Question about selling Index Futures Options

Discussion in 'Options' started by HotTip, Aug 23, 2007.

  1. HotTip


    I'm trying to understand the math of selling ES mini futures options. I'm a novice on options & futures in general, so please bear with me. Say I sold a naked sept07 put (1400 strike) on the ES, which is roughly 65pts below the underlying. According to IB it's currently trading at 16.75. Does that mean that if I sold one contract I would only get $16.75 cash for it, even though its value tracks the underlying futures (i.e., a one point movement is equal to $50)? If not, how much cash would I get? Also, say the ES takes a dive and moves down to 1390. If the buyer exercises that means I'm out $500, correct? Also, if the ES instead drops 35 points to 1430 and I get nervous and decide to buy back the option, and say it's trading now at 26.75, or 10 points above what I sold it for, does that mean I'm likewise taking a $500 hit?

    If that's truly how the math works out, the risk reward ratio of selling mini futures options looks horrendous. Any insight would be greatly appreciated!
  2. The risk/reward potential of naked options is always horrible. Think about it, you sell an option for limited profit while you could have unlimited (call) or significant (put) losses if market moves against you.

    I would advise against selling naked options. If you still want to sell premium at least look at selling spreads to limit risk somewhat.
  3. HotTip


    Thx Coach. I agree it looks horrible, but out of curiosity did I calculate the numbers correctly?
  4. Es options are worth $50 a point. So an ES option at 16.75 is $837.50. If you sell one put worth that much you take in $837.50 and that is your max reward. If the market tanks and that put is worth $40.00 you can close and will lose a lot per contract.

    Also if market drops and vols spike that naked put can be worth more than $40.
  5. HotTip


    Great. Thanks again. That makes much more sense.
  6. i had some short puts sold at 6 pts that spiked to 20pts......of course i professionaly extracted myself with minimal pain...ok , moderate pain.

    i traded naked in the past. no more. spreading allowed me to survive easier and with less pain.
  7. nitro


    Selling naked anything is extremely difficult to manage. Professionals don't like to do it because even if you dynamically delta hedge correctly, you cannot deal with large jumps adequately.

    There are right ways to trade options in relation to running a book. But AFAIK, it has never been written about. You have to learn it on the job at a firm that does it for a living.

  8. benysl


    my main trading market is now ES.

    Most of the time I sell ES naked Put. Call side has not much premium.

    Wait for ES to make a dip from the high. Put premium will rise. IV will rise.
    For a start aim at those put that is 1 point and below 2 points. Assuming 1 point (USD50) that trade will give you peace of mind.

    Try doing a credit spread and you want to collect 1 points of premium and see how close you have to sell.

    Problem with most naked seller is they sell too close (greed).

    I have been selling naked put on ES for a year and I have not had a losing month (of course that doesnt mean I wont have). The most recent meltdown on the market has not affected my position or sleep not a bit.

    ES Sept 1200 put selling for 1 points now. (I wouldn't sell now as I have mention wait for a dip in the market first) for illustration purpose. I will use 1200.
    270 points away from the market with less than 30 days.

    ES have to drop 10 points on average everyday including weekend to cause your position a problem. Even if ES drop there is technique to do adjustment.

    This is just my view.

    Naked seller (like me) usually get bashed badly by forum people so I have expected it.

    Another way to test is try buying 1 point naked put in this case is ES Sept 1200 put (be a buyer) and spend $50 every month and see after 1 year how many month did your trade ended up being in the money
  9. Well I dunno, Beny. Get an overnight event and 10-15% gap down, etc...and Blammo, account liquidation and total wipout.

    Even if your strike is not hit, gonna be a real bad day. Those little prems won't seem like enough.

    Doesn't happen very often and heck, you may never get hit. I don't like the odds, but it's a personal choice.

    Good luck and good trading. :cool:
  10. The overnight margin especially for a retail guy is silly on naked index puts. You're taking someone elses geopolitical risk each night for small premiums. The other issue is volatility skew in the puts is so great that in order to take in any decent premium on a spread you have to spread the strikes so far its hardly worth it. yes the volatility skew in the call side keeps premiums low but there is far far far less risk. Dont forget that many of the calls on barely move at all and surely underpeform their calculated delta on up moves since volatility falls.
    #10     Aug 24, 2007