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Naked Options Selling!

  • #41
  • Jun 24, 2007 8:23pm Jun 24, 2007 8:23pm
Quoting frank99
Are you going to buy a put debit spread? Which month? How far out do you usually buy?


Frank
Hey Frank. I am probably not going to buy any spreads or do any risk reversals. I've never tried the strategy before. If I did, I would probably sell about 45-60 days forward and buy 90 days forward. The put time spread works well when volatility is low (like it is now) and when prices are overbought. Someone I know recommended a risk reversal. The latter is a good strategy as well, but has unlimited upside losses in this case (sell the call, buy the put).

Below are some examples of put time spreads and 3-month risk reversals one might use to profit off a carry unwind within the next 2-3 months:

sell AUD/JPY 99 put Aug 24 for 19 pips
buy AUD/JPY 99 put Sept 24 for 61 pips

3M R/R: sell 107 call, buy 100 put

sell CAD/JPY 110 put Aug 24 for 19 pips
buy CAD/JPY 110 put Sept 24 for 55 pips

3M R/R: sell 118.7 call, buy 111.2 put

sell CHF/JPY 98.3 put Aug 24 for 24 pips
buy CHF/JPY 98.3 put Sept 24 for 55 pips

3M R/R: sell 102.6 call, buy 98 put

sell EUR/JPY 160.7 put Aug 24 for 44 pips
buy EUR/JPY 160.7 put Sept 24 for 90 pips

3M R/R: sell 169.5 call, buy 160.8 put

sell GBP/JPY 237.7 put Aug 24 for 79 pips
buy GBP/JPY 237.7 put Sept 24 for 161 pips

3M R/R: sell 251 call, buy 237 put

sell NZD/JPY 88.4 put Aug 24 for 23 pips
buy NZD/JPY 88.4 put Sept 24 for 67 pips

3M R/R: sell 97.5 call, buy 89.5 put

sell USD/JPY 120.7 put Aug 24 for 53 pips
buy USD/JPY 120.7 put Sept 24 for 101 pips

3M R/R: sell 125.5 call, buy 119 put

The strike prices for the put time spreads are based on the 61.8% retracement of the lows created around late February to early March 2007 and the recent highs. The 3-month risk reversal strike prices have approximately a 22-delta at the time of this writing. All of the risk reversals posted here would result in a net debit. To fully finance the put, I would buy deeper out-of-the-money puts.

If I had that OptionVue software or similar, I'd be able to figure the max profit for the spread (which would occur if the pair expired at the strike).
  • #42
  • Jun 25, 2007 4:27pm Jun 25, 2007 4:27pm
Sold short GBP/JPY put, strike 244.78, expiry July 2nd, 2007 for 34 pips.

The previous option expired worthless. Although the calendar is a bit more active this week, I'm still expecting the carry pairs to continue on as normal (buy on dips, range a bit, and/or break new highs). There is no sign of a reversal on the immediate horizon. Factoring in the added risk with selling a put at these levels, I've reduced my position size by 20% from the previous level. Tuesday, Wednesday, and Thursday should be interesting for JPY pairs. Retail sales, industrial production, and inflation data are set to be released.
  • #43
  • Jun 26, 2007 11:41am Jun 26, 2007 11:41am
ragingbull,

Thanks so much for sharing. I am still going through this. It's very helpful. It looks like you're doing Calendar spreads (great strategy).

The broker that I use for options quotes everything in dollars rather than Pips.


Frank
  • #44
  • Jun 26, 2007 2:23pm Jun 26, 2007 2:23pm
Quoting ragingbull94mtx
Sold short GBP/JPY put, strike 244.78, expiry July 2nd, 2007 for 34 pips.

The previous option expired worthless. Although the calendar is a bit more active this week, I'm still expecting the carry pairs to continue on as normal (buy on dips, range a bit, and/or break new highs). There is no sign of a reversal on the immediate horizon. Factoring in the added risk with selling a put at these levels, I've reduced my position size by 20% from the previous level. Tuesday, Wednesday, and Thursday should be interesting for JPY pairs. Retail sales, industrial production, and inflation data are set to be released.
Hi

On which platform and broker do you trade these options, are they options on the cash or on the futures?
Regards
  • #45
  • Jun 26, 2007 5:58pm Jun 26, 2007 5:58pm
Quoting frank99
ragingbull,

Thanks so much for sharing. I am still going through this. It's very helpful. It looks like you're doing Calendar spreads (great strategy).

The broker that I use for options quotes everything in dollars rather than Pips.


Frank
No problem, any time! Actually, no... I won't be doing any calendar spreads unless the unwinding is confirmed. I am able to see the option quotes in *both* dollars and pips. Maybe there's a certain view you have to change? I haven't used IKON's Core Options Client in a while (but I will be soon enough), so I don't remember how they quote...

Quoting Howard
Hi

On which platform and broker do you trade these options, are they options on the cash or on the futures?
Hi Howard. Thanks for your question. I use Synthesis Bank's Trading Floor platform to trade. I will be using IKON Global Markets' Core Options Client in the near future. No... I'm not switching brokers... I will be using them simultaneously.
  • #46
  • Jun 27, 2007 4:52am Jun 27, 2007 4:52am
Hi Howard. Thanks for your question. I use Synthesis Bank's Trading Floor platform to trade. I will be using IKON Global Markets' Core Options Client in the near future. No... I'm not switching brokers... I will be using them simultaneously.[/quote]

Thanks a lot
Regards
  • #47
  • Jun 27, 2007 4:14pm Jun 27, 2007 4:14pm
Today was a bad day... not only did the pair go past the strike, I also got stopped out on my hedge.
  • #48
  • Jul 2, 2007 4:39pm Jul 2, 2007 4:39pm
Well, it's that time of the month again. Time to tally up the total accumulated pips and percentage increase in the account. Today makes exactly two months since I've embarked on this strategy. My account is up 26.1%. Total accumulated pips is 111.

My account was shellacked last week when GBP/JPY went against my position and then whipsawed. The hedge worked as planned limiting my losses, but the option still expired worthless today anyway.

Sold short GBP/JPY put, strike 243.85, expiry July 9th, 2007 for 33 pips.
Sold short NZD/JPY call, strike 96.73, expiry July 9th, 2007 for 14 pips.

Bullish on the GBP, bearish on NZD, neutral on JPY. Hence the positioning. The total position size (despite having sold 2 options rather than one) is 20% less than the previous position... chalk it up to increased risk aversion.
  • #49
  • Jul 4, 2007 12:56am Jul 4, 2007 12:56am
FAQ's:

What broker do you use to sell options?
Ans: Currently Synthesis Bank. I'm going to find out in a few days as to whether or not I will be trading with IKON Global in addition to Synthesis. Any changes will be posted here.

Where can I find more info on options as they relate to FX?
Ans: http://learning.saxobank.com/forex/options/Default.aspx

What exactly are you doing?
Ans: I sell an option based on which way I think a currency is going to move. Neutral-bearish, I sell a call... neutral-bullish, I sell a put.

Why?
Ans: I'm willing to accept potentially unlimited losses (and limited gains), in exchange for a high probability trade.

Unlimited losses?! Are you insane?
Ans: Yes. :

How do you hedge?
Ans: I cover the *entire* position with a spot position. One astute poster pointed out that in a fast moving market (or worse, a gap), a fill may not be possible. In this case, I would buy an option with a strike price higher or lower (depending on whether it's a call or put respectively) in order to prevent further losses.

Max drawdown so far?
Ans: Approximately 3.7%.
  • #50
  • Edited 12:54pm Jul 6, 2007 8:25am | Edited 12:54pm
Long NZD/JPY at the strike, call option still open... GBP/JPY put deep OTM.

*edit* Stopped out on the NZD/JPY hedge... drawdown larger than expected. Updates to follow.
  • #51
  • Jul 6, 2007 11:59pm Jul 6, 2007 11:59pm
Today was a repeat performance of June 27th. Pair goes past strike, option gets hedged, pair quickly reverses, stops out hedge... this time with Kiwi/Yen.

According to my calculations, this brings the max drawdown to 8.4%... assuming the pair remains below the strike until expiration. I will be watching the Sunday open for any signs of trouble.
  • #52
  • Jul 9, 2007 9:45am Jul 9, 2007 9:45am
Quoting ragingbull94mtx
Today was a repeat performance of June 27th. Pair goes past strike, option gets hedged, pair quickly reverses, stops out hedge... this time with Kiwi/Yen.

According to my calculations, this brings the max drawdown to 8.4%... assuming the pair remains below the strike until expiration. I will be watching the Sunday open for any signs of trouble.
Options expired worthless at 10am. I miscalculated the drawdown because I double-counted the commissions that would be charged. The actual max drawdown so far totals 7.68%. The account is still up 20.85% since inception.
  • #53
  • Jul 9, 2007 5:20pm Jul 9, 2007 5:20pm
Sold short GBP/USD call, strike 2.0274, expiry July 16th, 2007 for 8 pips.

The pip count for this particular trade is low because I opted to go deeper out of the money than I normally would. Usually delta is between 20-25, this time below.
  • #54
  • Jul 11, 2007 9:46am Jul 11, 2007 9:46am
Position closed...

Total Drawdown (hi-to-low): -27.64%
Drawdown since inception: -5.28%

Details later...
  • #55
  • Jul 20, 2007 10:48pm Jul 20, 2007 10:48pm
Long story short... I broke all of the rules and paid the price... the interesting part is... had I left the strategy alone (i.e following the original rules) I would not have lost *anything*. Many important lessons have been learned as a result of this... all of which have been incorporated into a slightly modified version of my strategy. Although I entered the latest trade on Monday, July 16th, I didn't get a chance to post until now.

Sold short NZD/JPY put, strike 91.91, expiry August 15th, 2007 for 21 pips.

By the way, I miscalculated the total drawdown and drawdown since inception. Those numbers should read -25.55% (peak to trough), and -2.55% (from starting balance) respectively. The latter figure will be updated after each trade is closed from now on. The former, only if another total drawdown exceeds that figure.
  • #56
  • Jul 21, 2007 2:37pm Jul 21, 2007 2:37pm
Hi ragingbull

In one of your posts you said that you hedge your option position with a spot position; do you enter the spot position when the price moves beyond the strike price or do you enter the spot from the outset?
Regards
  • #57
  • Jul 21, 2007 5:46pm Jul 21, 2007 5:46pm
Quoting howard
Hi ragingbull

In one of your posts you said that you hedge your option position with a spot position; do you enter the spot position when the price moves beyond the strike price or do you enter the spot from the outset?
Hey Howard, excellent question. I create entry stop orders in place at or near the strike price immediately after opening a new position. I also place a conditional "if done" stop loss order attached to the entry stop order. When they are triggered, I go long or short depending on whether I sell a call or put (respectively) with a corresponding stop loss order a certain distance away. Hope this answers your question.
  • #58
  • Jul 22, 2007 3:52am Jul 22, 2007 3:52am
Quoting ragingbull94mtx
Hey Howard, excellent question. I create entry stop orders in place at or near the strike price immediately after opening a new position. I also place a conditional "if done" stop loss order attached to the entry stop order. When they are triggered, I go long or short depending on whether I sell a call or put (respectively) with a corresponding stop loss order a certain distance away. Hope this answers your question.
Thanks for the reply; so at this stage your risk is the stop attached to entry if market makes a u-turn, how far is this stop normally?

I apply the same procedure to jpy options on futures. At the moment I have sold 3rd Aug calls, and strike is only 100 pips away. I use FOP because the spread is no more than 3 pips as oposed to 10 pips on cash and there is the opportunity of rollover to next strike or expiry. I am also long cash to benefit from the positive swap.
Regards
  • #59
  • Jul 22, 2007 2:29pm Jul 22, 2007 2:29pm
Quoting howard
Thanks for the reply; so at this stage your risk is the stop attached to entry if market makes a u-turn, how far is this stop normally?
That is correct. Based on the modified rules, I try to set the stop around 7.5%-10% of the monthly ATR depending on the pair.

Quote
I apply the same procedure to jpy options on futures. At the moment I have sold 3rd Aug calls, and strike is only 100 pips away. I use FOP because the spread is no more than 3 pips as oposed to 10 pips on cash and there is the opportunity of rollover to next strike or expiry. I am also long cash to benefit from the positive swap.
Excellent! I'd like to look into options on futures as well. What are the margin requirements like?
  • #60
  • Jul 23, 2007 12:12pm Jul 23, 2007 12:12pm
Quoting ragingbull94mtx
That is correct. Based on the modified rules, I try to set the stop around 7.5%-10% of the monthly ATR depending on the pair.



Excellent! I'd like to look into options on futures as well. What are the margin requirements like?
All the margins for options and other instruments are set out here, select: trading>margin :

WWW.interactivebrokers.com or www.interactivebrokers.co.uk


For jpy futures, it is $2430
Regards
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