Short Volatility on Futures

Course 44 of 60 in the futures hub. Short options on a future collect a credit for a range the future is allowed to leave, and a scheduled report can veto the sale.

Premium Does Not Care About Your Range

A credit hits the account first. That order of cash is why selling volatility feels like a wage. In a quiet stretch, time decay and a drop in implied volatility are the coupon the drawing names. The bill is a limit, a gap, or gamma into a print. You are being paid for the bad week, not for the quiet sample.

Quiet weeks still need a calendar. You have to know which expiry you are short and which releases sit inside it.

1. What you are selling

What you sold is a range. The future is allowed to walk out of it. Small daily credits look fine in a sample where nothing was scheduled and nothing jumped. I can't tell you the quiet stretch will continue. Nobody can. "The range always holds" is how weekly options get sold into an inventory report.

Sideways charts are a poor stand-in for the loss. Turn the width into a max loss in dollars, then set that figure against the ceiling you already wrote down. If the worst case doesn't fit, skip the sale. The credit is the bait.

2. Event veto

Holding short premium into FOMC, the EIA petroleum report, or WASDE is a hobby unless the written plan names that release and the size. The move is the thing you sold. If the account can't survive the move the market is already implying, the credit is a donation. The default is to be out of the short premium before the number.

Credit $150. Width $600. Max loss = width minus credit = $600 minus $150 = $450. That's $196 over a $254 cap, so you don't sell that width.

Pass, or pick a narrower width whose max loss fits under the $254.

The FOMC meets eight times a year on schedule. Every one of those meetings ends with a policy statement, and since 2019 a press conference follows it, so one meeting can move the future twice. Get the dates off the Fed's own calendar before the week starts. EIA's weekly petroleum report is normally Wednesday at 10:30 am Eastern. When a federal holiday lands on the Monday, the report can slide a day to Thursday and the release time can move too, so check EIA's schedule any week with a holiday in it. WASDE comes out once a month at 12:00 pm Eastern, on a date USDA posts ahead of time, so pull it off USDA's calendar instead of guessing.

3. Defined vs naked

Defined short premium has a wing, so the most you can lose is the width minus the credit. In the example that's $450, and you know it before the order. That is the only reason the defined version is fit to size: the bad week has a dollar figure you can refuse.

Naked short premium has no wing. The future can keep walking, and the loss doesn't stop at a width you picked. I want the defined version for anyone who still needs to trade the week after a print. Nothing requires the future to stay inside the range you sold. If you can't point at the wing and the dollar max, you are in the naked case, whatever the order ticket says.

4. Management rules

Flatten rules get written before the week, when the credit still looks attractive. Short premium comes off before a release the plan didn't approve. It also comes off if the loss reaches the dollar ceiling, with no debate after the number. Leave the decision until the print is out and the loss is open, and people freeze and hold the naked side.

Option prices gap when the future gaps, so a stop on the option premium can be a wish. For a defined spread the ceiling is the max loss you already computed, width minus credit. For a naked short the flatten level has to be a price on the future, written down, because there is no width to subtract.

5. When to stop

Keep selling only if two things are true, which is the test on the drawing. The quiet-sample result has survived a real event, and the event rule was written and actually followed. Then the size stays small, and the structure stays defined. If the coupon is what keeps you selling into prints, stop selling. The sample that flattered you is the quiet one.

Listings change, and so does what a broker will let you short. Before a second spread, read the current spec for the width and for which future the option exercises into. The defined-risk spreads lesson goes further into sizing off the max loss.

6. Mistakes, limits, takeaways

Selling weeklies into an inventory report because the range has been holding gives the account back. Copying a stream's short-vol size is the same mistake with someone else's account. Ignoring what the wings cost is another. Theta, gamma and vega are useful words and a terrible reason to raise size.

Calendars hide a second futures month inside what looks like a pure vol sale: a near option against a later one, sometimes on different underlying months. The option calendar lesson walks through that structure. Don't assume the two options sit on the same future.

Size short options for the bad week

Cash from the credit shows up before the loss, so the statement looks like income on a quiet Tuesday. What you hold is a modest gain sitting in front of the week you were paid to insure. Size for that week. The account has to absorb the max loss you already computed and still be able to trade afterward.

Winning weeks strung together from short options are a quiet sample. They say very little about the next fast move. Selling into a report you didn't plan is a separate decision from the vol sale itself. Make that decision on purpose, or be flat.

Rules for selling premium

• On the example, max loss is $600 minus $150, which is $450.
• $450 doesn't fit under a $254 ceiling, so that width is a pass.
• FOMC (eight meetings a year), the Wednesday petroleum report, and monthly WASDE are vetoes unless the plan names them.
• A naked short has no width to subtract. The future can keep walking.
• A run of small credits is the quiet sample. It says nothing about the next gap.

Be out of short premium before a release the plan never named. Educational only. Not a recommendation to buy, sell, or hold any contract or pair.