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Here is a highly interesting options trader article about successfully trading commodity futures or stock options, written by one of our trader club member all about an amazing options trading strategy which has the potential to achieve at least 90% winning trades! Our name "Options Trading System" can help you achieve success in trading options is here to help traders achieve profits. No Losing Options is of course a figure of speech and bit of a misnomer too in that 90% does not equal 100% (meaning no losing trades), and you will have some losing options trades from time-to-time.
However, I am sure you understand there will always be losing trades but since most traders are lucky to obtain even 50% wins. The possibility of achieving as much as 90% winning trades almost seems like no losing trades at all to a typical equities and options trader! In addition, with correct use and execution of our Options Trading method it's possible to make a number of consecutive profitable trades before you encounter a losing trade.
I recently read 90% of options expire worthless and about that same percentage of option buyers lose money trading options. This coincidentally corresponds to the roughly 90% of commodities futures traders who also lose money trading commodities and the popular foreign currency forex market. I feel that the easiest way for the average trader to join the ranks of the winners is to sell options, to short puts and calls. Using a good "Options-Trading-System" would be ideal.
If 90% of options end-up worthless, one would expect if options are sold, and the short option positions are held until near expiration date, one should collect virtually the entire premium on about 90% of the option trades. Well, those are phenomenal statistics. But based on my personal experience, it is now rare that I ever take a loss on out-of-the money options I sell.
There are never any "sure things" but utilizing a carefully planned trading strategy which accounts for virtually any contingency, I think there is a way to come up with an option selling plan, that if properly implemented, will bring results much better than 90% winning trades. I am working hard to try and refine my trading methods to try and accomplish this.
Let me reveal some background information and then describe what I see as a golden opportunity now unfolding. The background information is very important as there are many pitfalls that must be avoided in order to be successful at trading.
I keep adding to my knowledge every time I put on a trade. I am writing so like-minded traders can contact me and we can learn together.
A few years ago, I only had to look at my own trading account to conclude trying to make a profit from buying commodity futures options was a rough road to travel. I was consistently losing. It was then that I reasoned I should do "naked" call and put selling. I decided to try a new approach.
Now, every time I felt I should buy a call option because I thought the market was going to go up, instead I would sell a put. Instead of buying a put when I felt the market was going down, I would sell a call. My results instantly and quite dramatically improved.
I had a lot to learn though, and continued to lose money because I combined commodities futures contracts to do covered writing when the futures market would go against me. Whenever I covered a call by going long the underlying futures contract, often the market would immediately turn lower and the loss on the futures contract exceeded the gain from the decay of option premium.
I was an overall winner on the options I sold, but lost a great deal of money on the futures contracts I purchased as a defensive measure to protect the options which seldom needed protecting.
Today I only combine futures contracts with my option writing, in very limited, special circumstances, and I near totally balance the number of contracts to become what they call 'delta neutral'.
One of the trade secrets I have found is to sell options that are "less rich" meaning further out of the money. Well, I went to the library a few years back and started doing research, manually back-testing several strategies. I immediately recognized that there was definitely something there. But doing the testing by hand became so tedious and hypothetical I gave it up and went back to day-trading.
A year ago I began intensively studying the markets to try and find a winning strategy. My study revealed that selling options had several advantages. I just love getting paid up front with an immediate profit the day I sell an option, and then my task is to try and keep as much of the money as possible.
Also, option selling allows one to do more long-range planning and does not require near as much scrutiny and close attention as buying and selling futures positions. And option trading is much more forgiving. I have done the most stupid mistakes when employing my option strategies and somehow was able to make a net profit.
Believe me, if I can't make money selling options with the time decay working in my favor, the guy trying to buy options and fight the time decay is in real trouble. The option seller is like the gambling house. One has to be well capitalized and willing to make small, slow profits. But those gains add up.
In search of a perfect strategy, I started from a premise that I wanted a market that spent a lot of time going sideways. One reason I like trading Live Cattle and using a Cattle Trading System is because when the cattle market sells off, it usually springs back.
There is good underlying support from traders to always go long cattle, taking advantage of the backwardation that's often present in the cattle market and the generally upward bias of cattle prices. Up moves are seldom straight up with ample backing and filling of price.
There are rhythms and cycles present and the support and resistance levels are clearly defined.
There are few false break-outs as there is usually follow-through when a support or resistance level is breached.
Most of what follows relates to Live Cattle options but the information is general applicable to other markets too.
Let me begin by setting up the market conditions of my personal method for option trading. You might be able to learn something from this that will make you a better trader. I would love to hear some suggestions which might help me improve my trading methods, heaven knows there is plenty of room for trading improvements.
When I originally sold uncovered calls and uncovered puts, I began by selling a call and a put at the same strike price, known as a short straddle position. I was taking the opposite side of the trades of persons who were buying a put and a call, waiting for a violent reaction. I was hoping the market went to sleep. To help expedite this, I decided to sell sleeping markets that were going nowhere.
What I didn't realize was that with a dead-market, the volatility was low and thus the option premiums I got from selling were at reduced prices. When the market finally erupted, the values of both the puts and calls increased.
That increase in volatility killed me when I was shorting volatility at the bottom when there was no room to diminish further. Therefore, to do well selling options which always involves shorting volatility, it' therefore important to sell right after a strong move has occurred.
After the commodity futures trading market advances a few days, the call premiums expand and that is an excellent time to sell. I like to sell right into that market strength. When the markets decline I like to sell puts, selling right into that strength of increasing put premium, as well.
Suppose December Live Cattle is in a trading range from $72.00 to $78.00. Then suppose the market is in the middle, say at $75.00. If the market rallies to the top end of the trading range and then one sells out-of-the-money calls, and then the market retreats to the bottom of the range and one sells out-of-the-money puts, if the market returns to the middle, one can have an extremely wide range of prices where a profit is assured.
I like to sell calls first because I find selling puts more tricky. This is due to the fact the financial markets drop much faster than they go up, about 3 times faster I think.
By waiting for a rally before I sell calls, I get the benefit of the fact there are more buyers of calls when the market is rising than when it is falling. Selling into strength allows one to sell to traders rather than local market makers, who virtually control the pits when liquidity is low.
You also want to sell into strength because when the market turns at a top, the option premium diminishes very fast, because the call buyers are trying to quickly take profits the same time you are trying to initiate your short trade. There is an order imbalance and only a market order is filled and that can be several minutes later at a very unfavorable price. It is better to sell a little early rather than late.
The same holds true with puts, you want to sell into price weakness when the put premiums are the highest. This goes back to being short volatility. You want to be a lion tamer, putting your hands around the jaws of a wild, ferocious lion, selling options when you can still hear the roar. When things are quiet premiums disappear. Fidelity is your appraisal company for all appraisal services! Your source for certified appraisals. All real estate, vehicles, boats, aircraft, machinery and equipment.
I call these options 'sleeping bears'. Let sleeping bears sleep. If you should awaken them they will rip you apart from both ends as the puts and calls both gain premium. When a market is limit up (down) is the best time to sell calls (puts), as the premium of the option continues to rise.
The next day the option premium shrinks down, virtually guaranteeing a profit. Often the panic buying of options causes a high during the day of the locked limit move and if you time it right, you are making a nice profit even that first day with the market still locked limit.
I have found that selling an option in the last hour of the trading day works out best for me. Option traders, the next day wait around trying to figure out which way the market is going and often don't trade for several minutes after the market opens. Price fills are usually very poor.
They also often lag the market which gives them an excuse to either fill you at a lower price than you theoretically deserve or not at all. On the other hand, during the close I believe that someone is there to try and keep the markets orderly so there is more credibility in option fills by the locals at the end of the day because prices are going to be printed in the newspapers and the trading prices have to roughly correspond to the estimated values of the options.
The fills have to be in the ball park at the end-of-day, whereas during the day the options market is free to trade about anywhere. That is just my theory.
I like selling options 7 to 8 weeks before expiration to maximize the time decay of premium and try to get out about 1 to 2 weeks before expiration.
Because the options expiration of the meat and livestock options often correspond to a meat report date, I never like to be in at the end when someone gets to find out the results of the report and then decide at the end of the day whether or not to exercise the option if it is in or very near the money.
Near expiration, volatility can actually increase rather than decrease. When I have recouped about 2/3rds of the option premium I look for a place to take profits. Many times this has made the difference between a winning and losing trade.
Numerous times the market rallies and the puts are almost worthless. I take my profits and then the market tumbles a couple limits down and those puts are now worth as much or more than I paid for them. But I don't need to worry, as I already took profits.
I have predicted the wrong trend direction many times but because I was able to take profits or a small loss during a correction, I am able to get out of the losing positions in good shape and the winning options more than make up for the losses.
As I described briefly above, I like to sell calls and puts at different strike prices. This is called a 'short strangle'. I leg the position on by doing one side or the other, depending on market conditions, my bias of where I think the market is headed, and several other factors I consider.
I already mentioned how I usually like selling the calls after a counter-trending rally and then later selling the puts. If on the other hand you think cattle is going to trend up shortly and you don't mind getting long the market, you can sell puts and effectively get a lower price than you would have gotten equal to the premium amount received.
That would occur if the market trended strongly lower and the put was exercised. If however the market reversed and went up, the put will lose value and although you did not get exercised, you make money that way and that is all that matters.
The Fall season is a good time of the year to consider selling April put options on seeing weakness as I wouldn't mind getting long the April contract if the market trends lower and the option is exercised. On the other hand, the downside is limited on the April contract due to the fact seasonally April cattle has in recent years rallied to $80.00 or more during the January through March or April rally. You win either way.
Today as I write this, December Live Cattle options have 7 weeks to expiration. Cattle has just rallied from lows and a very oversold condition. Today, December cattle closed at 74.70, very near the last swing high just around 75.20. The contract should begin to run into some resistance.
With the couple dollar premium that December is trading over October, when October goes off the board next week and December takes over, it is already a couple extra dollars higher than cash. Either cash has to rally to the futures or the futures will need to come down. I believe the futures will come down.
Feeder Cattle has a lot of problems in the cash market which should also negatively impact on cattle prices. I am looking for sideways to possibly higher cattle prices near-term with a final break into December when cattle has to compete with turkey for Thanksgiving and Christmas.
This slackness in demand comes at one of the worst times, when seasonal slaughter numbers are up. Although I will be selling calls lightly at this time to initiate the position. If we bottom early, I will be a very aggressive seller of December and later February puts should the market retest the bottom soon as I expect it to. I want to be effectively long the market by January 1, 1994 so I can take advantage of the first quarter rally.
I am experimenting with some different trading strategies right now, so I am not strictly following my basic scenario. But for the readers I will go through a dry run of what I anticipate will happen in the coming weeks. I will keep the numbers in single units, but a person with sufficient capital can double or triple these numbers while more conservative traders could cut these positions in half.
For example, if Dec Live Cattle broke above the resistance at 74.20, the next resistance is around 75.20 and it is likely we will see that price on Monday. However, there is a down-trending line which could contain the contract right at today's closing price of 74.70.
So what I would do is to sell a set of two 76.00 Dec. Live Cattle calls into today's close, placing a limit order during the last hour of trading with a cancel replace at the market if I am not sure I got filled, about 15 minutes before today's strong close.
One should have been able to do this at a premium of about 75 cents or more today. As long as Dec Cattle does not go off the boards above 76.75, I will be in a profit situation, less the commission of course.
However, this would require the December contract to make a new high, which is of course possible, but it is unlikely to happen immediately with a move straight up with no market trend correction.
Upper resistance will begin to mount above 75.00. If the market can close at 75.20 or higher, I would sell an additional set of 2 Dec. 76 calls at a premium of $1.00 or more. If the market never reaches 76.00 I pay absolutely no attention to the premium I may be losing on paper, as my account is well margined.
I do not get concerned until the options begin going into the money as I intend to keep these options close to the time of their expiration. When the market reaches 76.00 which I doubt will happen, but if it did, I could double my original position. Since I have already sold 4 options with a 76.00 strike price, I would now sell 4 77.00 calls and 4 78 calls.
If the futures price appears it's going to close at a price of say 76.00, I am concerned only about the 4 original 76 strike calls as they are the only ones going in-the-money. To balance out 4 calls one would roughly buy 2 futures contracts based on a delta of about .50, meaning the option premium of the calls rise 50 cents when the futures price rises a dollar. However, I have gotten burned so many times buying 2 futures contracts to balance this and gotten stung, that I will only buy one now, leaving myself only half balanced. I have somewhat cured this problem by buying earlier on a stop, say at 75.25 or 75.30 stop. Then by the time the market reaches 76.00 I can stop myself out of the 75.30 futures contract if the market takes a dive.
I don't want too many futures contracts going long, as I want to be able to still improve my position if the commodity futures markets retreat. What I would do if the market started rallying past 76.90, the approximate break-even for the two 76 calls sold for 75 cents, and the two 76 calls sold for over a dollar. That is not an easy question to answer. I guess I would have to hang tough and maybe say a little prayer.
If sufficient time passes, before we hit these prices, I will have the time to remove some options at little or no loss, reducing my exposure and allowing me to sell ever higher priced call options.
If we reach these levels very near option expiration, the time premiums are greatly reduced and the 77 calls will be making money and the 76 calls sold for over a dollar will be making money so I will still net a profit even when I was selling calls and the market kept going up.
A move into new market highs in the December Cattle contract would just be a tough break. I would call it a worse case scenario. I believe the market will find resistance at whatever today's close is, or somewhere above 75.20 and it will quickly begin dropping, putting me in great shape. Then as the market tests the lows, I would sell put options.
If the market goes sideways, and the chances of the 76 or 77 calls getting into the money, becomes very remote, I would sell more 76 or 77 calls, making sure I get at least 50 cents premium, and hopefully 70 cents or more premium for any options sold.
If the futures market declines, I more aggressively sell puts as I want to be long the market going into the new year. I want to be long cattle going into February so in late November or early December, I will begin selling February puts on any weakness.
It may ultimately turn out that I will have to move up an options strike price, and be further out-of-the-money as I may be selling options that are too close to the money. Some readers may not be aware in the nearby option month, the odd priced cents options trade so there is an option strike every dollar rather than larger $2 increments.
I believe the Wall Street Journal, still prints only even numbered strikes, causing many traders to ignore the odd numbered strikes and greatly reducing the volume, open interest and liquidity in the traders odd numbered strike options.
Of course, only time will tell how it will all play out. We are still trying to make this new and unique Options Trading methodology better so we will gladly look at any trade suggestions readers may have about this trading strategy as well as hearing about an options selling method someone else has found helps them to trade the financial markets successfully.
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