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The Power of Selling Options on Futures

It’s no secret that selling far out of the money options, as opposed to buying them, is a trading strategy with a high probability of success. Low-delta options have a proclivity to expire worthless. The dramatic downward moves required to make low-delta options profitable don’t happen all of the time.

This is not to say however, that selling options is more profitable than buying options, because it is largely dependent on trading preferences and risk tolerance.


Are there a lot of options that expire worthless? Sure. But there are also a lot of options that exponentially increase in value and expire in the money. The point is, as a well-rounded trader, you need to be capable and willing to take both sides of the market.


The Problem with Selling Stock Options

When the time is right, the best traders are those who sell options that are expensive and buy options that are cheap. It’s as simple as that.


Having said that, the most common problem traders run into when looking to sell options on individual stocks is margin requirements. Buying options is never a problem because the margin requirements are equivalent to the price of the premium. Unless you have portfolio margin approval (which typically requires anywhere from $125,000 to $175,000), the margin requirements to sell options are going to be high, especially if you are selling naked options and not spreads.


The Beauty of Selling Futures Options

But what about the trader who has a high risk-tolerance, a lot of market experience, and around $50,000 in trading capital? Should he never experience the perks of selling options?


Not so! Options on futures open up an entirely new world to options sellers. This is because futures options work under what’s called SPAN margin. Exchange algorithms for all futures and futures options traded in the US calculate and determine the worst possible one-day move and price the margin requirements for holding short futures options, and the underlying, accordingly.


Far More Reasonable Requirements

Essentially, SPAN margining brings the requirements to sell options on futures indices, currencies, and commodities to requirements that are similar for portfolio margin accounts. To put it simply, you can sell more options when the underlying asset is a futures contract.


This doesn’t mean you should apply for futures options approval with your broker and sell as many E-mini S&P 500 puts as your account will allow. What it does mean, however, is that options on futures allow for a better return on your trading capital.


Futures Options Trade almost 24/6

Besides low margin requirements, futures options offer better trading hours. Not only can you can sell options and not tie up all of your trading capital, but you can also trade a different set of instruments nearly 24 hours a day, 6 days a week Most futures open on Sunday at 6:00 PM EST. 


For example, if you are short SPY puts on a Monday night, there is no way to close out that position if you had to, like if every market around the world starting crashing. The only option would be to hedge with E-mini S&P 500 futures or volatility itself, but this would likely cause slippage.


However, if you are short ES puts, you could close them out at anytime! The spreads are often worse when liquidity is scarce in the middle of the night, but at least it’s possible to close the position; this is comforting to many options sellers.


Tips on Selling Futures Options

When sized properly, selling futures options is an incredibly powerful strategy. As long as you have a reasonable futures commission rate and are mindful of exchange fees, futures options are a fantastic asset class.


As for everything with trading, strictly trading one asset class with only one strategy, like selling  futures options, should probably not be a trader’s sole method of generating alpha. Nevertheless, writing options on futures is a paramount tool to have in your trading toolbox.


More information on options trading strategies and tips, like finding the best options brokers or learning the nuances of the option straddle, can be found at The Options Bro.



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