I am looking at the ES futures options. If I think that the market is going to hold steady or move up the next ten days and I also think that the odds of a move down of more than 2% are limited from this area of 1366 on the ES M8, is the folllowing a good strategy--- Sell April ES 1315 puts at about 5.75. They expire next week and if the market approaches the 1315 area, I can just sell ES futures to offset the options and then wait for the options to settle on April 18 at which point I cover the short on the ES. There appears to be virtually no downside risk (if I sell the ES on a stop near 1315) and if the ES doesn't drop much from here prior to Apr 18, I will simply pocket the 5.75 on each option. Thoughts?
Except of course when your 1315 short futures run to 1320 making you stop out then does the same thing 3 more times before expiration. There is no free lunch.
Try it, I would advise otherwise. What if the ES drops to 1310 and you sell the futures to hedge, then the market runs up to 1350?
THIS IS CORRECT. I TRADED LIKE THIS, AND EVEN USED PUTS FURTHER OTM. ONE STRONG DOWNWARD MOVE AND THE PUT EXPLODES BECAUSE OF ITS HIGHER VOLATILITY. THEN WHEN THE MARKET REACHES YOUR STRIKE AND BECOMES CHOPPY (AND IT DOES), YOU WILL BE COVERING AND UNCOVERING A FEW TIMES. AS A RESULT ALL OF YOUR PREMIUM WILL DISAPPEAR. BELIEVE ME, THIS HAPPENS.
People need to see that selling naked options can and will slap you around. If you believe that the market will hold or move up slighty higher sell a butterfly or condor either ATM or slighty above the current price.