What futures contracts have the most option liquidity? I know ES is very liquid and TY has been good. I swing trade and usually I have two options legs and then a position in the underlying I don't like legging into a position and having to wait for leg A to fill before knowing if it makes any sense to send leg B into the market. Also, entering a trade in the underlying contract is easy to get a good fill on, but I don't like have the excess deltas hanging out there until the options get filled. Any suggestion on the best markets and/or contracts for swing trading using both the options and the underlying futures? Most often I am short gamma, theta, vega, and the delta is the only difference depending on whether the overall trade is meant to be bullish or bearish in respect to the underlying contract. Thanks.
Well, you're not short gamma and theta as they are opposing-sign under all but certain arbitrage conditions. ES options are tight, but not terribly liquid in their own right. Posted conditions don't show a lot of depth, but are replicated with SPX and SPY; therefore there is implicit size beyond what is seen on the order book. My recommendation is to sell synthetics whenever possible; using spot as a side of the two-way; i.e., sell spot/short two puts to execute the synthetic straddle // the natural straddle. FI options [bonds, notes] have the largest notional OTC markets, so they dominate in listed-liquidity due to the cheapest to deliver replication play. Beans and corn are very liquid and the upside strikes are skewed. Crude is very liquid, but NY-markets are generally to be avoided.
Atticus, you're right. I meant long theta / short gamma. My positions tend to look like a strangle - covered call/put combination. If bullish: Short 2 otm calls and 1 otm put, long the underlying. Reverse for bearish trade. I'm looking for a sort of convergence or retracement fading the market. I usually like to put the trades on towards the end of the day. I don't like fighting a runaway intraday trend. The particular position delta and long theta tries to replicate the convergence between the underlying and its moving average. If the underlying becomes static a moving average will converge towards it, thus the long theta. For a negative divergence (underlying less than MA) I'll place the otm calls just above the MA and the otm put about one atr before the underlying. Adjust as/if needed. The trades are placed based on historical spread distributions. On futures with a inverse relationship between price and vol this trade works better with negative divergence as the position picks up value from both delta and decreased vol. Although the decreasing vol acts as a buffer in a positive divergence trade if the underlying keeps trending upwards. Most markets seem to behave and converge very differently depending on whether they are going up( positive divergence) or down (negative divergence).