I just came across an article in the latest YTE which compared stock options and futures options. In there, it mentioned that options in futures had lower margins, higher premiums and higher liquidity.
They gave an example of an investor selling a ATM Call on stock XYZ for a premium of $200, and the need to post a margin of $1500 to $2000, yielding a ROI of approx 10%.
However with futures, assuming coffee futures is at $1.03 per pound, a trader could write the call at $1.40 (Deep OTM) for $400 and needing to only post a margin of $800, yielding a ROI of 50%.
The interesting thing to note is that coffee futures write option is OTM by inexcess of 25%, and yet able to generate an attractive ROI. With stock options, unless you are writing options ATM, or 1 - 2 strikes OTM, you will end up with premiums that are worth, literally, peanuts (unless the stock has some incredible IV) .
My question is how does this happen??? If what the article says is true, all us stock option writers are trading the wrong instrument. I simply cannot understand how the futures options valuation do not follow the same valuation methodology as stock options
Surely if we are to apply stock option valuation to the coffee futures example above, the IV would fly off into the stratosphere. But off course, it is possible to measure the historical volatility of coffee and it would be nowhere near the IV for the futures contract. Can somebody please explain this discrepancy to me