Why I Stopped Selling Put Options on Micro Gold Futures (MGC)

  • Lack of Liquidity: The primary reason for stopping the sale of put options on Micro gold futures is the lack of liquidity in the order books, which makes trade adjustments difficult and increases slippage and market impact.
  • Micro vs. Regular Gold Futures: Micro gold futures (MGC) control 1/10 the size of regular gold futures (GC), requiring less capital and offering more flexibility, but still suffer from liquidity issues.
  • Shift to GLD ETF: Instead of continuing with put options on Micro gold futures or moving to regular gold futures, the focus has shifted to the GLD ETF, which provides better liquidity and more manageable exposure to gold.

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As a seasoned trader and CEO of Terramatris crypto hedge fund, I have explored various trading strategies over the years. One strategy I have experimented with is selling put options on Micro gold futures. Recently, I decided to stop using this approach. 

In this article, I'll explain the main reason behind my decision, providing insights that might be valuable for fellow traders.

Understanding Put Options on Micro Gold Futures

Before delving into why I stopped selling put options on Micro gold futures, it’s essential to understand what they are. A put option gives the holder the right, but not the obligation, to sell a specified amount of an underlying asset (in this case, Micro gold futures) at a predetermined price within a set period.

Selling put options involves taking on the obligation to buy the underlying asset if the option is exercised. This strategy can be profitable if the price of the underlying asset remains above the strike price, allowing the seller to keep the premium received for writing the option.

The Initial Appeal of Selling Put Options

Selling put options on Micro gold futures initially appealed to me for several reasons:

  1. Premium Income: Writing put options generates premium income, which can provide a steady stream of cash flow.
  2. Bullish Sentiment: As someone bullish on gold, I viewed selling put options as a way to potentially acquire gold futures at a lower price while earning premiums.
  3. Lower Capital Requirement: Micro gold futures require less capital than standard gold futures, making it accessible for smaller trades and risk management.

Main Differences Between Micro Gold Futures (MGC) and Gold Futures (GC)

Understanding the key differences between Micro gold futures (MGC) and regular gold futures (GC) is crucial:

  1. Contract Size: Micro gold futures control 1/10 the size of regular gold futures. While a regular gold futures contract (GC) controls 100 ounces of gold, a Micro gold futures contract (MGC) controls only 10 ounces.
  2. Capital Requirement: Due to the smaller contract size, Micro gold futures require less capital, making them accessible for traders who prefer smaller positions.
  3. Flexibility: The smaller size of Micro gold futures allows for more precise adjustments to trading positions and risk management.

The Primary Reason I Stopped Selling Put Options on Micro Gold Futures

Despite the initial appeal, I decided to discontinue this strategy due to one significant factor:

Lack of Liquidity in Order Books

The lack of liquidity in the order books for Micro gold futures put options was the primary reason I stopped selling them. Liquidity is crucial for several reasons:

  1. Trade Adjustments: In a liquid market, it's easier to adjust trades, buy back options, and sell new ones to manage positions effectively. The lack of liquidity in Micro gold futures made it difficult to execute these adjustments without facing unfavorable prices.
  2. Slippage: Low liquidity often leads to higher slippage, meaning that the actual execution price can differ significantly from the expected price. This can erode profits and increase trading costs.
  3. Market Impact: In illiquid markets, large orders can have a significant impact on prices, making it challenging to enter or exit positions at desired levels.

Considering Regular Gold Futures

While selling puts on regular gold futures might still be an option due to better liquidity, these contracts control 100 ounces of gold each. This significant exposure makes me uncomfortable, as it involves a higher level of risk and capital commitment.

Shifting Focus to GLD ETF

Instead of continuing with put options on Micro gold futures or moving to regular gold futures, I have shifted my focus to trading the GLD ETF. The SPDR Gold Shares (GLD) ETF provides exposure to gold with better liquidity and smaller capital requirements. This approach allows for easier adjustments and more flexible trading strategies without the liquidity concerns associated with Micro gold futures.

In the ever-evolving world of trading, it's crucial to continuously evaluate and adapt strategies based on market conditions and personal risk tolerance. While selling put options on Micro gold futures can be a profitable strategy under certain conditions, the lack of liquidity in the order books led me to move away from this approach.

Instead, I have shifted my focus to trading the GLD ETF, which offers better liquidity and more manageable exposure to gold. As I continue to explore and refine my trading strategies, I remain committed to sharing my experiences and insights to help fellow traders navigate the complexities of the financial markets.

If you're considering selling put options on Micro gold futures, I recommend conducting thorough research and understanding the potential liquidity issues involved. Always be prepared to adapt your strategies in response to changing market conditions.