Re: Implied Volatility for Futures Contracts

["DC" <dc010225@xxxxxxxxxxxxx>]

Howard,

I am selling only options on futures at MAN Financial. My next goal is to develop options 
selling for E-Mini Stock Index Futures (e.g. Russell 2000)  at TradeStation Securities. 
For this reason, TS 8.1 has to correctly compute the implied volatility as explained in my 
prior posting. The implied volatility topic is the focus of my postings, all my other 
comments are secondary.

Under normal market conditions (Gaussian/Normal distribution of returns), it is relatively 
easy to develop a selling strategy with very reasonable gains. However, this is not 
enough, and you should not start selling options unless you study in details so called 
"extreme" markets conditions.

These conditions happen when market returns are beyond of 3 standard deviations, at the 
"fat tail" region of distribution curve (markets behave closely to the inverse power 
laws). I recommend that you create an "inventory" of these events, study them, and then 
develop a simple and effective hedging strategy for all cases when market prices get to 
close to your striking price. Hedging will costs you money, and will decrease the gain for 
the particular month. In very rare cases, you will experience a very small drawdown 
(1-2%), that can be recovered the following month. So far, no losing month for me in spite 
of several "fat tail" events.

If given futures market doesn't support well enough your hedging strategy (i.e. it is 
illiquid under extremes) then don't dare to trade it. Otherwise you will end up as famous 
Victor N.

DC

----- Original Message ----- 
From: HBernst963@xxxxxxx
To: omega-list@xxxxxxxxxx
Sent: Tuesday, July 04, 2006 8:27 PM
Subject: Re: Implied Volatility for Futures Contracts


In a message dated 7/4/2006 11:00:54 AM Eastern Standard Time, dc010225@xxxxxxxxxxxxx
writes:
I can accurately compute synthetic options prices, and greatly simplify the
backtesting of my option strategies: selling the deep-out-of-the-money options for about
30% annualized gains and with zero drawdowns.

DC

Are you selling options on individual stocks as well as commodity futures?  You say zero
drawdowns but there can be so called 'black swan' events such as a stock being bought out
where it jumps 30-40% in a day; a freeze in Brazil causing coffee prices to soar, Iran
could blockade the Persian Gulf and crude oil soars, as examples.  Are you saying that you
have never had a losing trade?

If you are looking for a program where you can find implied volatility on both stocks and
futures, OptionVue software is what I use and recommend.  www.optionvue.com

Thanks for replying,

Howard Bernstein