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Diary of a WTI options market maker

GL

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I have been a trader since 1980. I started trading options in late 1983. I lost every penny of a $1.6 million portfolio in the crash of October 1987. What doesn't kill you makes you stronger. I have a undergraduate degree in Finance. I have a Masters degree in Economics. I have completed about half the requirements of a PhD in Financial Economics. I don't advise pursuing a PhD unless you want to be a teacher. It will not make you a better investor/trader. I developed a trading strategy involving shorting calls against GUSH in 2015 that I managed for a trucking firm to alleviate the strains of high fuel prices. Early in 2019 the owner of the trucking company sold the company and devoted his time to managing just the strategy itself. He said that he expects to make more profit in 2020 from writing calls against GUSH and writing puts and calls against his WTI contracts than his 32-truck transportation company ever did...all from his home...in his pajamas.

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You won't learn this from anywhere else. Many many years ago I complained to my mom that my education in Finance and Economics seemed to give me enough knowledge to consistently get beaten trading options. She said that "People that can "do" do. People that "can't" teach. In other words the knowledge I wanted to acquire was not going to be taught to me in college. Anybody that had this knowledge would be utilizing it and not teaching it.  It was going to be taught to me under fire. It was up to me to figure it out. I figured it out. Took decades. Still tweaking the system. No one to learn from. I have never ever met someone that trades as I do. My main bread and butter is shorting puts and calls against my WTI holdings. To do this I have to own the contract outright. If it's $58.20 a barrel I pay $58,200 to buy one contract. This stops EVERYBODY from doing it. This is by design. The market makers don't want you stepping on their toes so they make it cost prohibitive. The market offers great leverage/margin for "newbies" to trade from the retail side. This is by design. Since 90-95% of new WTI traders wash out within 6 months market makers need a constant new source of traders. This system will change your life. Understanding how lopsided the oil market is in favor of the market makers is imperative. I'm not sure if my system helps a retail trader. It is a knowledge-based system, not a system that benefits a day traders strategy. Are you ready for Lesson #2 ?

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I don.t understand what you mean by "against my WTI holdings'. Do you buy WTI futures and short options calls and puts against futures ?

Yes on lesson 2.

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Yes. For example, I own the Jan contracts at $54.86. On Wednesday as WTI went up my order to "Sell to Open 2 Jan 58 calls at $1.25" executed. WTI was about 57.70 when this order executed. This means I sold someone the right to buy my Jan contracts from me at $58.00. In return I received $1.25 per barrel or $1,250. I sold ( shorted ) Jan 58 calls against both of the contracts I own. These calls expire in 11 days. I recieved a total  of $2,500. This is mine to keep. It goes directly into my cash account. I can withdraw this money immediately and go have fun on it. If I do nothing else and WTI is above $58 at the time of expiration I only receive $58,000, but I keep the $1,250 I received so my net Sale Price is $58.00 + 1.25 or 59.25. If WTI is below $58.00 I get to keep the $1.25 AND the Jan contracts. I have three days after options expire to liquidate the contracts. I also have the option to "Buy to Close" the 2 Jan 58 calls. This is my normal strategy. I usually place an order to Buy to Close at ~25% of the premium I received. In this case I have an order to "Buy to Close" 2 Jan 58 calls at 25 cents. Should this order execute I will profit $1.25 - .25 or $1.00 ( $1,000 ) per call. Should this order execute the profit from the call trade gets subtracted from my original purchase price. If this order doesn't execute that means WTI continued up in price and thus I get to keep all $1.25 of the call premium. I don't anticipate this happening but there is that probabilty. If this trade does get close out at 25 cents my profit will be $1.00 on the trade and that gets deducted from my current Net Purchase price of $50.15 establishing a new Net Purchase Price of $49.15. Once I've closed the Jan 58 short-call position I get to do it again if I so desire. If you notice on the Feb Options Strategy I currently have 58 calls shorted against them too. Any questions so far ?

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Gary, I am here too. I found you! Btw nobody posted you were gonna be here but I do not blame them... I tried leading a petition to get your account back but my posts keep getting deleted (your "fans" must have reported my posts obviously). If you wanna go elsewhere like stocktwits or slack, just let us know. I have been posting my analysis over there but tired of the swine who mock me and then profit off it. 

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Yes. For example, I own the Jan contracts at $54.86. On Wednesday as WTI went up my order to "Sell to Open 2 Jan 58 calls at $1.25" executed. WTI was about 57.70 when this order executed. This means I sold someone the right to buy my Jan contracts from me at $58.00. In return I received $1.25 per barrel or $1,250. I sold ( shorted ) Jan 58 calls against both of the contracts I own. These calls expire in 11 days. I recieved a total  of $2,500. This is mine to keep. It goes directly into my cash account. I can withdraw this money immediately and go have fun on it. If I do nothing else and WTI is above $58 at the time of expiration I only receive $58,000, but I keep the $1,250 I received so my net Sale Price is $58.00 + 1.25 or 59.25. If WTI is below $58.00 I get to keep the $1.25 AND the Jan contracts. I have three days after options expire to liquidate the contracts. I also have the option to "Buy to Close" the 2 Jan 58 calls. This is my normal strategy. I usually place an order to Buy to Close at ~25% of the premium I received. In this case I have an order to "Buy to Close" 2 Jan 58 calls at 25 cents. Should this order execute I will profit $1.25 - .25 or $1.00 ( $1,000 ) per call. Should this order execute the profit from the call trade gets subtracted from my original purchase price. If this order doesn't execute that means WTI continued up in price and thus I get to keep all $1.25 of the call premium. I don't anticipate this happening but there is that probabilty. 

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Thanks Robinhood. That's a kind gesture, but Investing.com has become overrun by "people" that have no clue to what they are doing and as a result are even more cluelese about what I do. S'ok by me. Not in search of "followers". I was expecting that some traders would take an interest in the WTI options strategy but most were content to just be combative or liars. This site is more conducive to sharing strategy. I go back occasionally to WTI and see fresh faces doing the same one-upmanship. That's why I moved to the OVX board. And then that became polluted. Much better off here. I don't need a crowd. I don't need adulation. What I need is someone to kick my *** in trading so I may learn something new. There is no knowledge on the WTI board that will enable me to further my strategy. It's just nickle and dimers. In the reality of trading that's considered " crumbs". Only 5% of traders make a living on crumbs. It's a never ending cycle for them. If they don't trade their income goes to zero immediately. I am preparing to sail the Caribbean next fall and anticipate being out of range for a week or so at a time. My strategy is very simple and low maintainence. It will allow me the peace of mind to enjoy myself in the company of dolphins instead of combative lying traders.

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Dec 6 2019

Today the Jan WTI contract is trading at $59.58. If today was options expiration ( but it's not ) my Jan contracts would get called away from me at $58.00 since I am short Jan 58 calls against them at $1.25. As a result I get to keep the entire $1.25 call premium I received netting a Sale Price of $58.00 + 1.25 or 59.25. The net purchase price for the Jan contracts is 50.15 so the profit on the Jan Options strategy is $59.25 - 50.15 or $9.10/barrel/contract or $18,200 profit on the pair. If today was options expiration and I had closed my Jan contracts I would then short 2 March contracts at the current price of $59.16. This trade would be averaged in to 4 March contracts at $56.75 thus giving me 6 short March contracts at an avg of 57.55. At 6 × ( 59.16-57.55) this would be a current loss of $9,660. When the Feb options expire I will do the same as to roll over 2 more March contracts giving me 8 short March contracts. 

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Dec 6 2019

 If today was Feb options expiration my Feb contracts would be called away from me at $58.00 since I am short the Feb 58 calls at $3.00. I would collect all $3.00 of the call premium giving me a Net Sale Price of $61.00. The Net Purchase Price for the Feb contracts is $49.83. The net profit would be $61.00-49.83 or $11.17/barrel/contract or $22,340 for the Feb Options Strategy on those 2 contracts. I would then short 2 more March contracts at $59.16 ( theoretical market price at the time ) giving 8 short March contracts at an avg of $57.95. At that point I would be 100% short on 8 March contracts at 57.95 with a target of 52.50.

Edited by Gary LeBlanc

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Hi Gary, just to confirm. When you said you would have short Mar contracts 59.16 you still do not have any options written for Mar, right? So it would be a naked short? And were you going to wait for price to decline and then short puts against then? Trying to understand :) Btw it is Red over here... lol

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I only short options against long positions in futures. When I'm short I can't write ( short ) any options. I am exposed to market risk just like anybody else. 

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27 minutes ago, Gary LeBlanc said:

I only short options against long positions in futures. When I'm short I can't write ( short ) any options. I am exposed to market risk just like anybody else. 

Oh... thanks. I wanted to check since I see some people claiming to do covered puts for SPY ETF lol.

Holding some short over the weekend. Take care and I informed more of the wolf pack already :)

Edited by RRH

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Greetings Gary and RRH . Miss you very much Gary and thanks to Red’s effort I found you at last . Something is not right with investing. Com when they have moderators in collusion with ignorant traders. Some kind of hidden agender or just bad management when they believe the ignorant and forgo the truly excellent . It’s their loss . 

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I talked to management about the situation and this is what they said in a nutshell. Having experienced traders on Investing.com only has a negative influence on Investing.com ad revenues. That's how investing.com makes money. They make it from novice traders using their sponsors and thus generating revenue for their sponsors who in turn continue to advertise on Investing.com. I do not utilize any of their sponsors. Traders with my experience do not "pay" for systems/advice. It's all a gimmick. If all traders on Investing.com were elite traders Investing.com would go out of business in a matter of months unless it went to a pay site. I go back every few days and see new IDs asking "Up or down" with IDs I've never seen either giving them advice. Massive turnover. Not at all what interests me. It's better to have quality as compared to quantity in everything you do. I added a discussion today in " Latest Duscussions".

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I suspects as much , the dude with multiple ids running around talking about his bosses is probably one of those “ small sponsors “ . Reminds me of a Idiom that goes like this “ skinny man hit his own face until its puffy to appear fat so he can proof he is rich and eats well” Sad way to make a buck for them but I will never bring this topic up again . True waste of time there . All conversations from now on from me will be about trading and learning from you . Thank you Gary !

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Dec 9 2019 5:45 a.m. EST

  Pre-market ( NYSE ) shows RBOB leading the way down at $1.6280 with WTI at 58.62. As EIA has reported builds in RBOB over the last three weeks WTI continued to rally. This week that corrects itself. Anticipating RBOB dropping below $1.60 today and WTI to test $57.50 for support. WTI closed Friday at $59.18. Refinery inputs are down 4% from this time last year yet WTI is 8.5% higher. Just a matter of time until the bubble bursts. 

 Added 3,500 shares short to my RIG position at $5.45 giving me 15,000 shares short at $4.95. RIG closed at 5.63 on Friday. Target: 3.01

Edited by Gary LeBlanc
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Thanks. I was shorting too and wanted to see what your take was on CL. Glad we are on the same direction :) I also have the same view there, plus the PCPR method suggests upside is limited.

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Dec 10 2019 WTI Financial Report

The Jan WTI contract is currently trading at $58.91. Since I am short the Jan 58 call the value of the contract is maxed a out at $58.00 should today be expiration date which it isn't. The premium I collected gor the Jan 58c was $1.25 so this gets added to the $58.00 netting a Sale Price of $59.25. The Net Purchase Price for the 2 Jan contracts is $50.15. If today was expiration my profit on the Jan Options Strategy would be $59.25 - 50.15 = 9.10 per barrel/contract or $18,200 for the 2 Jan contracts

  The Feb Options Strategy Profit is $58.00 + 3.00 ( short 58c at $3.00 ) = Net Dale Price of 61.00 - the Net Purchase Price is $49.83 = $11,170 per barrel/contract or $22,340. 

  March Strategy:

 Short 4 March contracts at $56.75. Currently $58.57 for a loss of $7,280.

WTI Trading Profit for the Jan-March contracts:

     $18,200 + 22,340 - 7,280 = $33,240

Strategy going forward

  As US refinery inputs continue to be weak in comparison to 2018 exports take up the slack. US production is at a record high and it will continue to set records led by the shale drillers. Offshore will continue to stagnate. As a result of these dynamics I anticipate WTI to trade $56.00 +/- 3.50 for the foreseeable future. We are at the high end of the range. The Jan options expire in 6 days and I will sell the Jan contracts at that time. Since I anticipate WTI to be 58ish I will short 2 more March contracts at that time. My short prices were 56.00 then 57.50 and perhaps 58.00 on this next opportunity giving me 6 short March contracts at an average of 57.17 with 2 Feb contracts long with 58 calls at 3.00 shorted against them. Building a short position at higher and higher prices. The Feb contract has 2 options between now and its expiration date. 1) It can go higher from here and as a result my Feb contracts get called away at $58.00 but I keep all $3.00 of the Feb 58c netting a Sale Price of $61.00. I would then roll over into 2 more short March contracts giving me a total of 8 short March contracts. 2) It heads down to where my Buy to Close 2 Feb 58 calls at 75 cents executes and I collect $3.00 - .75 = $2.25 which I deduct from the Net Purchase Price of $49.83 or $49.83 - 2.25 = $47.58. At that point I would not have any puts or calls shorted against the position, but I will have orders in for both. This is when I'm at my busiest. The only way this strategy works is to be short options against the contracts. As I am closing one short-option I am looking to establish a short position in the opposite option. Time is very very expensive in WTI. That's why I am ALWAYS a seller of time. I am 0-3 in long-options in WTI. I have never had a losing trade on the short side in 14 months, probably about 30 trades. Not bragging. It's the mechanism of the market. It's like this. No matter how sharp I am I'm going to fail going long WTI options. 100%. I've been out on Bourbon Street getting tipsy putting in trades for the next day and having them execute only to wake up and look at them and think WTF. And the trades work out fine. If you notice I always use 54 puts and 58 calls. I would like to experiment with maybe 53s and 57s but the current strike prices seem to be working just fine so maybe when I get a few more contracts I'll experiment. Like I said. There is no blueprint for me to go by. If the market maker does it I want to mimic it. He has all the numbers. All the months. Once I get 5 months with 2 contracts each I'll start adding one at the end month so my contract distribution from closest month's expiration will go from 2 2 2 2 2 to 2 2 2 2 3 to 2 2 2 3 3 to 2 2 3 3 3 and so on.

Edited by Gary LeBlanc
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If the "pspr" is actually the pcpr that would indicate that if the market makers could drop the price significantly especially while the options market is closed to truly gap down all the calls they could pocket a large %  of that $6 billion. However, over the course of the last year I was able to identify imbalances such as this one in WTI and took a small long-position in the appropriate option on 3 seperate occasions only to lose everything each time. My rationale being that I was risking $1,600 to practically double my return for the month from $16,600 to $30,000 but ended up with $15,000 for the month. My two cents.

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35 minutes ago, Gary LeBlanc said:

If the "pspr" is actually the pcpr that would indicate that if the market makers could drop the price significantly especially while the options market is closed to truly gap down all the calls they could pocket a large %  of that $6 billion. However, over the course of the last year I was able to identify imbalances such as this one in WTI and took a small long-position in the appropriate option on 3 seperate occasions only to lose everything each time. My rationale being that I was risking $1,600 to practically double my return for the month from $16,600 to $30,000 but ended up with $15,000 for the month. My two cents.

thanks for the answer....i apologize pcpr😃

i apologize for my englich ...im from russia😍

Edited by Captain J. Flint

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Are you considering trading it or do you have a position ? My experience tells me I would fail if I bought an out of the money put on the mini. My last WTI long option trade was I bought 20 calls ( I forget which strike price ) at .08 each with a target of $1.00. I think they got to 12 cents and eroded to zero from there. 

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If you were 30-3 trading WTI options most traders would say "I need to do what you're doing". But if the "3" were on the opposite side of the "30" they'd say " Whatever you're doing to get to "3" just quit doing it and do it the way you got to "30". And they'd be correct with both statements. I learned my lesson. It's like hitting .225 but leading the league in homeruns or batting .400 and leading the league in slugging %. One's for show. And one's for dough.

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Just now, Gary LeBlanc said:

If you were 30-3 trading WTI options most traders would say "I need to do what you're doing". But if the "3" were on the opposite side of the "30" they'd say " Whatever you're doing to get to "3" just quit doing it and do it the way you got to "30". And they'd be correct with both statements. I learned my lesson. It's like hitting .225 but leading the league in homeruns or batting .400 and leading the league in slugging %. One's for show. And one's for dough.

presently short brent 64.50 ...sl 64.49...already...

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1 minute ago, Gary LeBlanc said:

Jan contract ? If so when do options expire ?

13 Days to expiration on 12/23/19 ...Put/Call Premium Ratio 1.51... i am scalp...

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