SELLING OPTIONS

[MAKTRADER6970]

Hi

I am little bit confused with how IG handle selling PUT options and was wondering if someone can help please :-

Lets say SHARE A i has March PUT option selling at 40 and I sell one contract. Later on when market moves against me I buy it back at  80.

I was expecting to be initially credited with £400 premium for selling the option and then it would cost me £800 for buying it back ie total loss of £400.

HOWEVER with IG I do NOT get the premium and instead have a loss of £800

Can anyone explain why is that please as I have tried contacting IG number of times without reply

Thanking you in advance

[Diego321]

Hello,

 

Disregarding spreads and commissions, your exact loss should be £400 not, £800, ensure you have done your calculations correctly, as it does not make sense to me,

 

Cheers

[J_Bernard]

You don't receive the premium when selling options via spread-bet/CFD as you are not actually writing an option, just a trade based on the movement of the underlying instrument e.g never any possibility of shares being assigned etc.

You may be able to do this over the phone, but not on the site, currently. Possibly not writing naked options, not sure of IG policy.

I think its an interesting question how any virtual initial premium might be reflected in P&L if options sold expire OTM, as planned Maybe someone else has more knowledge on this?

[gezmond]

you only get the premium after the expiration date ( assuming the trade hasnt gone against you/ you and the option is “in the money”...

[QTPI]

Hi MAKTRADER6970,

I puzzled by this as well.  You're right this is not how options really work.  I trade options all the time in the US and make money by selling calls on shares I own and selling puts on shares I want to buy.  When you sell you should get the premium immediately the option is sold.

J_Bernard appears to be correct.  We're not buying and selling options just betting on the option prices.  You can't  use them sensibly or profitably, so I think we should not bother with them.  It appears to me CFDs and spread betting is just that - gambling where the broker wins every time.

[gezmond]

Of course you can use them sensibly , you just have to wait for the exp date for premium as i said in my post above....I also sell put options on us shares in a broker account...what I like with IG is that I can do the equivalent of selling puts on SPY with US500 spread bet here, but without needing a big account as the underlying is much less ....its just a shame its only indices you can trade online and not individual stocks

[MAKTRADER6970]

Thank you everyone for responding with great information - much appreciated.

Stay safe!

[Sam252]

I was looking for anyone that has become confident with an options strategy on IG.  Perhaps anyone out there would like to exchange ideas?

Being able to use leverage on IG and the tax advantages of spread betting, it seems there is great value in using Options on IG for the markets they cover.

I have been shorting monthly out of the money PUT options on the S&P 500 to earn circa 6-8% return monthly. Typically the strike price ranges from 23-25% below the current market price.   Historic volatility on this index shows it rarely breaches this level of drawdown in any 30-day period, and the success rate is comfortably high enough that any losses can be offset by a long term discipline to sticking with the strategy (3-4 years minimum).  In effect, it's not investing or trading, it's selling insurance. 

Be good to connect with a serious market participant willing to share ideas! 

[Bopperz]

This is classic tail risk. It works really well, till it doesn't. Then you will wipe out your account.

Be clear what your trading here, (not the underlying), your trading the assumptions in the options pricing model.

If (and when) the trade goes against you, make sure you have an exit plan! You could either cash out at a fixed loss or try and delta hedge or something else.

[Sam252]

Agree.  Getting my account wiped out is something I am mindful of.  To mitigate this I have applied the following:

1) Must have min 20pc margin between the strike price and market price at time of taking the position.   Previous trades I have averaged around 23pc margin.

2) I have three years worth of premiums in cash.  I add to positions monthly and compound last months returns, and then will rebalance at the end of the year.  

3) dont be greedy for the premium

If I get wiped out in one month, maybe i get wiped out for the next two consecutive months, but that would represent a considerable drawdown in the market - it is unlikely to continue.  In such instance, I would probably take a separate long position in the index.  If the market crashes like this, my odds for success historically improve.

I am trying to review what would be a suitable hedge  - perhaps you can help? Unfortunately, I don't think the IG Options are priced favorably where I could buy a PUT to hedge but keep a sufficient margin with the index while maintaining a decent premium as my return (it then becomes questionably if its worth the time and just buy the index with some leverage for the long term and roll over the futures).  Hence why I am looking at this like an insurance salesman, reviewing the statistics and the odds, Im not concerned about the volatility of the Put, just the likelihood of it expiring out of the money based on the fundamentals of the market and the strike price.  Back testing 1-month rolling returns on the S&P it breaches -20% approximately once every 10 years.   

Would be most grateful to hear your feedback.  Thanks. 

 

[dmedin]

59 minutes ago, Sam252 said:

Being able to use leverage on IG and the tax advantages of spread betting, it seems there is great value in using Options on IG for the markets they cover.

If only they would offer a wide ranger of options online.  They seem to be completely resistant to do this. (Maybe it would cause their dodgy web platform to go TDAU)

Edited April 23, 2020 by dmedin

[Sam252]

Just now, dmedin said:

If only they would offer a wide ranger of options online.  They seem to be completely resistant to to this.

Agree.  I have asked for the Nasdaq options to be made monthly, but i guess that fell on deaf ears as I am just one client.  I am not too sure how many products are traded against the market or against IG.  I guess it is down to how profitable a product would be for IG and if it wins for them more times than not they would make it available.  

Other platforms such as Interactive Brokers have really good tools for being able to design an options strategy, but the IG platform is sufficient enough for what I am doing.  

Saxo Bank provides a lot more, but while you could open an account through a company and let the returns grow free of tax, you would pay UK tax on withdrawals as income (assuming you are a UK resident like me).  

As I only want to trade on the S&P its good for me.  Out of interest, what are you wanting to trade?  perhaps I can help.

[sinkmac]

Quick question hopefully on-topic. Put £350 on WTI May Call 1600 option yesterday.  Now in profit £60. If I sell option now how much do I get back ie only  £60 or £60 plus part of  £350 initial cost?

[Sam252]

2 minutes ago, sinkmac said:

Quick question hopefully on-topic. Put £350 on WTI May Call 1600 option yesterday.  Now in profit £60. If I sell option now how much do I get back ie only  £60 or £60 plus part of  £350 initial cost?

As I understand it you would get your balance in the P/L plus the margin used to purchase. 

[sinkmac]

great many thanks Sam. 

 

[gezmond]

Hi Sam, when you say nasdaq options not monthly , isn’t the us tech 100 on IG the equivalent of nasdaq/ QQQ  and these are showing as monthly as far as i can see?

[Sam252]

Thats correct yea, I just only have Jun and September options available.  On the US 500 for example, I can still buy May.  You see the same?

[dmedin]

18 minutes ago, Sam252 said:

Agree.  I have asked for the Nasdaq options to be made monthly, but i guess that fell on deaf ears as I am just one client.  I am not too sure how many products are traded against the market or against IG.  I guess it is down to how profitable a product would be for IG and if it wins for them more times than not they would make it available.  

Other platforms such as Interactive Brokers have really good tools for being able to design an options strategy, but the IG platform is sufficient enough for what I am doing.  

Saxo Bank provides a lot more, but while you could open an account through a company and let the returns grow free of tax, you would pay UK tax on withdrawals as income (assuming you are a UK resident like me).  

As I only want to trade on the S&P its good for me.  Out of interest, what are you wanting to trade?  perhaps I can help.

I'd love to be able to trade options on individual stocks and to a lesser extent commodities like coffee which need huge amounts of margin.

[Guest Homer Enronride]

1 hour ago, Sam252 said:

I was looking for anyone that has become confident with an options strategy on IG.  Perhaps anyone out there would like to exchange ideas?

Being able to use leverage on IG and the tax advantages of spread betting, it seems there is great value in using Options on IG for the markets they cover.

I have been shorting monthly out of the money PUT options on the S&P 500 to earn circa 6-8% return monthly. Typically the strike price ranges from 23-25% below the current market price.   Historic volatility on this index shows it rarely breaches this level of drawdown in any 30-day period, and the success rate is comfortably high enough that any losses can be offset by a long term discipline to sticking with the strategy (3-4 years minimum).  In effect, it's not investing or trading, it's selling insurance. 

Be good to connect with a serious market participant willing to share ideas! 

"23-25% below the current market price "

If VIX goes up from 12 to 80, do you buy back and sell new ones with a lower strike?

[Sam252]

Yea that is frustrating.  Hopefully IG will make it available in time.  I don't understand why they haven't done it yet when other platforms can do it such as Saxo.  Perhaps it has something to do with the viability based on client demand and average account values.  Who knows..

[Bopperz]

19 hours ago, Sam252 said:

Agree.  Getting my account wiped out is something I am mindful of.  To mitigate this I have applied the following:

1) Must have min 20pc margin between the strike price and market price at time of taking the position.   Previous trades I have averaged around 23pc margin.

2) I have three years worth of premiums in cash.  I add to positions monthly and compound last months returns, and then will rebalance at the end of the year.  

3) dont be greedy for the premium

If I get wiped out in one month, maybe i get wiped out for the next two consecutive months, but that would represent a considerable drawdown in the market - it is unlikely to continue.  In such instance, I would probably take a separate long position in the index.  If the market crashes like this, my odds for success historically improve.

I am trying to review what would be a suitable hedge  - perhaps you can help? Unfortunately, I don't think the IG Options are priced favorably where I could buy a PUT to hedge but keep a sufficient margin with the index while maintaining a decent premium as my return (it then becomes questionably if its worth the time and just buy the index with some leverage for the long term and roll over the futures).  Hence why I am looking at this like an insurance salesman, reviewing the statistics and the odds, Im not concerned about the volatility of the Put, just the likelihood of it expiring out of the money based on the fundamentals of the market and the strike price.  Back testing 1-month rolling returns on the S&P it breaches -20% approximately once every 10 years.   

Would be most grateful to hear your feedback.  Thanks. 

 

Hi Sam,

I would be interested to know how this works out. What kind of market conditions have you tested this trade with? If the market rallies do you close the position and sell more puts with a higher strike?

As for the hedge, lets look at a nasty scenario:

You sell an Out-The-money (OTM) put option. The day after, the market crashes and is just above your strike. You now have a decision to make:

1) The put option you sold will now be worth considerably more. You could buy back the put, realising the loss, but it does draw a line under the whole event and you live to fight another day.

2) You wait, assuming the market does not move, the option will expire worthless. But you will have a drawdown on your capital which will be (slowly) returned by the theta decay on the option. If the market moves, could go either way.

3) Delta hedge, you accept that the trade has gone badly. There will be losses, its just how big. If you nullify the delta of the position by selling the correct amount of the underlying it will reduce your PnL to moves in the underlying. Upside, if the market continues to drop the loss on the put will be partly offset by gains on the position. Downside, if the market rallies, you will lose money on the position. Again, if the market is stable, the theta will slowly come back into your account.

Which ever method you use, just make sure you decide in advance!