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Your screen showed 1 short bond future and it looked like you were short 1 put. So with stocks, 1 option usually represents 100 shares. With futures is it generally true that 1 option represents 1 futures contract? Just for fun I pulled up a way out of the money Put on the ES, the January 1120. The bid is 9.50, so I'm assuming if you sell that put you get $950 and you are obliged to go long 1 ES at 1220 if you get assigned. One thing I can't figure out is that TOS risk profile is showing a max profit of $475 (exactly half) if ES closes above 1120 at expiration. Is this right or am I missing something? Thanks.
Yes, 1 futures option represents 1 futures contract. Your logic is correct on the ES but your math is off. If you sell the put at 1120 then you would take possession of a long position at 1120 if assigned. But you wouldn't receive $950 for selling the put, the multiplier on the ES is $50 per point, so if you sold the put for 9.50 pts then (9.50 x $50 = $475). So that's why TOS shows it at that price.
Sorry for all these questions about the bonds, just want to make sure my understanding is correct. If an investor thought that the bonds were high, this is the trade of the decade, etc... and wanted to take a short position using the futures, then he could just sell 1 ZB contract at the current price 145"11 and take the directional risk with the wide stop as we talked about.
Alternatively, the much more conservative approach (and much less profitable if ZB goes down from here) would be to just sell an out of the money call, say the Jan 152 with a delta of 0.16. It says last price 0"330 so you would collect (33/64) x 1000 = $515.62 if you did this and if assigned your position would be short 1 zb contract at 152. So if zb reached that level and kept going above 152 you would be hurt, but it would be better than being short at the current price.
Aside from that is there any other risk that I am not considering? Also, with equity options as long as the underlying doesn't gap way up or move too quickly you can usually roll up and out for some credit - do you find that you can do this with these futures options as well or are they more tricky to deal with?
Well don't take that trade of the decade bullcrap too far, Sosnoff has been spouting that rhetoric literally since ZB was at 125, not kidding. That's the reason I got hurt so bad was at 135 I felt like if I wasn't already short I would love to short here, so I stayed in the trade until at 141 I had enough back in September. I can't believe that in December we are at 145.
So yes, it works exactly as you have described. I am currently short one contract at 142'22 and have been shorting and covering for 1 full point several times over the last few weeks.
Yes there is risk you are not considering. You have to roll these contracts every 90 days and the price of the roll is different each time. This past one was only about an 8-tick differential, so quarter of a point. But the one before that cost me 1'08 to roll and keep a short position.
AS far as options go, yes you can roll these up and out like equity options. Here is the good and the bad I've experienced on ZB options. The bad is that they are not a tight BxA spread, so I usually have to give up 2 ticks or one full ZB tick to put your trade on. The BxA spread on TLT is usually one penny wide. However, the good news is that futures options trade 24 hours a day as well so you don't have the gap risk associated with playing TLT only during regular market hours. Also, the BxA spread on ZB options in after hours isn't that bad, maybe 1 more tick wide than regular hours.
Assuming that I have correctly stated what the positions would be in the above post, then obviously the logic is that for ZB to get to 152 by January expiration would require it to make more than a 1 standard deviation move and hit an all time high, which would presumably be a good time to take a small short position in anticipation of a pullback.
Thanks - I don't know if it's true but I've heard people say that the bond markets/traders are the most sophisticated of all - so I'm not going to play with those any time soon but it is interesting to watch.
Yes, that is essentially what happened back in the first week of August, we had 2 and 3 stan dev moves in back to back weeks. I felt real good staying short there and it didn't work. Also, for context, the high on ZB during the financial crisis when financial institutions were failing was 141.50. And we immediately fell 10 points from there, it just spiked to that level, not stayed there for three months as we have done now. So I have zero idea how to analyze this at the moment other than to stay short one contract and take my profits quickly rather than trying to call top and make 10 points.
Yeah I grew up hearing that same misinformation. The bond market got things completely wrong in the fall of 2008, anybody who bought up there just got back to whole this week when you consider the cost to roll contracts 8 times. They got it way wrong last fall as well. So this summer when we started going parabolic again I had to wonder, can they really get it wrong to such a horrible degree three times in four years?
I don't know how anyone can accurately predict the inflation/deflation/sovereign debt issues that keep morphing each week. We're in wacky territory.
Definitely wacky territory, probably not the ideal time for me to try my hand at futures trading. Selling premium seems a lot easier, albeit slower, method of making money. Have you traded other futures or just sticking to ZB? Is your preference for trading ZB based on the belief that bonds will eventually crash or are there other reasons you prefer it to ES or some of the other futures?
That's funny you say that because I got in to trading futures because being short time premium ended up being too slow for me and I wanted to do something more active. So I added futures trading to the mix. I have traded NG, DX, and ES in addition to ZB. I can't explain why, but I somehow just liked ZB better than the ES. Probably something as simple as my first several trades in ZB were winners and it was the opposite for ES. So psychologically I'm just more comfortable playing ZB. Which at the moment that argument makes no sense because I lost huge on ZB. But before I lost 60K I made 25K the previous 12 months. So it will take me a while to work my way back but I will. I picked up $3500-4000 on ZB in November but down -$2000 at the moment. The sad part is I lost big with a 4-lot but will have to pick it back up slowly using a 1-lot. I'm no longer in a position to play with more than that.
I'm still intrigued by the futures on the options so just ran some numbers on TOS looking at selling naked puts for January expiration and comparing ES vs SPY. I'm looking for a relatively safe entry, so picked the price at the October low which is about 1060 for the ES. Using the last price, you could sell five of the Jan 1060 puts for a credit of $1150, and they show delta 0.08, and BP effect of $11 K.
On the other hand the Oct. low for SPY is $107, and the $107 put has a similar delta of 0.09. You would need to sell 23 of the Jan 107 Puts at $0.50 to collect the same $1150 and the BP effect would be about 50 K.
So the ES trade would give you a return on capital of 10.4% in a month with a greater than 90% chance of success, and in the worst case scenario you go long 5 ES at 1060 which would probably have a reasonable chance of working out well if you didn't get stopped out.
Can you think of a good reason not to try this with a small number, like selling 2 puts? It would still bring in a premium of $460 and seems like a pretty safe bet.
On further analysis, perhaps the best way to play this hypothetical trade would be to sell an equal number of calls and make it a short strangle. Maybe sell the 1310 Calls and the 1065 Puts to collect $750 with BP effect $6000, and only be at risk for 2 contracts.
Ok - slept on it and just ran the numbers again - spreads are wide so just used the last trade for the prices. Since this would be my first time trading options of futures considering an extremely conservative approach - just selling a single Jan12 1065 Put and a single 1310 Call. TOS shows premium/BP = 367/3047 = 12%. Unless there is some big risk I am completely overlooking here I want to put this on next week.
What I like about this trade is that as long as you keep enough capital behind the 1 contract to keep it secure you can pretty much forget about it. If they expire worthless fine. If you just let it go and the worst that happens is that you go long after the market makes a huge move down or short after a huge move up you will probably end up making 10x the premium eventually.
So I just loaded up the trade you suggested and what I would caution is that the initial BP required is $3047, but as the underlying starts to move the BP changes. I set the price slices at your break even points and set the date ahead two weeks and if we were to get a move that quickly to one of your short strikes the BP needed to maintain the position is almost double, and the P/L varies between $1000-$1400.
And obviously you have theoretical unlimited risk so unless you had a stop point on the short strangle or a stop point after you took possession of either a long or short position, then you don't know what your BP will be to maintain the trade. Five weeks is a long time given recent volatility. And although at the moment it feels like you're willing to go long or short at those prices, you might feel differently if those strikes are violated rather quickly, so just keep in mind what the BP required to maintain the trade or losses to close the trade might look like if that happens.
That's something that bothers me about the Tasty Trade guys when they are throwing out trade ideas on something that has unlimited risk like a short strangle. They always talk about the BP needed to put it on and how the ROC makes so much sense, but they never mention potential increased BP needed if you get in trouble.
I understand that there is some risk, but it seems much smaller than the risk I took just a few days ago buying 1-2 contracts and holding them for less than 24 hours. In that short time I went from a loss of about $1100 to a gain of around $350 at the time I got out. This trade requires a huge move in a short period of time, and even then it doesn't get in that much trouble. As you said, if we got this huge move in either direction you could just place a buy stop 10 or 15 points outside the strike prices to limit the loss, and at the same time roll the other side of the trade to bring in a little more premium. This still looks to me to be a very high prob. trade.
Regarding the BP, it would make the 12% ROI go down but I'm not so concerned about that. If I did a trade like and the price got near one of the short strikes then I would have to treat it just like an ES scalp trade and keep enough cash on hand to employ a wide stop, based on my limited experience thus far I would probably use something like a 20 point stop.
How about this - pull up 3Y day chart on TOS charts for ES and set your slices to chart at 1330 and 1080. For regular Jan expiration the Probability analysis shows a 12% chance of being above 1330 and 9 % chance of being below 1080, so basically a 20% chance that one of these sides will get in trouble. My contention is that if one is going to play the futures, then even though 35 days is a long time and a lot can happen, just looking at that chart those are general areas where you would probably expect the market to at least face some resistance (1350 would be better on the topside but need to try to collect a little more premium on the call side). Of course I also see in the chart that the market filled that entire range during 1 option cycle between July - August, and it would only need to make 1/2 of that move now to put teh short strikes in trouble. So how about if you were to put the position on and just wait to see if the market breaks strongly one way or the other, and if that happens just take a 1 contract position. For example if the market roars up go long 1 ES if it breaks 1260, or if Europe collapses go short 1 if it breaks 1160. Then if it continued in that direction and blew past the short strikes it wouldn't matter because you would be flat after assignment. Of course if you took this position there is always the risk of the market getting choppy, so it would need some monitoring and potentially getting stopped out mulitiple times.
Tried to sell the ES put but order was rejected. Talked to Ameritrade and they said they don't offer options on futures yet, expect to be have it sometime in 2012.
I thought one of the reasons for them buying TOS was for the merging of technologies and product offerings they didn't currently have. I guess you could sign the ACATS forms and just send over enough money to make the trades you want with TOS.
Your screen showed 1 short bond future and it looked like you were short 1 put. So with stocks, 1 option usually represents 100 shares. With futures is it generally true that 1 option represents 1 futures contract? Just for fun I pulled up a way out of the money Put on the ES, the January 1120. The bid is 9.50, so I'm assuming if you sell that put you get $950 and you are obliged to go long 1 ES at 1220 if you get assigned. One thing I can't figure out is that TOS risk profile is showing a max profit of $475 (exactly half) if ES closes above 1120 at expiration. Is this right or am I missing something? Thanks.
ReplyDeleteYes, 1 futures option represents 1 futures contract. Your logic is correct on the ES but your math is off. If you sell the put at 1120 then you would take possession of a long position at 1120 if assigned. But you wouldn't receive $950 for selling the put, the multiplier on the ES is $50 per point, so if you sold the put for 9.50 pts then (9.50 x $50 = $475). So that's why TOS shows it at that price.
ReplyDeleteSorry for all these questions about the bonds, just want to make sure my understanding is correct. If an investor thought that the bonds were high, this is the trade of the decade, etc... and wanted to take a short position using the futures, then he could just sell 1 ZB contract at the current price 145"11 and take the directional risk with the wide stop as we talked about.
ReplyDeleteAlternatively, the much more conservative approach (and much less profitable if ZB goes down from here) would be to just sell an out of the money call, say the Jan 152 with a delta of 0.16. It says last price 0"330 so you would collect (33/64) x 1000 = $515.62 if you did this and if assigned your position would be short 1 zb contract at 152. So if zb reached that level and kept going above 152 you would be hurt, but it would be better than being short at the current price.
Aside from that is there any other risk that I am not considering? Also, with equity options as long as the underlying doesn't gap way up or move too quickly you can usually roll up and out for some credit - do you find that you can do this with these futures options as well or are they more tricky to deal with?
Well don't take that trade of the decade bullcrap too far, Sosnoff has been spouting that rhetoric literally since ZB was at 125, not kidding. That's the reason I got hurt so bad was at 135 I felt like if I wasn't already short I would love to short here, so I stayed in the trade until at 141 I had enough back in September. I can't believe that in December we are at 145.
ReplyDeleteSo yes, it works exactly as you have described. I am currently short one contract at 142'22 and have been shorting and covering for 1 full point several times over the last few weeks.
Yes there is risk you are not considering. You have to roll these contracts every 90 days and the price of the roll is different each time. This past one was only about an 8-tick differential, so quarter of a point. But the one before that cost me 1'08 to roll and keep a short position.
AS far as options go, yes you can roll these up and out like equity options. Here is the good and the bad I've experienced on ZB options. The bad is that they are not a tight BxA spread, so I usually have to give up 2 ticks or one full ZB tick to put your trade on. The BxA spread on TLT is usually one penny wide. However, the good news is that futures options trade 24 hours a day as well so you don't have the gap risk associated with playing TLT only during regular market hours. Also, the BxA spread on ZB options in after hours isn't that bad, maybe 1 more tick wide than regular hours.
Assuming that I have correctly stated what the positions would be in the above post, then obviously the logic is that for ZB to get to 152 by January expiration would require it to make more than a 1 standard deviation move and hit an all time high, which would presumably be a good time to take a small short position in anticipation of a pullback.
ReplyDeleteThanks - I don't know if it's true but I've heard people say that the bond markets/traders are the most sophisticated of all - so I'm not going to play with those any time soon but it is interesting to watch.
ReplyDeleteYes, that is essentially what happened back in the first week of August, we had 2 and 3 stan dev moves in back to back weeks. I felt real good staying short there and it didn't work. Also, for context, the high on ZB during the financial crisis when financial institutions were failing was 141.50. And we immediately fell 10 points from there, it just spiked to that level, not stayed there for three months as we have done now. So I have zero idea how to analyze this at the moment other than to stay short one contract and take my profits quickly rather than trying to call top and make 10 points.
ReplyDeleteYeah I grew up hearing that same misinformation. The bond market got things completely wrong in the fall of 2008, anybody who bought up there just got back to whole this week when you consider the cost to roll contracts 8 times. They got it way wrong last fall as well. So this summer when we started going parabolic again I had to wonder, can they really get it wrong to such a horrible degree three times in four years?
ReplyDeleteI don't know how anyone can accurately predict the inflation/deflation/sovereign debt issues that keep morphing each week. We're in wacky territory.
Definitely wacky territory, probably not the ideal time for me to try my hand at futures trading. Selling premium seems a lot easier, albeit slower, method of making money. Have you traded other futures or just sticking to ZB? Is your preference for trading ZB based on the belief that bonds will eventually crash or are there other reasons you prefer it to ES or some of the other futures?
ReplyDeleteThat's funny you say that because I got in to trading futures because being short time premium ended up being too slow for me and I wanted to do something more active. So I added futures trading to the mix. I have traded NG, DX, and ES in addition to ZB. I can't explain why, but I somehow just liked ZB better than the ES. Probably something as simple as my first several trades in ZB were winners and it was the opposite for ES. So psychologically I'm just more comfortable playing ZB. Which at the moment that argument makes no sense because I lost huge on ZB. But before I lost 60K I made 25K the previous 12 months. So it will take me a while to work my way back but I will. I picked up $3500-4000 on ZB in November but down -$2000 at the moment. The sad part is I lost big with a 4-lot but will have to pick it back up slowly using a 1-lot. I'm no longer in a position to play with more than that.
ReplyDeleteI'm still intrigued by the futures on the options so just ran some numbers on TOS looking at selling naked puts for January expiration and comparing ES vs SPY. I'm looking for a relatively safe entry, so picked the price at the October low which is about 1060 for the ES. Using the last price, you could sell five of the Jan 1060 puts for a credit of $1150, and they show delta 0.08, and BP effect of $11 K.
ReplyDeleteOn the other hand the Oct. low for SPY is $107, and the $107 put has a similar delta of 0.09. You would need to sell 23 of the Jan 107 Puts at $0.50 to collect the same $1150 and the BP effect would be about 50 K.
So the ES trade would give you a return on capital of 10.4% in a month with a greater than 90% chance of success, and in the worst case scenario you go long 5 ES at 1060 which would probably have a reasonable chance of working out well if you didn't get stopped out.
Can you think of a good reason not to try this with a small number, like selling 2 puts? It would still bring in a premium of $460 and seems like a pretty safe bet.
ReplyDeleteOn further analysis, perhaps the best way to play this hypothetical trade would be to sell an equal number of calls and make it a short strangle. Maybe sell the 1310 Calls and the 1065 Puts to collect $750 with BP effect $6000, and only be at risk for 2 contracts.
ReplyDeleteOk - slept on it and just ran the numbers again - spreads are wide so just used the last trade for the prices. Since this would be my first time trading options of futures considering an extremely conservative approach - just selling a single Jan12 1065 Put and a single 1310 Call. TOS shows premium/BP = 367/3047 = 12%. Unless there is some big risk I am completely overlooking here I want to put this on next week.
ReplyDeleteWhat I like about this trade is that as long as you keep enough capital behind the 1 contract to keep it secure you can pretty much forget about it. If they expire worthless fine. If you just let it go and the worst that happens is that you go long after the market makes a huge move down or short after a huge move up you will probably end up making 10x the premium eventually.
ReplyDeleteSo I just loaded up the trade you suggested and what I would caution is that the initial BP required is $3047, but as the underlying starts to move the BP changes. I set the price slices at your break even points and set the date ahead two weeks and if we were to get a move that quickly to one of your short strikes the BP needed to maintain the position is almost double, and the P/L varies between $1000-$1400.
ReplyDeleteAnd obviously you have theoretical unlimited risk so unless you had a stop point on the short strangle or a stop point after you took possession of either a long or short position, then you don't know what your BP will be to maintain the trade. Five weeks is a long time given recent volatility. And although at the moment it feels like you're willing to go long or short at those prices, you might feel differently if those strikes are violated rather quickly, so just keep in mind what the BP required to maintain the trade or losses to close the trade might look like if that happens.
That's something that bothers me about the Tasty Trade guys when they are throwing out trade ideas on something that has unlimited risk like a short strangle. They always talk about the BP needed to put it on and how the ROC makes so much sense, but they never mention potential increased BP needed if you get in trouble.
ReplyDeleteI understand that there is some risk, but it seems much smaller than the risk I took just a few days ago buying 1-2 contracts and holding them for less than 24 hours. In that short time I went from a loss of about $1100 to a gain of around $350 at the time I got out. This trade requires a huge move in a short period of time, and even then it doesn't get in that much trouble. As you said, if we got this huge move in either direction you could just place a buy stop 10 or 15 points outside the strike prices to limit the loss, and at the same time roll the other side of the trade to bring in a little more premium. This still looks to me to be a very high prob. trade.
ReplyDeleteRegarding the BP, it would make the 12% ROI go down but I'm not so concerned about that. If I did a trade like and the price got near one of the short strikes then I would have to treat it just like an ES scalp trade and keep enough cash on hand to employ a wide stop, based on my limited experience thus far I would probably use something like a 20 point stop.
ReplyDeleteHow about this - pull up 3Y day chart on TOS charts for ES and set your slices to chart at 1330 and 1080. For regular Jan expiration the Probability analysis shows a 12% chance of being above 1330 and 9 % chance of being below 1080, so basically a 20% chance that one of these sides will get in trouble. My contention is that if one is going to play the futures, then even though 35 days is a long time and a lot can happen, just looking at that chart those are general areas where you would probably expect the market to at least face some resistance (1350 would be better on the topside but need to try to collect a little more premium on the call side). Of course I also see in the chart that the market filled that entire range during 1 option cycle between July - August, and it would only need to make 1/2 of that move now to put teh short strikes in trouble. So how about if you were to put the position on and just wait to see if the market breaks strongly one way or the other, and if that happens just take a 1 contract position. For example if the market roars up go long 1 ES if it breaks 1260, or if Europe collapses go short 1 if it breaks 1160. Then if it continued in that direction and blew past the short strikes it wouldn't matter because you would be flat after assignment. Of course if you took this position there is always the risk of the market getting choppy, so it would need some monitoring and potentially getting stopped out mulitiple times.
ReplyDeleteActually that call is so cheap it's probably not worth selling. I'd still consider selling the put though.
ReplyDeleteTried to sell the ES put but order was rejected. Talked to Ameritrade and they said they don't offer options on futures yet, expect to be have it sometime in 2012.
ReplyDeleteI thought one of the reasons for them buying TOS was for the merging of technologies and product offerings they didn't currently have. I guess you could sign the ACATS forms and just send over enough money to make the trades you want with TOS.
ReplyDelete