General Options on Futures Question

6 posts / 0 new
Last post
Vypuero
Vypuero's picture
Offline
Joined: 06/14/2011
Hat Tips: 3999
Posts: 1110
General Options on Futures Question

I notice that they are much less liquid than futures.  When you look at the spreads, I often see bid and ask, and amounts, that can be wildly different from "last" - sometimes because the future has changed in price, sometimes not. I also see that often, despite bids that are not too far apart, there is no actually buying and selling taking place.  So my questions are:

1 - How is it that there can be so few "last traded" even when there are bids?

2 - It appears after hours options are slim to non-existant.  Is that normal?

3 - What are very outlandish ask/bids for?  Stink bids people put in?

4 - What dangers exist when buying/selling?  How do I know what the "real" value should be when there is little liquidity?

Edited by admin on 11/08/2014 - 06:16
Vypuero
Vypuero's picture
Offline
Joined: 06/14/2011
Hat Tips: 3999
Posts: 1110
Think I got it

exploring ways to use it.  The trading itself can be crazy but the valuations do get set.

Some thoughts - suppose you sell a PUT out of the money to collect some premium if you think the price will go UP.  You can always buy a put of it starts to drop to cover your losses.  You could even sell a call too, and could do the opposite if the price gets high, or if it stays between you get both.  Interesting, but you can still lose if prices start going wildly one way to the other and you can't predict the move correctly.  Just some thoughts on how this stuff works so I can understand the dynamics in my head (this is the writing version of talking to myself)

mattz
mattz's picture
Offline
Joined: 11/16/2011
Hat Tips: 242
Posts: 6
Vypuero wrote: I notice that

Vypuero wrote:

I notice that they are much less liquid than futures.  When you look at the spreads, I often see bid and ask, and amounts, that can be wildly different from "last" - sometimes because the future has changed in price, sometimes not. I also see that often, despite bids that are not too far apart, there is no actually buying and selling taking place.  So my questions are:

1 - How is it that there can be so few "last traded" even when there are bids?

2 - It appears after hours options are slim to non-existant.  Is that normal?

3 - What are very outlandish ask/bids for?  Stink bids people put in?

4 - What dangers exist when buying/selling?  How do I know what the "real" value should be when there is little liquidity?

Options on some futures do have low liquidity and most do not trade overnight. There is no real demand for some options as most spec and hedge guys prefer the outright futures. 

You would see discrepancies between last traded, and bid/ask figures because transaction could actually take place way off from the current bid/ask. When there is low liquidity try putting something way below offer in the case of buying or in the case of selling way above. This is a judgment call depending on the underlining instrument. Real value in options is a formula based on the "Greeks" but in illiquid markets that could be way off. You should use your judgment about the expiration date, price of option and volatility if you have a potential of reaching your strike price. 

mattz
mattz's picture
Offline
Joined: 11/16/2011
Hat Tips: 242
Posts: 6
Vypuero wrote: exploring ways

Vypuero wrote:

exploring ways to use it.  The trading itself can be crazy but the valuations do get set.

Some thoughts - suppose you sell a PUT out of the money to collect some premium if you think the price will go UP.  You can always buy a put of it starts to drop to cover your losses.  You could even sell a call too, and could do the opposite if the price gets high, or if it stays between you get both.  Interesting, but you can still lose if prices start going wildly one way to the other and you can't predict the move correctly.  Just some thoughts on how this stuff works so I can understand the dynamics in my head (this is the writing version of talking to myself)

Selling options is one of the RISKIEST strategies you can use in futures trading. It's always a balance of the premium you collect, which has to be close to the money and at the same time far enough not to get "hit". Options are volatility based play so you can have a huge spike in volatility without even being close to your selling strike price. Options can "explode" in premium and since they are none linear they can blwo past your account balance. I recommend not to sell options if you are a beginner.

On instruments like Gold, Silver and Crude Oil you have mini contracts and they could serve better  (IMHO) in terms of risk/reward.  (there is a substantial risk of loss in futures and options trading) 

Ragnar
Ragnar's picture
Offline
Joined: 06/15/2011
Hat Tips: 246
Posts: 7
Quotes on options on futures

Just curious if there is a good place to find current or delayed online price quotes of options on futures such as gc and si online?

Am aware of TradingCharts.com but wondering if anyone has found something better maybe?

Thanks.

Ragnar
Ragnar's picture
Offline
Joined: 06/15/2011
Hat Tips: 246
Posts: 7
Risk of selling options on futures

I'm assuming one of the greatest risks of selling a put on a future is watching the underlying price decline towards being assigned the future contract on or approaching first notice day.  Even if you had adequate funding in your account some brokers do not allow you to hold a future after FND as they don't provide for physical delivery. 

Assuming in this case if you would have preferred to be assigned you'd have to go out a month or two and buy a future for that month.  Would that be the best way to hedge in the above case?

Edit:  I see that at least the options on futures last trading day is one day before last trading day for the underlying future..

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Topic locked
Syndicate contentComments for "General Options on Futures Question"