, KWZ-WZ, LHG6-LHZ5, SK6-SX5, MPU,CDU-ADU.) To avoid clump risk, I usually hold 8 – 15 positions, which are (more or less) independent from each other. Usually the share of option positions is larger than currently, but I just liquidated several positions in the grains and in cotton as well as the ES puts.
I would be happy to discuss all issues regarding this strategy, especially interesting options to sell.
Your basic rule structure you have detailed is close to what I have been trading. I am also looking at trying to be a bit more diversified in the futures and equities options that I trade. I am concerned with being concentrated on one position. I am trying to ensure there is low correlation between trades
If possible I would also like to open the discussion to trading volatility VIX and /VX for 2 reasons to either
a) act as hedge for volatility spikes
b) act as a revenue generator
I have been doing lots of reading on the subject lately and I would appreciate opinions for other folks
Sold the WH6 C6 / WH6 P4 strangle. Wheat in my opinion should move more or less sidewards, after the USDA report today volatility should come down.
Also sold the BOH6 P24. i do not think Crude will go down much further. Palm Oil production should suffer from El Nino (dryness in eastern Asia) during the next months. After USDA report today volatility should come down.
Additionally added to my short live cattle position by selling LCZ P130.
I was just curious if you choose you positions based on trying to keep non-correlated positions? I am still trying to determine what limits I should use to avoid being concentrated on one position.
Yes, I try to sell non-correlated positions. Of course there are correlations between most of the commodities (eg. via the US$ or the S&P index), but there are stronger and weaker correlations.
I also like strangles in one commodity or puts in the one and calls in the other (correlated) commodity to avoid these correlations via the US$ and S&P index.
Avoiding these correlations (US$, S&P index) is of special importance at times where they are hard to predict. And currently I am unable to find out if they will go up or down in the near future. There are times when they show a clear trend - in this case I might be less careful avoiding these correlations.
