The short side of commodities options | Forex Factory

Options

Go to
Permalinks
Print Thread

Similar Threads

Trading stocks, ETF, commodities using options 97 replies

Is "short covering" just profit taking on the short side? 5 replies

Any Options, Bull Options & Option Bit 39 replies

Indices, Forex, Commodities, Fixed Income, Equities (And/or) Options 3 replies

The Left Side of the Quadrant, by Dr. Van K Tharp 0 replies

Attachments: The short side of commodities options
Exit Attachments

The short side of commodities options

  • #1
  • First Post: Feb 27, 2012 5:14am Feb 27, 2012 5:14am
Last week I posted some of my successful trades on XAG/XAU thread. The trades were with gold/silver futures options, the short side.

I've been shorting commodity, stock index, bond and currency futures options for 10 years now, and have achieved average annual returns of 20-30%. My largest drawdown was in Oct 2008 at 18% as SP500 crashed.

Although FF is mostly about FX trading I was wondering if there are guys here who do similar stuff and/or people who'd be interested to look into this trading practice and learn something new?

I could start this journey by posting every week 1 actual trade in real time and discuss and analyse why I did this trade. Could there be any interest for this?
  • #2
  • Feb 27, 2012 4:02pm Feb 27, 2012 4:02pm
Yes, I'm interested in crude oil and refined products trading.
:: everything is awesome ::
  • #3
  • Feb 28, 2012 10:42pm Feb 28, 2012 10:42pm
Quoting Pommegranate
Last week I posted some of my successful trades on XAG/XAU thread. The trades were with gold/silver futures options, the short side.

I've been shorting commodity, stock index, bond and currency futures options for 10 years now, and have achieved average annual returns of 20-30%. My largest drawdown was in Oct 2008 at 18% as SP500 crashed.

Although FF is mostly about FX trading I was wondering if there are guys here who do similar stuff and/or people who'd be interested to look into this trading practice and learn something new?

I could...
I'm interested in crude oil, DOW-30, and gold trading so would like to know what your up to.
  • #4
  • Feb 29, 2012 9:41am Feb 29, 2012 9:41am
OK guys, my first trade of the week is now initiated. I just shorted Dec 2012 COMEX Silver 125 call option for 0.035 or $175 per contract. If on Nov 27 (the time when this option contract expires) Silver will trade below 125 then this $175 will be my profit. Silver future trades currently on Comex at 36.685 so there's a lot of room till 125 level.
  • #5
  • Mar 1, 2012 4:29am Mar 1, 2012 4:29am
Quoting Pommegranate
OK guys, my first trade of the week is now initiated. I just shorted Dec 2012 COMEX Silver 125 call option for 0.035 or $175 per contract. If on Nov 27 (the time when this option contract expires) Silver will trade below 125 then this $175 will be my profit. Silver future trades currently on Comex at 36.685 so there's a lot of room till 125 level.
I bet you wish you more than just shorted the call, the thing crashed last night, trading a put long would have been optimal (this being said in hindsight means nothing). I am not that familiar with options as my main focus is in equities. That being said, your trade did make you money, which is good. However, explaining your methodology that led you to take the trade is even better. Otherwise, posting trades without explaining why you took em is a total waste of time to you and the readers of this thread.
  • #6
  • Mar 1, 2012 12:30pm Mar 1, 2012 12:30pm
Today shorted again this Dec 2012 Comex Silver future's 125 call option for 0.035 or $175 per contract.

My bet is that Silver will have hard times surpassing the 37.5 level short-term, or 50 dollars medium-term. It will definitely not reach 125 by 27th of November when this contract expires.

The contract I shorted takes up approximately $500 of my account margin. If it expires out of the money and the whole $175 will become my profits then I have 35% return on my employed capital.

With shorting options you'll never make 100% returns a month but 20-30% annual returns are possible based on my 10 year experience.
  • #7
  • Mar 1, 2012 10:10pm Mar 1, 2012 10:10pm
Quoting Pommegranate
Today shorted again this Dec 2012 Comex Silver future's 125 call option for 0.035 or $175 per contract.

My bet is that Silver will have hard times surpassing the 37.5 level short-term, or 50 dollars medium-term. It will definitely not reach 125 by 27th of November when this contract expires.

The contract I shorted takes up approximately $500 of my account margin. If it expires out of the money and the whole $175 will become my profits then I have 35% return on my employed capital.

With shorting options you'll never make 100% returns a month...
Pommegranate, thanks for the explanation, I had a question though, are the options you trade European?
  • #8
  • Mar 2, 2012 7:39am Mar 2, 2012 7:39am
Quoting split_unit
Pommegranate, thanks for the explanation, I had a question though, are the options you trade European?
I trade only futures options available on liquid US futures excanges like ICE, NYMEX, COMEX, CBOT, CME, GLOBEX, NYBOT, etc. The reason is liquidity. I haven't find similar conditions.

The instruments I trade can be seen here:
http://www.admis.com/QuotesChartsNews.aspx
  • #9
  • Mar 4, 2012 10:45pm Mar 4, 2012 10:45pm
Quoting Pommegranate
I trade only futures options available on liquid US futures excanges like ICE, NYMEX, COMEX, CBOT, CME, GLOBEX, NYBOT, etc. The reason is liquidity. I haven't find similar conditions.

The instruments I trade can be seen here:
http://www.admis.com/QuotesChartsNews.aspx
Pommegranate,

Don't you someimes get ripped apart when you sell calls or puts short? Your downside in unlimited with your upside limited to the commission that you grab at the begining. Can you give us a short brief on your strategy and parameters that you use to trade options short with. What intrigues me is that you have taken the disadvantage mentioned above and turned it into an advantage.
  • #10
  • Mar 5, 2012 1:18am Mar 5, 2012 1:18am
it is an interesting strategy shorting way out of the money option. where can i start trading and use the platform to trade and how much money do i need to open this account.
  • #11
  • Mar 6, 2012 9:38am Mar 6, 2012 9:38am
Quoting split_unit
Pommegranate,

Don't you someimes get ripped apart when you sell calls or puts short? Your downside in unlimited with your upside limited to the commission that you grab at the begining. Can you give us a short brief on your strategy and parameters that you use to trade options short with. What intrigues me is that you have taken the disadvantage mentioned above and turned it into an advantage.
That's absolutely great question! Of course I sometimes get ripped apart. In fact, 3-5% of my trades end up problematic, I either have to close them at loss, hedge them with futures or bite my nails until they expire.

Couple of rules.

1. Short instruments that have experienced really high recent volatility, like Silver the past weeks. You should check out and see that the trade I made last week here has already lost 70% of its value!

2. 90% of my trades are with call options as it is much harder for the markets to go higher (excluding FX futures options) and thus reach my strikes.

3. Try to short options contracts where you receive at least $100 per contract.

4. Try to choose strike prices at least 30% away from current futures price. If gold is at 1000, never short steikes below 1300 level.

5. Try to short options that expire in 2-3 months - time decay is the largest.

6. Always check seasonal trends of the underlying instrument. If over the past 30 years WTI crude always rises in June, then start call shorting in the end of June after seasonal jump in the underlying.

7. Diversify! I have currently in my portfolio short options in Gold, Silver, Soybeans, Natural gas, Coffee, Orange juice, SP500, euro, yen, Aussie, Corn.

8. Stop opening new positions when your Initial Margin reaches 40% of Account Value. Spare liquidity comes handy during volatile times when exchanges hike margins - remember Gold/Silver crash in 2011!
  • #12
  • Edited 6:13am Mar 7, 2012 3:13am | Edited 6:13am
Quoting Pommegranate
That's absolutely great question! Of course I sometimes get ripped apart. In fact, 3-5% of my trades end up problematic, I either have to close them at loss, hedge them with futures or bite my nails until they expire.

Couple of rules.

1. Short instruments that have experienced really high recent volatility, like Silver the past weeks. You should check out and see that the trade I made last week here has already lost 70% of its value!

2. 90% of my trades are with call options as it is much harder for the markets to go higher (excluding FX futures...
+1

Pommegranate, your post reflects your experience. It was very informative and brilliant, your level of knowledge on options is impressive. My comments can be found in blue below:

That's absolutely great question! Of course I sometimes get ripped apart. In fact, 3-5% of my trades end up problematic, I either have to close them at loss, hedge them with futures or bite my nails until they expire.

Couple of rules.

1. Short instruments that have experienced really high recent volatility, like Silver the past weeks. You should check out and see that the trade I made last week here has already lost 70% of its value! How do you calculate this recent volatility? Do you use technical methods such as the ATR, Bollinger Bands or the put/call ratio? Or do you assess the market as a whole through the VIX to identify periods of high and low volatility to base your trade on?

2. 90% of my trades are with call options as it is much harder for the markets to go higher (excluding FX futures options) and thus reach my strikes. I get this point, which is the main reason I dont trade FX markets. The excess liquidity can put you deeply in the red if your wrong especially if you only trade calls which would handicap your options trading.

3. Try to short options contracts where you receive at least $100 per contract. Why would it matter what you recieve? Whats the difference of trading one contract worth 100 and two contracts worth 50 each?

4. Try to choose strike prices at least 30% away from current futures price. If gold is at 1000, never short steikes below 1300 level. I get this point, the way I see it is that you wait for the instrument to stretch itself out and performs in a volatily manner before you sell its option with strike prices thats way far away. You do this because you believe that stretching another 30 percent wont be easy.

5. Try to short options that expire in 2-3 months - time decay is the largest. Here, time decay is in your favor since you are a seller of the option. The higher the time decay, the safer your position. Am I correct here?

6. Always check seasonal trends of the underlying instrument. If over the past 30 years WTI crude always rises in June, then start call shorting in the end of June after seasonal jump in the underlying. My comments here are almost the same as in point #4

7. Diversify! I have currently in my portfolio short options in Gold, Silver, Soybeans, Natural gas, Coffee, Orange juice, SP500, euro, yen, Aussie, Corn. I get this point, you try to pick as many asset classes as possible, my question is, why not include stocks as well which would further diversify your portfolio?

8. Stop opening new positions when your Initial Margin reaches 40% of Account Value. Spare liquidity comes handy during volatile times when exchanges hike margins - remember Gold/Silver crash in 2011! This is a risk management measure that suits your personality.

Thanks.
  • #13
  • Mar 7, 2012 7:20am Mar 7, 2012 7:20am
  •  Sahil
  • | Joined Jan 2009 | Status: Options Trader - Commodities & FX | 24 Posts
Quoting Pommegranate
OK guys, my first trade of the week is now initiated. I just shorted Dec 2012 COMEX Silver 125 call option for 0.035 or $175 per contract. If on Nov 27 (the time when this option contract expires) Silver will trade below 125 then this $175 will be my profit. Silver future trades currently on Comex at 36.685 so there's a lot of room till 125 level.

HI, WHat broker are you using, I ma currently using Options xpress and INteractive brokers. I only trade the options in Commodities and GBP.
I achieve around 30-40% annual return.
I am soon starting my own FUND.
Good to see your post
  • #14
  • Mar 7, 2012 12:27pm Mar 7, 2012 12:27pm
Quoting Sahil
HI, WHat broker are you using, I ma currently using Options xpress and INteractive brokers. I only trade the options in Commodities and GBP.
I achieve around 30-40% annual return.
I am soon starting my own FUND.
Good to see your post
I'm using ADM for my options trading. (www.admis.com) In the past I've been also with RJO and Lind Waldock before it was taken over by that as.hole Corzine.

So I'd pick either RJO or ADM. If you want to launch fund with serious money then you should talk to New Edge.

IB & OE are also ok if you trade responsibly - IB likes to manipulate with margins especially before options expirations and periods of high volatility. Be careful with them.

I've tried to launch my own fund but find it difficult as serious family offices and seeder funds don't like naked options sellers, they think there's too much tail risk, and most of the guys think you can't manage your risks, even if you show your track record. Hope you have more luck.
  • #15
  • Edited 8:12pm Mar 7, 2012 7:33pm | Edited 8:12pm
I assume that you meant that you "wrote" or "sold" a put option, not shorted one. I never heard of terminology of shorting a put or call option.

Wow, $150 for silver put that is over $20 OTM by Nov - I'm going to check this out.

Quoting Pommegranate
New trade guys, this time also with Silver!

Just shorted Dec 2012 Comex Silver future's 10 put option for 0.030 or $150 per contract. Silver currently trading at 33.47 .

My bet is that Silver will not crash to 10.0 by 27th of November when this contract expires.

The contract I shorted takes up approximately $300 of my account margin. If it expires out of the money and the whole $150 will become my profits then I have 50% return on my employed capital.

Next week I'll try to post a trade other than Silver to make this thread more interesting.

Also...
  • #16
  • Mar 8, 2012 1:45am Mar 8, 2012 1:45am
Quoting Nomi1
it is an interesting strategy shorting way out of the money option. where can i start trading and use the platform to trade and how much money do i need to open this account.
For example, the trades i've done so far have taken 300-500 USD of margin per contract. Ideally you would have at least 4-5 different instruments in your portfolio - silver, crude, grains, softs, FX futures options. These 5 positions could take up to $4000 of margin. If we follow one of the rules above (initial margin shouldn't exceed 40% of your account value) then you'd be safe with an account of 10k USD.

With this amount you could start at Interactive Brokers, OptionsXpress.
  • #17
  • Mar 8, 2012 2:27am Mar 8, 2012 2:27am
Quoting eagle4x
I assume that you meant that you "wrote" or "sold" a put option, not shorted one. I never heard of terminology of shorting a put or call option.

Wow, $150 for silver put that is over $20 OTM by Nov - I'm going to check this out.
The correct wording is either write or short an option, as you're selling to the market something that you don't have. Selling an option would imply you're selling something that you already have!

The interesting thing about yesterdays option trade is that somebody bought it from me at much higher price than was the model price. I shorted it for $150 but the closing price was 0.008 or $40. So I made unrealized profit of $110 per contract in one day.

How is it possible? With far out of the money options there are usually no market makers out quoting bid and ask. So when somebody has margin call on his account he could be buying back his short options at ridiculous prices - like happened yesterday.

The trick is to constantly monitor the whole options universe to spot price anomalies. You can either build special program for that or monitor yourself.
  • #18
  • Mar 8, 2012 5:20am Mar 8, 2012 5:20am
What broker are you using and how much are commissions?

Quoting Pommegranate
The correct wording is either write or short an option, as you're selling to the market something that you don't have. Selling an option would imply you're selling something that you already have!

The interesting thing about yesterdays option trade is that somebody bought it from me at much higher price than was the model price. I shorted it for $150 but the closing price was 0.008 or $40. So I made unrealized profit of $110 per contract in one day.

How is it possible? With far out of the money options there are usually no market makers out quoting...
  • #19
  • Mar 8, 2012 5:45am Mar 8, 2012 5:45am
  •  Sahil
  • | Joined Jan 2009 | Status: Options Trader - Commodities & FX | 24 Posts
Quoting eagle4x
What broker are you using and how much are commissions?
I will still recommend Options xpress as their platforms and service is good.
ALso Pommegranate, are you trading full size future as the margin on those asre around 3000USd and not 300USd
  • #20
  • Mar 8, 2012 5:54am Mar 8, 2012 5:54am
Quoting eagle4x
What broker are you using and how much are commissions?
I'm using ADM. Not the cheapest one around but have been with them for a long time. RJO is also good. Choose broker that provide not only access to electronic trading but also to pits.

At ADM I pay 8 USD roundtrip. Same rates at RJO. This comes with personal approach to client service.

Interactive Brokers provides only electronic access. Optionsxpress does provide pit access for some products but not electronic. Out of the ordinary brokers I would probably choose ThinkorSwim.
0 traders viewing now