S&P 500 Futures Option Risk Reversal Exit

Paragon Options is a service that focuses exclusively on futures options. By doing so we are taking advantage of superior premiums compared to stock options and asset diversification offered by futures. Paragon Options is a directional options service that will focus on Metals, Energies, Bonds, Currencies, and Commodities. This service will launch on June 25th.

The S&P 500 has been testing the open (March) island top gap and was struggling to get through it. Decent looking short term rising wedges have formed on both SPX and ES futures and there is a significant chance of another rejection and retracement. As this trade was very well up and we were in any case only looking for 2765-75 before the next retracement, we reviewed the trade on Monday with a view to a possible exit, and exited the trade.

The ES futures option trade was opened for a credit of $4.50 and was exited on Monday (4th June) at 14:46 ET for $13.20 positive, an overall profit on the trade of $17.70 which was a return of 12.3% of margin employed.

Reasons for the Exit

We chose to exit the futures option trade at these levels for a few reasons.  Firstly as mentioned there is significant resistance at the 2750 level and we were not confident that ES future could get through it and might reverse.

From an futures options perspective we had a few factors to consider.  Primarily, the trade was starting to run short on time and only had 11 days remaining.  This means that the 2750 call which we were long was starting to lose a reasonable amount of time value (Theta).  The short 2650 put offset this slightly but as the 2750 call was only 5 handles out of the money, it had a lot more time decay on it than the put 100 handles away which had already lost significant value.

Secondly was the implied volatility (Vega) of the 2750 call option.  Again, this was slightly offset by the 2650 put but as with the theta, the Vega on the 2750 call is significantly higher than on the 2650 put.  Vega and Theta are always highest at at the money strikes.

It is also a feature of futures options that implied volatility generally gets crushed as equities rise and so our call only being 5 handles out of the money meant it was subject to a theta burn and vol crush.

It should be noted that had ES future stayed above 2650 but below 2750 by the expiry, the trade would have still collected the full $4.50 credit, however, because there was time left on the trade the 2750 call still has significant value, resulting in our much higher exit price.  This shows how had our view of a rise to 2750 or higher not come to fruition, as long as we had stayed above 2650, we would have still collected a profit on the trade. Highlighting how important trade design is.

Portfolio Performance Short Term

As you may be aware, this project has been in the works since November of last year. Since the project entered the final pre-launch stage on the 26th April (5 ½ weeks) we have returned to date 11.06% on the margin employed across the portfolio and 3.3% on the $100k model portfolio, all with a very low risk approach across many different asset classes.  We are looking forward to the official launch of this product on June 25th.

Join our next webinar on Paragon Options by clicking this link to register.

Written by:

Richard Chappell

Jack is a 20 year retail trading veteran and co-founder of The Art Of Chart. He started his blog at channelsandpatterns.net in 2010 and since has published tens of thousands of charts looking at hundreds of trading instruments across most tradeable markets, doing original work mainly in the areas of trendlines, patterns and divergences. At The Art Of Chart Jack has taught trading skills, technical analysis, and the discipline and trader psychology that allow those to be used effectively in trading.

06th Jun 2018

Leave a Comment

Your email address will not be published. Required fields are marked *