Good afternoon. This is James Cordier of OptionSellers.com with a market update for November 10th. Well, so often in the investment world, we’re all looking for the next best buy, or which stock is about to take off, or which piece of real estate has been overlooked and is probably going to be increasing in value. Option selling, especially on commodities, is probably the only investment around where you can identify fair value and actually predict a market to go sideways in price and to prosper from it. Quite often looking for the next big winner in the stock market or in a commodities market is what everyone is scrambling trying to do. In 2017, some of our best investments were identifying fair value markets. We in think in 2018 we probably have a similar list coming up and we’re starting to take positions accordingly. Precious metals have a lot of interest right now. We think that gold and silver are going to be very well supported throughout the remainder of 2017 and probably the beginning of 2018, as well. A lot of investors are trying to diversify away from the stock market and that does include being long some precious metals. Of course, the stock market is precariously high right now. That has some gold fever taking place, as well I’m sure – and of course, you have North Korea, you have Saudi Arabia, you have things going on in Asia – these are all nice supporting factors for the markets of gold, and silver, and platinum. What’s so interesting right now is the third leg required for the gold market, in our opinion, to have a sustained rally, and that would be inflation. And we simply don’t have any now. We don’t see any coming anytime in the near future. This is providing a very stable mark in the precious metals. The gold market we do see having a $100 trading range. We see gold right now trading at approximately $1300 an ounce. We do see it getting up into the high $1300’s – probably in the next six to twelve months. We also see it testing the downside somewhat. It might go down as low as $1200. But we do see this probably being a collar on this market and, you can use the same parameters for silver, as well. One of our very best investments in 2017 was predicting fair value markets. We had a couple. We had coffee. We had natural gas and, we certainly had precious metals. We are positioning with this in mind for 2018 and, we think 2018 is going to be a very good year based on these facts. We’re shorting precious metals, up some sixty to seventy percent from the current price and, we love going long from thirty percent below the going market value because we are slightly bullish on the market, as well.
One fundamental factor that changed in 2017 and that was in the crude oil market. For the first time in decades the United States has been able to export as much crude oil as they want. So, instead of the market taking a tail spin in October, November, and December, this year, large exports left the United States. That, along with cuts from production from the OPEC nations has propelled the market to heights not seen in approximately three years. That did stop us out of some of our crude oil recently. We are going to change the parameters on crude oil. We think it’s still going to be kind of a sideways market over the next year or two but, we do have some of the definitive bearishness that takes place in winter each year, probably alleviating. So, the deep sell-off that takes place in the fourth quarter with now large exports leaving the United States, those might be a thing of the past. We’re going to be adjusting our parameters on the price of crude oil going forward. We now think that petroleum prices are likely also a fair value market – practically a widget if you will – especially with the United States about to produce ten million barrels a day. That will keep large spikes up in price from happening, as well.
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Michael: Hello everyone. This is Michael Gross at OptionSellers.com here with your podcast for October 27, 2017. Well, we marked the thirtieth anniversary of the stock market crash of 1987 this month. With stocks hitting new highs every day, a lot of investors are asking that same question – can it happen again. Some people say no, some people say yes but, an interesting prospect comes into play here with the news on tax reform. Will tax reform get passed? How will that affect the stock market? [I’m] here with James Cordier our head trader. James, welcome to the show.
James: Thank you every much, Michael. Good afternoon to you.
Michael: James, what’s your take on this. Everybody’s building up to tax reform – how it could affect stocks, if it does or doesn’t go through. Do you have a viewpoint on this right now?
James: Michael, the discussion about tax reform is certainly extremely business-friendly. Practically all facets of the U.S. economy would likely benefit from this and of course bringing overseas dollars back to the United States, allowing companies to generate more income through investment as well as the one-percenters that sometimes sit on their hands when taxation is too high, a great number of these things could be alleviated if tax reform goes through. Certainly, I think, that’s what a lot of the bullishness is with the stock market right now. It’ll be very interesting to see the next thirty days how that plays out and then what the stock performance is after that.
Michael: I saw this month that Goldman-Sachs projected there’s a sixty-five percent chance tax reform gets passed in 2018 but, there’s also some dire warnings what could happen to stocks if it doesn’t get passed. Do you think there’s a built in assumption right now in equities that this does go through and if it doesn’t, there’s going to be some disappointed bulls out there?
James: I think so. Certainly, the stock market is forward thinking and they are looking at tax reform in the very near future, probably the first half of 2018 like you mentioned. There is no question that the stock market is at precarious levels. If it continues to get positive forward thinking, no reason why it can’t go up but, sooner or later, it’s going to get a dose of medicine that it may not tolerate and tax reform not passing would certainly be one of those possible culprits.
Michael: Alright. Certainly something to watch over the next several months. Let’s hope we can get it done. Topic for this month’s podcast is two markets for year-end positioning and, we’re going to talk about a couple markets here that probably don’t care much about what happens in stocks. They’re completely uncorrelated. As we know from anybody that’s listened to us or read our materials we trade commodities primarily because that non-correlated aspect to stocks and each other. Primarily answering to their own supply-demand fundamentals. Out first market this month we’re going to talk about is the natural gas market. James, this is a market you’ve talked about here previously – the last month or two. But now we’re coming into the time of year where a lot of small speculators, people that aren’t real familiar with commodities often think of kind of that pop analysis, ‘boy, I should buy natural gas heading into winter because it’ll probably go up.’ A good article you wrote this month about that says maybe you want to do just the opposite. Do you want to talk about that a little bit?
James: Michael, it’s interesting natural gas just has incredible historic volatility. With hurricanes that came into the Gulf of Mexico several years ago and then some extreme winters that we’ve had a few years ago as well, and that has brought investors looking at things like natural gas going into the winter season. The last few fourth quarters in the United States have been relatively mild. That is one of the reasons why natural gas is down this year going into winter heating season. It appears to us that natural gas supplies however, will be quite ample. We do often with the first cold blast in either November or December you do have speculators, both large and small, run into that market. The bottom line is this: Natural gas is now produced in so many not only nations around the world, but also states here in America. The idea that we could run out of a certain amount of the supply, one mishap or another as far as production, or if there’s a big spike in demand, natural gas can go to the moon, and right now that criteria has really been taken out of this market. We have a great deal of new drilling, especially in Texas. We have natural gas basically being produced as a by-product. So, we think natural gas in the low 3’s is probably fair valued for the market right now. We are going to be very keen to selling calls above the market on again if we do get a bit of spike here in November or December but, we’ve had positions laid out for several months already as high as $7 in natural gas. I know that seems quite high above the market right now and it certainly is however, we probably get one more push up in probably late November, early December, and at that point we could probably be looking at selling calls practically double the price of natural gas. So, we’ll be watching very closely for that when some cold temperatures finally come down from Canada here over the next thirty days, or so.
Michael: Yeah, and talking about supply, the latest supply figures showing natural gas supplies in the U.S. at 3.595 trillion cubic feet. That’s near a historic high for this time of year. So that’s really backing up what you’re saying there as far as supply goes. But we have another dynamic in natural gas as well. I know another thing we look at, especially this time of year, is we have a seasonal tendency and, that seasonal tendency do tend to get a little spike in the fall at some time leading up to winter, as you mentioned, and then natural gas prices historically have tended to decline sharply after that. Can you explain a little bit for our listeners why that tends to happen?
James: Generally, we were building supplies here in the United States just for that reason, for a potential frigid winter, especially in the northeastern United States. If the winter turns out to be anything other than a historic low temperature winter, we have more than enough supplies and of course, natural gas is used to be heating homes and businesses and fueling factories and such. But it never quite seems to be such a demand driven market in the winter as it normally would be possibly several years ago when natural gas supplies weren’t as high as they are right now. The market does seem to make a little bit of a pop to the up side in November/December but, it’s interesting if you look at a fifteen or twenty year seasonal pattern for natural gas, it actually falls into January and February only to bottom out then. So, I basically think that you have bullish investors trying to game the market a little bit before winter. If we have anything other than an extreme historic winter season prices do fall on expectations of the demand not being as high and then, we actually go down in January and February and that often then is the seasonal low for a rally going into spring.
Michael: Very good. So, it’s a combination of fundamental high supply-side factors and we also have a seasonal tendency. And remember, if you’re listening, we’re not trying to predict prices going to be lower. We’re simply trying to predict where they’re not going to go. At this point, James feels that the pressure is going to be on the bulls this season and the highest odds trades are going to be selling those calls high above the market with expectations that prices could be lower but they don’t necessarily have to do that for call sellers to make money. If you’d like to learn more about the natural gas in this trade, you want to check the blog. We have a full-length article there and we talk about different potential trading opportunities there. That’s OptionSellers.com/blog. James, let’s move into our second market this month. That is the coffee market and, this is another market we’ve talked about recently but we’ve had a significant development there during the month of October. We had the event of coffee flowering, which takes place in Brazil – a big time of year for coffee. Do you want to talk about that and what’s going on down there?
James: Michael, the most important seasonal factor to influence coffee prices over the entire year is the weather in Brazil in the months of October and November. We have a record number of coffee trees in the largest producing country of Brazil and, they are waiting for precipitation and that normally takes place in October and November. If, in fact, precipitation does develop during these two months, you have the largest number of trees ever on record waiting to produce cherries, which of course turn into coffee beans later on. What’s so interesting about October is that leading up to October weather patterns in Brazil are normally moving from west to east. A situation develops where it starts moving from south to north and during this transformation, it’s often dry in Brazil and people start getting excited about the fact that we might have a smaller crop next year. Precipitation, as we can see it right now, looks like it’s going to be right on course for October and November. We think that we’re going to probably be looking at the largest production ever coming out of Brazil next year but we will be keen to watch is for some periods of time, maybe a week to ten days, where it’s not raining in Brazil. That’s when you get investors, once again, speculating that it’s too dry there. It’s seems to make the news quite well because that is an important timeframe. So, we will be looking for rallies in coffee in October and November to take a short position by selling call options far out of the market and, we do watch the weather closely and for October and November that’s what we’ll definitely have our eyes on.
Michael: James, we also have a seasonal tendency in coffee, as well, and it’s associated exactly what you talked about – about the flowering season. It tends to be dry. Speculators come in and bid up the market. Then, when rains inevitably arrive, which the almost always do, that anxiety comes out of the market and you often see coffee prices fall. Now, we’ve had coffee – hasn’t really had a rally this year. Is that because of the higher expected supply this year?
James: Michael, it is. Everyone knows that this is going to be the “on” cycle for Brazil. That is, when the tree has a smaller seasonal production, and then a larger seasonal production the following year. We are coming onto the “on” cycle in 2018. So, the idea that Brazil could produce sixty million bags of coffee this coming year, at a time when U.S. supplies are at all-time highs, the combination is really lethal for higher coffee prices, we think. You could get a seasonal weather rally. It could happen in October/November but longer term, the reason why coffee prices haven’t rallied this year is because they are looking down the barrel of extremely high supplies and the United States, of course, is the largest consumer of coffee in the world and, we’re sitting on the highest level of coffee beans in thirteen years. If Brazil does get the rain that they’re expected to in the next thirty to sixty days, we’re looking at a bearish coffee scenario for the next six to twelve months. – Would really enjoy seeing a little bit of weather premium built in in the next thirty days. That would be something that would really play into our hands, I think.
Michael: Okay. So, you and I know there’s a lot of different things we’re doing in coffee right now for clients – different strategies we can use, whether it’s up or down but, the guy sitting at home, he’s listening to us and he wants to maybe try out some trades, look at the coffee market, does he wait for a rally into the end of the year? Or, does he go ahead and sell calls now with the expectation that if it does rally, it’s not going to go too far?
James: I would start selling calls, just a small position, right now and then hope and wait for a rally. The coffee market is sitting right near twelve-month lows. I think it’s just a couple pennies off the lowest price of the year. There will be ideas of dry conditions. There’ll be talk about the weather is not just right and, this is the critical time of the year. It just simply takes a little bit of the news media to get a hold of weather that isn’t quite perfect and they will talk about it and, I would expect coffee will probably get a ten to fifteen cent rally this November, possibly December. That would be the time to really lay out coffee calls, in my opinion.
Michael: Okay. For those of you who do want to read more about the coffee market and some suggested trades we have in there for option sellers, you’ll want to read this month’s OptionSellers newsletter. That is the November edition. It should be out at or around November 1st. If you’re currently not on our subscriber list, you can get a free trial copy of that at OptionSellers.com/newsletter and also read our other features we have in there this month - a good piece in there as well on how to use technical analysis in your option selling. Obviously, we focus a lot on fundamental supply/demand of the markets, which is probably your most important aspect but, there are some technical tricks you can use to really help boost your odds and we talk about that in this month’s issue. James, why don’t we go ahead and move into our lesson for this month. Probably a valuable lesson to people, especially new option sellers that haven’t sold a lot of options, and that is a concept we talk about in our book, which is staggering or layering options through different expiration months. James, I know this is a strategy that, I don’t know if you invented it but, you certainly in my opinion came close to perfecting it. Do you want to talk a little bit about what staggering is?
James: Michael, it’s interesting when we have new clients join our firm, I from time to time I’ll get a new client say, “James, how many trades do you do in a month?” Or, “How many trades will we be doing in a year, as far as positioning the portfolio goes?” Basically, we trade, of course and identify opportunities based on fundamentals. So, what we might do is sell a six to twelve month option in coffee or, natural gas or, gold and, if we see the type of decay that we project, often three months later the option will have lost already maybe 50% of its value. The fact that we trade based on fundamentals, we will now look at that exact same positioning three to six later and, if the fundamentals are the same, we will start doing what we call layering. In other words, right now we’re in the month of October, we might possibly be selling June options for natural gas, or for coffee, or for gold, and as we turn into 2018 we get into say January or February – if those options are behaving like they normally should, they’ve lost probably over half of their value - at that point, we lake a look at the price of the same commodity. If the fundamentals are the same, we will then sell six months out and use the exact same strike price, or very close to it, collecting the same amount of premium, or very close to it, and basically just positioning on fundamentals. So, after the pipeline is filled, if you will – after you have five or six selections in commodities that are working for you – that is what we call layering. Three months later the original options are now 10% of what we sold them for, we might buy them back. The options that we sold on the second round, they may have decayed 50% and, what are we doing now? We’re selling the next six months out. And that is what we call layering. Basically, a brand new portfolio is just basically filling the pipeline. As you go forward, three months, six months, nine months out, you start having options decaying and then coming off every three to six months.
Michael: You make a good point there. You have expirations expiring every couple months and some cases, every month. It’s really smoothing out that equity curve, if you’re the investor that has your portfolio structured this way but it’s also spreading the risk around so you don’t have all your risk concentrated in certain expiration months or even certain markets and ultimately, I think that the reason you adopted it James, it’s really helped produce more consistent results. Would you say that’s the case?
James: It is. You certainly don’t want to…you’re not scouring different commodities and different options and make one big bet on what you like that particular month or period of time. Being in a basket of commodities, selling options sometimes 50% out of the money, granted you’re selling a lot of time when you’re doing that but, generally speaking, the price of coffee has little to do with the price of gold, and gold has little to do with price of Apple stock. It’s a great way to diversify.
Michael: Alright and if you’re listening and you’d like to learn more about the concept of layering or staggering your options, you will want to consult The Complete Guide to Option Selling, Third Edition. You can get that on our website at a discount to Amazon or bookstores. That link is OptionSellers.com/book. We thank you all for listening this month. We do have an announcement here as far as final openings for new accounts for 2017. We are currently filling our final new account interviews. They’re taking place during the month of November. If you are interested in potentially opening an account in 2017, you’ll want to contact Rosemary Veasey, our office manager, at 1-800-346-1949. I believe there are still a few openings in November for those final interviews. James, I really want to thank you this month for your insights.
James: My pleasure, Michael. Always enjoy bringing information to our listeners and showing them maybe a smarter way to invest.
Michael: Great! For all you listening out there, have a great month of option selling and we will talk to you next month.
Michael: Hello, everyone. This is Michael Gross at OptionSellers.com. We are here with your monthly podcast for August 25th, 2017. I’m here with James Cordier. James, welcome to the show.
James: Thank you, Michael. I’m always glad to be here and share our knowledge and wisdom.
Michael: Excellent. Well, we are here in the last week of August and we are heading into Labor Day weekend and right around the corner is, of course, September. A lot of people come back from vacation, a lot of traders come back into the fold, and often times we find out where we really stand in a lot of markets that may have drifted one way or the other during the summer. Right now, as we look at stocks, kind of off a little bit. From the beginning of August we’re down, although up a little bit early in the week here at time of recording. We’ve had a little push downwards and, James, I know you addressed this in your bi-monthly address to clients on video, but do you want to talk a little bit about what might be going on right now in equities?
James: Yes, Michael. The equities market, as everyone knows, has been hitting all-time highs throughout the first 6 months or so of the year; however, just recently, a bit of a speed bump with just absolute chaotic times right now in Washington D.C. A lot of the Trump ideas that helped get him elected, which propelled the stock market recently, are in question. Tax relief and de-regulation and 0% interest rates all might be influx right now, and, certainly, a lot of the reasons why people were buying stocks over the last several months were these very business-friendly ideas. I wouldn’t say that they’re gone and out for sure, but certainly they’ve taken a back seat to just simply getting Washington squared away. Hopefully these ideas will come back because they definitely are business friendly. While we’re not in the stock market, we certainly do root it on, because I’m sure a lot of our listeners and a lot of our clients do have stock holdings, so we’re always rooting for it. It has taken a little pause here for certain reasons, and a lot of them are some of the goings-on right now in Washington D.C. Hopefully it’ll get straightened out before too long.
Michael: Yes, obviously this market is still in a bull market. There has been no bottom falling out and there may still be some reasons to buy the stock market. Just some interesting stats I saw was that as of earlier in the week here, on the whole year the S&P was up about 9%- not too bad, but certainly off the highs. Interesting note, James, the Russell was even on the year- no gain at all.
James: Right. I noticed that, and a lot of the ideas of deregulation and, you know, lower taxation, that should be helping the small caps. The Russell being basically even on the year really does bring into the question is “How broad is this rally?” Certainly, the Dow Jones, basically we cherry-pick 30 stocks and the ones we like we put in there and the ones we don’t like we take out. Certainly, the Dow Jones has done extremely well, but some of the larger gauges of the stock market, like you said, are unchanged or up a percent for the year, and I think that was an eye opener to a lot of investors that saw that in the news here recently. I know it was to me, as well.
Michael: Well, I’m just glad, James, that you and I don’t have to forecast the stock market because that’s certainly too many moving parts there for me. I know you feel the same way.
James: Likewise. I really enjoy investing our client’s money and talking to our listeners today based on fundamentals of 10 commodities that have been around here forever and will likely be consumed for years and years to come.
Michael: On that note, why don’t we talk about something we do know quite a bit about and that would be autumn seasonals, which is the topic of our podcast this month. We’re going to talk about a couple commodities here that we do study very closely and maybe do have some insights into. As far as talking about seasonals to begin with, if you’re a listener or have been listening to us for a long time or you read our book, you’re certainly aware of seasonal price tendencies in commodities. It is something that we follow very closely. They are not the buy-all and end-all of price forecasting, but they can certainly be a very big factor and something that can help you tremendously as an option seller. James, I know we were talking quite a bit about grain seasonals this summer and how they often sell off into the fall. Lo and behold, that seems to be exactly what happened across the board.
James: Boy, it really is. Grain stockpiles around the world are at extremely ample levels. We did have quite a weather rally in the month of July and, Michael, it always seems to be too hot or too wet or too cold or something, then the market rallies. Come fall season, generally, some of the greatest producers of the world of grains are here in the United States and, lo and behold, we’re going to have quite a bit of a bumper crop in corn, wheat, and soybeans. When you add that to carry-overs from all the other production in the world, lo and behold, prices come back down to earth and they’re doing again this year. We’re not even through August yet and we’re making quite a push to seasonal lows here probably over the next 30 days. We have corn, wheat, and soybeans testing 12-month lows. It wasn’t that long ago, just a month ago, they were testing 12-month highs. Certainly, there’s a bit of a whipsaw action this year, like most years, and as we get into September and October we think prices will probably be quite heavy because of seasonal factors.
Michael: Yeah, the seasonal tendency is not always perfect, as you and I know. At the same time, grains this year seem to follow it to a tee. They start declining oftentimes into harvest, the market starts anticipating that harvest, starts anticipating that excess supply coming on the market, and prices tend to start going. That’s exactly what they’ve done this year, especially now that we’re past the pivotal parts of potting and pollination in corn and soybeans. So, it’s just an example. If you’re listening at home and following grains, this is an example of what seasonals can do and how they can help. It’s not always perfect, but it certainly can help. That’s what we’re going to talk about now as we come into autumn. It’s a key time of year for a lot of commodity seasonals. The seasons are changing, there’s a lot of things going on fundamentally, and the first market we’re going to talk about of course, James, is one of your favorite markets, which is the crude oil market. This is the key time of year for crude oil, as well. Maybe you want to talk a little bit about the seasonal there and what tends to happen this time of year?
James: You know, Michael, you mentioned something really interesting. The seasonals aren’t the end-all to commodity trading; however, it certainly is a tool that we enjoy using. It’s not spot on every year, but what we like to do, as you know, is we gauge the fundamentals going into a seasonal time frame. If they coincide with the seasonal factors, that is certainly something we like getting involved with. The energy market coming up again is one of these. As you know, Libya, Nigeria, and west Texas are producing some 20-30% above what they were expected to produce as far as reference to oil production. If you take west Texas, Libyan and Nigerian extra barrels that they are now producing in excess of what people were expecting, it is going to come extremely close to what the OPEC production cuts were. So, Michael, if you look at it that way, the production cuts that were creating quite a bull stare in the market this summer, that seems to be coming to an end based on the fact that production is going to equal out with the extra barrels coming from those other locations.
Michael: The media really hit that hard and talked about the OPEC cuts and the bulls came out of the woodwork. It didn’t seem to have much of an effect, and now you’re saying that it may have no effect on supply whatsoever, being made up elsewhere. So, as we head into fall, we’ve already taken away one of those big bullish bullets, so to speak, is what they were hanging their hat on. If we look at a seasonal chart, which if you are getting the upcoming newsletter we do have this featured prominently in there, but James, we see crude oil going into the 5-year seasonal average here, and it tends to start falling pretty dramatically in September. Now, we talked about fundamentals and underlying fundamentals driving the seasonal, but what are the fundamentals that tend to happen this year that tend to cause that price decline?
James: Michael, that’s a really good question, and a lot of our listeners and clients probably have the same question. It’s basically we are looking at a balanced to over-balanced oil market; however, in the months in June, July, and August, the United States, which is the largest consumer of energy in the world, heads out for driving. It is driving season and if you think that that’s just a saying, it truly does matter. When you have some 300 million people that have vacation ideas versus stay-home ideas, that makes an enormous difference to the consumption of gasoline in the United States. In July and the first half of August, the United States set all-time records for consumption of gasoline. That is what has propelled the market here for the last 4-8 weeks that got us out of the 40’s. It got us up to $50 a barrel in crude oil. However, the magic is, starting in September and then October, all those driving ideas and all those vacations are now pictures in albums, or should I say pictures in people’s Apple iPhones. People are sitting at home and they’re digging in for school and fall, and that makes a huge difference. We think that seasonal is setting up practically perfectly again this year.
Michael: So, you’re somewhat bearish as we head into fall, here. I know you’re going to be doing an interview with Bloomberg in New York next week in-studio, and you’ll probably be talking about at least partially about the crude oil market, so this is something that our listeners want to hear now is to not only what we think it’s going to do but why we think it’s going to do it. You’ve already covered a couple aspects of that. Let’s just talk about supply here briefly. We’ve talked about the seasonal, we’ve talked about OPEC, which is kind of a non-factor right now in your opinion. What about U.S. supply? What are we looking at there?
James: The U.S. supply usually comes down during these large driving season months, and it has done that. We are some 3-4% below all-time record levels that we had earlier this year and late in 2016. So, the supplies have come down. Generally, that’s a very seasonal pattern. We’re not producing any extra oil or gasoline during the summer months. It basically stays pretty constant throughout the year. The seasonal factor then is the less driving that happens in September, October, and November – they call it the shoulder season. Basically, it’s after driving season and before winter hits. That is when the U.S. supplies will start increasing again and whether they hit a new time record this fall, or not, we’re going to be pushing at levels that is way more than what the U.S. needs. Of course, you have OPEC nations that will likely be scrambling and probably fudging a bit on the compliance with their production cuts that a lot of people talked about. What’s so important to know about oil is a lot of these countries, OPEC nations in particular, they have a specific amount of income that they need from their oil production. When oil is sitting at $50, it is pretty constant; however, if we start getting in down to 42, 40, possibly below 40 later this fall, they’re still needing the same amount of income from oil production. That is where it could get a little bit of a slippery slope for oil prices this fall when countries like Iran, Nigeria, Libya, and Saudi Arabia need to produce a certain income for their country and for their needs, and yet oil might be at 10-15% below the price. Then, the barrels start to flow and that’s what’s going to get probably interesting here on the downside here in the months of October and November.
Michael: James, that’s a great point. You talked about OPEC and addressed it earlier that OPEC’s potentially cheating. A figure I know that we discussed a few weeks back was although OPEC is still “supposedly” under the restraints of the cuts, exports of oil out of OPEC nations hit a record in July- 26.11 million barrels a day. So, maybe they’re pumping a little bit less, but they certainly haven’t stopped selling it any more slowly, have they?
James: Well, Michael, that’s the exact thing. Certainly their storage facilities and producing nations, as well, not just here in the United States, and that’s basically a way to get around the quota. They’re keeping oil flowing through export channels and, yes, lightly reducing production; however, what does that mean? That means the world is supplied, in some cases over-supplied, with oil. It’s interesting, later this fall and early this winter we could have millions of barrels more than what the world needs. Yet, if the world is producing just one extra barrel the price goes down. So, we do have some interesting times coming up in oil. We really like the idea of selling calls above this market for the next 6-month time frame. As you know, there are never any sure things, but we really like the idea of selling oil calls some 20-30% above the peak that they hit in summer as we go into the fall low-demand season.
Michael: Okay. Yeah, a lot of people that listen to this or maybe watch some of our things think that to sell this we have to have oil prices go down to make money. While we think that possibly could happen, that doesn’t necessarily have to happen for an option selling strategy to be successful. James, just one more thing I wanted to throw out here, you were talking about supply levels and I pulled up some stats here while we were talking. You made a good point that supplies you’re down this year over last year, about 5.3% below where they were last year at this time, but we were at record levels last year. Even at current supply, we’re still 22% above the 5-year average. We’re certainly still in a burdensome supply situation as far as that goes. As we head into the winter months here, you’re talking about particular strategies, do you like selling naked here? When you look at it, is there a strategy that you could put together for a spread? I know we do a number of different things in our managed accounts, but maybe just for the individual investor listening… any advice for those guys?
James: You know, Michael, I think some of our listeners actually take positions on our discussion, and other listeners are probably learning about selling options possibly on their own for the first time. Just as a pure speculative position for a listener is to simply take a look at selling calls, and I would say naked calls yes. Certainly we do have spread analysis we do as well in positions that we take that are covered. With oil trading around 48 and, in my opinion, probably going down to the low 40’s over the next 2-3 months, I would sell calls in the $64, $65, $66 level going out, say, 6-9 months or so. The conversation about selling naked options, I think they use that word for a reason to scare people away from doing it, but people who take a short position on oil at 48, they may have to sit with that position for a while and it may jostle around above and below their entry level. Selling calls at $65 is some 30-35% above the summer highs that we’re hitting. We’re doing it using timing, using seasonal factors, when oil will likely get down to the low 40’s, and think of how far out-of-the-money you are at that point. I would simply sell mid-60 crude oil calls and put a stop-loss on it that you’re comfortable with. Something tells me that somewhere between Thanksgiving and the holiday season that option is going to be worth about 10% of what you sold it for. We’ll have to wait and see, that’s what makes a market. That’s how we would invest in crude oil going through the rest of the year.
Michael: Okay. That naked term, I think, scares a lot of stock options sellers, too, because they’re used to selling 1 and 2 strikes out-of-the-money. Of course, in commodities, we can sell much deeper out-of-the-money. We’re going to talk a little bit deeper about that later. What you’re talking about is we’re taking a position above where the price was at the highest demand point in the year and we’re taking that position heading into the lowest demand point of the year. So, those are certainly the type of odds you look for and, hopefully, if you’re listening you picked up on what James was saying and how you might go about that. If you would like to learn more and get a little bit more analysis of the crude oil market, we will be featuring in our upcoming September Option Seller Newsletter. That comes out on or around September 1st. You’ll get that in your e-mail box and, of course, a hard copy as well if you’re on our subscriber list. If you’re not a subscriber and you’re a high net-worth investor, you can subscribe on our website – optionsellers.com/newsletter. James, why don’t’ we go ahead and move into our second market here. Something you featured earlier in the month but it’s an ongoing opportunity, we feel, and that’s the coffee market. We’re rapping up the Brazilian harvest. Of course, Brazil, the largest producer of coffee in the world, and thus events in that country can have a major impact on prices. I know you’ve been following this pretty closely, James. Do you want to give kind of a summary of what’s going on in the ground of Brazil?
James: Michael, some of the most ideal growing and weather conditions are happening right now in the southern hemisphere. Brazil, of course, was basically one large forest. Whether some people like it or not, the forest was cut down and coffee, sugar, cocoa, and soybeans were all planted in their place. That rainforest is just one incredible farm that feeds the world. What’s happening right now in Brazil is practically ideal conditions for productions of, especially, coffee. Coffee acreage is absolutely giant in Brazil. It’s a very large portion, especially of their mountainous regions. We have 2 cycles in coffee. One is an off-cycle and one is an on. The off-cycle obviously produces slightly less coffee than does the on-cycle. It’s basically the tree taking a rest for 12 months and then it produces the large amount again. Basically, the world is absolutely full of coffee at this point, both in Vietnam and Brazil and here in the United States. The U.S. has the largest green coffee stocks ever since they’ve been counting coffee stocks here in the United States. Also at a time when weather conditions in Brazil are absolutely ideal, we’re looking at practically perfect growing conditions for coffee in Brazil. We’re going into flowering season, which is going to start in September and go through November. If, in fact, the precipitation that has been going extremely well in Brazil is expected to continue through the rest of the year, we’re probably going to be seeing record crop production for coffee beans in Brazil next year. Basically, that entails all the fundamentals that we need to know for the entire year. Consumption stays the same- it’s always up about 1% a year. Production the next year is going to be a large surplus. It’s setting up absolutely ideal in selling options for coffee.
Michael: Yeah, I saw some of the estimates. The market looks forward here- we are in 2017 but these are the futures markets. Futures look into the future. These markets are now starting to price the new crop, the crop that beans will be on the market in 2018. For 2018, as you mentioned, James, it’s a potentially record harvest. I know we had discussed there are some estimates- 58-62 million bags of coffee, which would just be gigantic. That would be an all-time record. As the market prices that, we could be in for some lower prices. I know you’re certainly looking for some prices to mitigate here as we head into our winter. Let’s talk a little bit about the seasonal since we are talking about seasonals this month. We’re pretty much at the end of the Brazilian harvest for 2017 the crop. I think as of August 1st we were about 80% done. I’m sure we’re closer to that now. What tends to happen with the seasonal price? I see we go down a little bit into the fall, then there’s a little rally in October, and after October it seems to just really fall off. What happens then?
James: Michael, I think what seems to happen is investors, both speculating in coffee and users, otherwise known as commercials, they will take long positions going into flowering season. So, basically it’s not exactly a tree that coffee grows on, it’s more of a very large bush. What happens starting in October is the bush is expecting rain to develop, and then it flowers, and each flower, of course, turns into a cherry. If we have steady rainfall starting in September, a bush will flower some 3-4 times, which makes a huge difference during this time frame as opposed to if we have very small amounts of rain and then the bush only flowers possibly 2 times. Simply doing the math, you can see how important this time frame is. That is why the coffee market will start rallying in October as investors and end users want to guarantee themselves coffee prices at a certain level. Should precipitation then be ample through October, November, and the beginning of December, basically the fundamental analysis for the entire year at that point is over. So unlike waiting for monthly reports or quarterly reports out of a company that sells widgets, the production of coffee is then set in gear for the next 9 months, waiting for harvest to begin again. So, we have a rally that starts in September, it goes on through flowering season, as the weather cooperates, and all models right now are showing me that it will again this year, the price goes back down. The seasonal factors are the market falls in September. As we have harvest pressure, then we start getting a rally in September, October, and November, and then we look to sell probably very expensive call options in coffee, once again. We are bearish on the price of coffee, we are record supplies in the United States, we are going to have record supplies in Brazil, and anyone who is wondering what 60 million bags means, 6 times what is produced in the country of Columbia is what 60 million bags turns out to be. Certainly there’s no shortage of coffee over the next year or two.
Michael: That’ll be good news for those of our listeners that enjoy a cup in the morning.
Michael: Now James, you’ve been a proponent of selling calls in coffee most of the year now. We’ve made no secret of that. You’ve had several articles, you’ve talked to Reuters, and the whole time you’ve been moderate to bearish, but just thinking it’s continuing to sell calls is a great way to pull income out of this market, and that’s because it simply has some strong fundamentals. We don’t know if it’s going up or down tomorrow, but overall we feel there should be a price cap on prices that keeps it under certain levels. As a call seller, that’s all you really need. Now, I know you’ve been selling these and have been talking about selling them in your articles. Do you think that we’re at a point right now where you sell them or do you think since we’re heading into flowering season the better opportunity may be a few weeks or months down the road?
James: Michael, as they say on TV, “That’s an excellent question”. We’ve been selling coffee calls practically all year. The coffee market has recently fallen some 15-20 cents over the last week or two, which has basically cut our calls in half in a very short period of time. I would hold off on any additional sales. We’re going to look at taking profits on our positions over the next 4 weeks or so. As listeners and people who follow along, one of the best things that could possibly happen is have a bit of a dry weather concern in the month of October. That could get prices back up another 10-20 cents that they had given back recently. I would then look to lay out coffee calls with both hands. The really interesting part about dry conditions in Brazil, if it’s just slightly drier than the farmers there would like, it’s going to likely make a difference of 1-2 million bags. When you’re talking about a 60 or 62 million bag crop that is just a drop in the bucket. Hopefully we have a little bit of weather concerns at the beginning of flowering season, get about a 15-20 cent rally on coffee, and I would be back to putting on my tuxedo and jumping back in on the short side.
Michael: For those of you that would like to read more about how you can use seasonals or apply them in commodity option selling, I do recommend out book The Complete Guide to Option Selling: Third Edition. That will really lay it out for you and give you some of the key markets and key seasonals you can use in these markets. If you don’t have a copy yet, you can get it at a discount on our website – that’s optionsellers.com/book. James, we’re going to go into our lesson right now and I’m sure this is probably something anyone who has been reading or listening to us for any period of time is familiar with, but it never gets old. It’s something that bears repeating over and over. It’s something we call going deep, which is really a reference to selling deep, deep out-of-the-money calls. It’s done with a little more time on them and it’s a strategy that you’ve adhered to for some time. The common wisdom is when you’re selling options you sell them for 30 days out because you get the fastest decay, but you subscribe to the opposite theory. I think we’ve both found that when you’re trading fundamentally or seasonally, as we’ve discussed now, it’s almost optimally designed for that. Can you talk a little bit about the benefits of selling that far out and what we have to do to get there?
James: Michael, it is so interesting. When you and I first discovered writing premium as an investment for clients, we were subscribing to the same ideas… 30, 60, 90 days out- that’s where the large decay is, that’s where the large curve is. Certainly, we had success doing that; however, in this day and age of computer driven buying and computer driven selling, against what the fundamentals might dictate that prices should do, we do sell options in commodities 6, 9, and even 12 months out. People who have sold options on their own would say to themselves or write the question to us, “That certainly gives you a lot of time for the market to be wrong”. My really easy answer is that it gives us a lot of time for our prediction to be right. Basically, technical factors can move the market for 30 or 60 days, whether the fundamentals had changed in that favor or not. What fundamentals won’t allow the market to do is make a 40, 50, or 60% move. So, the investors that are trading, selling options on a 30-60 day idea, and certainly they might be very successful in doing that, what we don’t want to have happen is have a technical move in a market with no fundamental market change and us get stopped out. We are paid to wait. Most investors have a very difficult time doing that. When you know what the fundamentals are, waiting is quite easy and, as a matter of fact, waiting is fun because you’ll see technical buying or selling in gold, coffee, or oil all the time. Yet, it’s not reaching ever a 50% move; however, it does make the news and it makes options expensive. That’s just the way we like it.
Michael: That’s some really good points you brought up there. It reminds me of a story of why we started doing this in the first place. For investors listening that have sold close-to-the-money options, you know it requires a lot of effort and babysitting. What James is talking about, going further out in time, allowing you to sell much deeper out-of-the-money, not as concerned about those short-term random swings, higher odds. Probably one of the most overlooked benefits is lower stress, both to the investor and the trader. James, I know many people might not know that you and I, when we first started out, were retail brokers. So, about 20 years ago when we first started working together, we were brokers and we were making these trade recommendation to people and we were trading options 30, 60, 90 days out. A lot of the time, they did very well and they were very successful, but it was a high maintenance type of trading. You and I would be on the phone all day because people would be calling in and we’d be changing orders and changing positions and writing new because the market was moving and the options were always moving. When we switched to the strategy of selling deep out-of-the-money options, once that conversion was done, it was crickets. There was nobody on the phone and there was no reason to call. So, it was a lower stress for the trader, but as an investor, I don’t want to say you never have to watch it if you’re managing your own account, but certainly it’s a lot less maintenance than it is if you’re trading those short-term options. It’s almost like day trading, wouldn’t you think?
James: Michael, I remember making that switch to much further out dated options. It’s so funny you bring this up. We did get one or two phone calls, and I remember one, it was from one of our favorite clients. He said, “James, I just love selling options this way because I’m such a bad trader.” Once you get that mindset, that you’re no longer gambling, you’re no longer betting on the spin of the wheel or the roll of the dice, when you’re actually taking fundamental analysis, if you possess it, and turning that into an investment, this is just a great alternative to what some mainstream investments are. Taking long-term views, treating this as an investment, once you made that switch, I know how it was for us, I would never trade a futures contract again. Selling options on commodities this far out based on fundamentals does give you the patience to wait. Let’s face it, that’s what the big money does and, U.S. listeners, that’s where you want to be, too.
Michael: It’s hard to put a price on sleeping at night. I think that’s a good place to wrap it up this month. Obviously, these days, James and I offer fully managed portfolios. If you’re interested in a new account with us, I’m just looking at the sheet here, it looks like we are fully booked for September; however, Rosemary is currently booking interviews now for October openings. So, if you are interested in exploring the possibility of a managed account, you can certainly call her at the main number. That’s 800-346-1949. If you’re calling from outside the United States, the number is 813-472-5760. You can also contact her via e-mail. That is email@example.com. She will schedule you with a free consultation interview to find out more about our accounts. Obviously our recommended opening account is U.S. 1 million. Rosemary can certainly provide you with other details on the accounts, as well. James, thank you for your insights this month.
James: Michael, always my pleasure. I just love chatting about what we do.
Michael: Great. For all you listeners, have a great month of option selling. We will talk to you again in September. Thank you.
Good afternoon. This is James Cordier of OptionSellers.com with a market update for October 6th. Well, it really wasn’t that long ago when the U.S. stock market was in dire straits, unemployment was in double digits, and millions of homes were under water in the United States, not literally, but figuratively, and millions of homes were completely vacant. Basically, giving the keys back to the bank and saying, ‘you take it.’ Several years later, after something called quantitative easing, we have unemployment at 5%; we have the stock market making new highs practically every day and, the only trouble right now with the housing market right now in the United States is there aren’t enough houses to sell. How much of this can be attributed to quantitative easing I’m really not sure but, what’s been announced recently is the rollback of quantitative easing – actually selling back the bonds that we’ve been buying here in the United States which drove interest rates down to zero. With all the uncertainty around the world, geo-political, the height of the stock market, the value of the dollar, all these uncertainties are really causing investors to purchase options, both puts and calls, and especially in commodities, such as precious metals, energies, and foods. I’m not quite sure that’s such a great idea. Of course, we’re always selling options and we’re looking to take advantage of over-priced puts and calls in the main commodities that we follow. All this uncertainty is causing a lot of buying but, the rollback of quantitative easing, the normalization of interest rates here in the United States, we think it’s going to be quite a stabilizing factor and, we think that selling options on commodities right now is ideal. Over the last six to twelve months, we thought that gold calls were too high and we took a short position there. We thought that coffee calls were too high, along with the price and, the price of coffee has come down. We recently took a pretty decent sized position in short natural gas thinking that calls double the price was probably a good idea and all three of these different positionings that we’ve taken have done extremely well. Going into the fourth quarter of this year, we’re looking at the price of crude oil. Crude oil, of course, has been supported by OPEC nations banding together to keep some production off the market – a resounding ‘yes’ by many market participants buying crude oil above $50 recently. To peel back the onion on crude oil production – countries like the UAE and Iraq, and a couple others are participating in the rollback of production to the tune of 30% compliance, not very impressive. Going into should season, of course, that is much after driving season, well before heating season, we’re looking at not only cheating amongst OPEC nations but, of course, here in the United States we’re looking at a huge ramp-up of production of crude oil. We think that ten million barrels a day is probably right around the corner and, going into shoulder season we expect crude oil prices to ease somewhat. We like being short the market in the mid to upper 60’s. We think that oil will likely be in the 40’s later this year. We’ll have to see how that plays out. Anyone wanting more information from OptionSellers.com can visit our website. If you’re not already a client of ours and wish to become one, you could speak to Rosemary at our headquarters in the great city of Tampa, Florida. As always, it’s a pleasure speaking with you and looking forward to doing so again in two weeks. Thank you.
Michael: Hello, everybody. This is Michael Gross of OptionSellers.com here with your monthly podcast for September 22nd, 2017. I’m here with head trader, James Cordier. James, welcome to the show.
James: Thank you very much, Michael. Always looking forward to them.
Michael: Boy, we had kind of a quiet summer and then, all of a sudden, in September a lot of news stories breaking and we saw a lot of volatility start to come into the commodities markets, at least in some commodities, not so much in stocks. James, do you want to talk a little bit about that? Tell us what’s going on.
James: Michael, that’s a really good point you make. Often, they call them the dog days of summer just for that reason. A lot of investors and traders alike are kind of taking off June, July, and August. As we went from August to September, a whole lot has been hitting the wire. We have Kim Jong Un lighting off his rockets, yet again. We have interesting things happening in Washington D.C. lately, and there’s always a lot of talk about the value of the stock market, how high it is, and, of course, interest rates in the value of the dollar. Practically hitting on all cylinders here as we start getting ready for the 4th quarter of the year.
Michael: Obviously, as commodities options sellers, that is a good thing. If you’re listening, you certainly want volatility. That’s what makes those deep out-of-the-money premiums fatten up a little bit. In addition to what you talked about, James, I know we had a couple hurricanes blow through here, too. It did some things with energy prices, orange juice, and I know you were on CNBC this month talking about that and also Fox Business. A couple commodities there were affected by the storms.
James: You know, Michael, you really have to stay informed being a commodities investor or trader. 12 years ago, when we had these hurricanes hit New Orleans, just amazing havoc on oil production and natural gas production. A decade later, practically the same regions are getting hit and people racing to the options screen to buy calls in natural gas and buy calls in crude oil. The storm that hit Houston did absolutely nothing to commodity prices, such as natural gas and crude oil. It did pump up the price of gasoline, as you can imagine with the refiners going down. Boy, was that a great opportunity to sell options as people were watching the news and the weather channel that weekend.
Michael: James, that’s a good teaching lesson, too, because I know something you talk about is the people that trade by following the news, and what you always talk about is if you know the real underlying fundamentals, those can be opportunities to go in and sell premium on people selling off the news that aren’t really familiar with the real story and how that could likely really affect prices.
James: Well, it’s interesting, Michael, we just go through our day to day business and we’re familiar with the new production areas of natural gas and crude oil. Basically, the Gulf of Mexico 10 years ago was everything, and now they’re producing oil in the Dakota’s, Pennsylvania, Oklahoma, Kansas, and Arizona now for a huge find. You know, you definitely want to be on top of that when the normal investor comes in racing to buy energy calls. We’re more than happy to sell them based on the fact that we probably felt very little impact from the storm this year, and certainly that’s kind of the way that played out.
Michael: Well, great. If you’re listening and you’d like to watch James’ interviews on both Fox and CNBC on those commodities, they are available on the media page of our website – that’s OptionSellers.com/media. James, let’s go ahead and move into our first market this month. The gold market: a market that even a lot of non-commodity traders follow. We’ve seen some pretty good strength in the gold market through, not just this year, 2017. Gold prices have been pretty strong, but especially through the months of July and August. We’re off a little bit now in September, but what’s going on there? What’s driving this rally right now?
James: Well, Michael, as we often talk about, a lot of investors want to be diversified from the stock market. I think a lot of investors have a particular amount of money in, of course, securities; however, when they are watching all the situations around the world happening and playing out on TV, they see a falling U.S. dollar. The dollar is down some 12% or 13% this year, if you can believe that. Basically, the gold market will mirror to the opposite direction whatever the dollar is doing. You throw in Kim Jong Un and you’re really causing some jitters. It really wasn’t a big surprise that the gold market did rally some $100 over the last month or two. It has been putting on a pretty decent show. It has actually outpaced the stock market for the first time in several years.
Michael: James, I know gold is one of your favorite markets to trade, especially given the current levels of volatility. We’re going to give listeners a view into some of our privately managed portfolios with this trade, but that’s fine… we think it’s a good teaching example. I know you had written strangles on there, we had talked about it this summer, it was on our website, you had talked about writing gold strangles. We had some of those on the market that started to rally, and you said, “No, we’re going to let it go. We’re not going to close out those positions on the call side just because we’re getting a little strength here.” Do you want to explain that position and your rationale behind that decision?
James: Michael, a strangle on some of the commodities that we follow really gives the client an incredible amount of staying power. If you’re long gold from $950 by selling puts at that strike price and you’re short gold, for example at $1,800 an ounce by selling calls at that strike price, it really gives an extremely large window for the market to stay inside. Generally, gold over the last year or two has been kind of meandering up $25 and down $25. With the recent weakness in the dollar, and the geopolitical concerns that we’ve had, especially with North Korea, the gold market rallied real rapidly- practically $100. It went from $1,260 to basically $1,360 an ounce almost overnight. Our short positions did pressure us a little bit. Basically, I really had a strong feeling that the 3rd leg of pricing gold is inflation. Yes, you can have a weak dollar- that’s bullish for gold. Yes, you can have geopolitical concerns- that’s bullish for gold. The missing piece to the gold market rally is inflation. Basically, gold is a hedge against inflation and, as we all know, Japan tried creating inflation with 0% interest rates. Here in the United States we’ve done the same, and there simply isn’t any. We thought that the rally in gold would be short lived and we’re not exactly sure, day to day, where it’s going to travel to, but we backed off a quick $60 or $70 over the last couple of days and we’re very glad we stayed with our short positions in gold. It’s not getting to $1,800, at least it doesn’t look like from my desk, and any time it rallies we’re going to be likely selling it over the next 6-12 months based on the same idea- no inflation.
Michael: Boy, that’s some great lessons in there if you’re listening and you’re just learning how to sell options. James is talking about selling calls deep out-of-the-money, high above the market. We had strikes on both sides, puts and calls, so when gold market rallied, if you’re short futures you’re probably getting stopped out there, or even ETFs you’re taking a beating, whereas our strategy with selling both sides of the market, even though those calls got a little bit of pressure, the puts were making up for some of that on the backside. When gold inevitably starting coming back down, the premium comes out of those in a hurry, doesn’t it James?
James: It really did. A lot of the calls that we were short were double the value that we put them on at. We are now profitable our short gold calls in less than a week. It’s just a great lesson for people listening in and following us and for ourselves, as well. We learn on every single trade we make. Using our compasses, we thought staying short was the right idea and we continue to think that probably through the end of the year, as well.
Michael: Good. Something else you bring up there… the option doubled, we held them, and a lot of people that read the book or read some of our materials say, “Well, I thought you were supposed to get out when it doubled.” That’s an excellent point and we’re going to be talking about that a little bit later today and today’s lesson. One of the reasons is we had a strangle on so we had a lot more leeway, but we’re going to talk about risk management here and some more advanced strategies later in the podcast here. For now, James, I know I said I wouldn’t put you on the spot, but the title of today’s podcast is Will gold’s rally continue? What are your thoughts here through the end of 2017? I know our job isn’t to pick what the market’s going to do, we only have to pick what it’s not going to do, but for people listening, maybe they don’t do this yet, maybe they’re thinking about selling options, but what’s your gut feel here? Do you think a rally continues through the end of the year or do you think we may be reaching some value levels here?
James: Michael, that is a great question. The gold market is something near and dear to many investors. You can talk to clients about the price of cocoa, they might not be familiar with where that’s trading at, or soybeans, but a lot of investors know what the price of gold is trading at for one reason or another. They probably have some stashed away or it’s something they might be interested in purchasing. The gold market has a personality. It’s not necessarily all supply and demand, like soybeans or crude oil or coffee, a lot of it is perception. One week ago, the North Koreans were slapped with the harshest situations as far as deterring trade, you know, going to that country. The sanctions that were levied on them were thought to be the strongest ever. Two days later, Kim Jong Un is lighting off missiles. That seemed to really ratchet up the rhetoric and the tensions that day. The gold market traded up $7 that night. The following day after the day traders were able to get a hold of the price of gold and trade it, it closed lower the day after Kim Jong Un was lighting off missiles. That tells you that that market had topped out. Certainly, hindsight is 20/20, but it did fall some 7 days in a row since then. That tells us that a very important top was made in gold for the remainder of the year. I think fair value for the beautiful shiny yellow metal is probably $1,275 to $1,300 and we have a decent economy, we have no inflation, we have interest rates about to rise, and that is going to take a lot of the steam off of the bulls, as far as the gold market’s concerned. If you read the Wall Street Journal just 2 weeks ago, it went on and on about small investors are long, ETFs are long, large investors are long. If you follow along with that, investors listening to us today, that basically means anyone who wanted to buy the market was already in, and you’re going to see large investors pull out and take profits when that’s the case. I think that’s what we just saw and we just made an important top in gold that will probably last at least the next 3-6 months.
Michael: All right, that makes a lot of sense. As far as investors maybe looking to trade gold or maybe use some of our strategies, obviously a rally like this helps us because it pumps premium into those call options. Even after the sell-off, do you think there’s still an opportunity there for investors to go in and still take premium on the calls side of this market?
James: I think so. We have a couple of important announcements by the FED over the next day or two. We have some very large decisions made by the EU coming up over the next week or two. You can basically play the middle of gold right now if you just can’t fathom being short the gold market and you can’t fathom having a short gold call in your portfolio. We really like selling the 1050 gold puts, in other words the $1,050 gold put strike. We think that’s a great idea, but we are neutral to negative gold. We don’t see it going that low. That’s some $200-$250 lower than where we are right now. That’s a great window for gold bugs to participate in being in the shiny metal. Being neutral to negative I would sell the $1750-$1800 gold calls. I think that is a very low hanging fruit and I think the beginning of next year those would start being very profitable for anyone selling those.
Michael: So, that’s for gold. That’s about a $700-$800 profit window that gold prices can move around and still those options would expire worthless. That’s a pretty wide range.
James: You know, trying to get gold’s next $25 move is difficult. Can you imagine how many small investors and large investors alike poured into gold here the last 30 days? They’re probably going to be waiting maybe a year or two to see the market come back to that level or get slightly above it. Positioning yourself $500 above and $200 below, I know that’s not the typical investment in gold, but if you take a look at it, it might be for more investors than what they might think.
Michael: Good. James, I know you’ve been tweaking some strategies here. Some of our strategies we’re going to be using for our privately managed clients as far as option selling goes, but if you heard James’ commentary here, for anyone listening, he’s just giving you a sample strategy you can possibly even use at home of a gold strangle. If you’d like to read more about strangles and other option strategies we recommend, I do suggest our book The Complete Guide to Option Selling: Third Edition. If you’d like to get a copy of it for a lower price than you’ll get at Amazon or at the book store, you can get it at our website, OptionSellers.com/book. James, let’s move into our second market this month. We’re going to move over to the grain markets, in particular the soybean market. For those of you that have listened to our commentary over the last 4-8 weeks, we’ve talked a lot about the upcoming harvest, and seasonally in soybeans, harvest time is when supplies will be at their highest. Typically, when supplies are at their highest, Economics 101 dictates that’s often when prices will fall to their lowest level. That’s why you see the seasonal chart tends to decline right into the fall and October is when harvest tends to get in full swing and then wrap up at the end of October and early November. So, often times you’ll see prices make a low around that time of year, but then something different happens. We kind of reversed that. James, do you want to talk a little bit about that? We have a change going on possibly this month in the seasonal pattern of soybeans.
James: Yes, Michael, that’s exactly how it follows out. I’ve been looking at soybean seasonal charts here quite a bit. I have one very near to me right now. June and July we have weather scares and the soybean market rallies. It falls off as the scares seem to be not as defined as previously thought. The soybean market and the corn market have fallen steadily since the 4th of July. This is truly the seasonal bottom coming up practically every year at the end of September and beginning of October. Looking for a possibly different trading approach might be up on us here in the next 4-6 weeks.
Michael: Yeah, and looking at soybean prices we had a pretty good nosedive into August. Sometimes that could have been a seasonal low there, I don’t know. We’ve rallied a little bit since then. We’re going to see a secondary low in October; possibly, it’s hard to say at this point. We may get the low in October or we may have already seen it in August, but the fact of the matter is after October and November prices have historically tended to start strengthening. That’s when a lot of those forward sales and those orders start to get filled and it starts to draw down inventories again and, often times, you can see soybean prices firm. Now, if you’re listening you would think, “Well, then we would want to sell puts”, but that’s not necessarily the case. James, you made a case for this in our upcoming newsletter this month. Maybe it’s the better strategy to employ the think strategy we just talked about here in gold.
James: Michael, I really think it is. Seasonally, we’re going to have very good support under soybeans. At the same time, we have carryover from this year’s production practically as high as we’re ever going to see it in the past 10 years. That will likely keep a cap on soybeans. Once again, when finding a fairly valued market, that is just a great deployment of selling calls way above the market and selling put strikes way below the market. This fall and this winter for soybeans, it may be ideal for that. We have large supplies likely to hold the market down and we have a very strong seasonal tendency for the market to rally that might be the perfect equation for probably a sideways market at a time when both puts and calls are quite expensive. It might be setting up extremely well and something we’re going to be paying very close attention to as we speak.
Michael: It really makes a lot of sense, because that seasonal does carry a lot of weight. At the same time, soybean stock is 475 million bushels. Not only is that going to be the highest in over a decade, but it’s the second highest in over 25 years. So, the supply levels here in the United States are pretty sizeable, yeah we could still get an adjustment in the October report, but for the most part it looks like we’re going to have a pretty sizable crop. I see what you’re saying- that could tamper that seasonal a little bit and keep prices in a nice defined range. Good thing about strangles is you’re getting double premiums. You’re getting premiums on both sides of the market. Those can be big income earners to pad an account.
James: Michael, absolutely. So often, people are trying to define the next bull market or the next bear market, but when you’re able to identify a sideways or fairly priced commodity, that can be the best of both worlds. As you’re short one side of the strangle, it’s basically taking care of the other one while you’re waiting for decay. As option sellers, patience is the name of the game, and having a strangle on as your key position can really help, not only a portfolio, but help the manager taking part in deciding what to do as you have the trade on.
Michael: All right… pretty good stuff. For those of you that would like to read more about the soybean market, we are featuring it in the upcoming October Newsletter. You can see the seasonal we’re talking about and also take a look at the fundamentals we’re looking at, get James’ analysis and possibly strikes you can look at if you’re trading at home. Obviously, if you’re interested in a managed portfolio, you can request our information pack on that, as well. As far as our lesson this month, James, we’re going to address something this month that we probably get more question on than anything else. It’s because it’s a very important topic and that is kind of a broad question, but it is “How do I manage risk on my short options?” We do have a whole chapter dedicated to this in The Complete Guide to Option Selling. We talk about it a lot in our videos and seminars, but I think we should cover it here because there’s a little bit of confusion as to what’s the best way, what’s the right way, etc. What we’ve put forth in our book is what we recommend to beginners, people either new to commodities or new to option selling, is the 200% rule. It’s a good basic rule; it keeps you out of trouble, if the option doubles then you end it, end of story. We still think that’s a good rule and I know you think that’s a good rule, as well. When we’re managing a portfolio with $100 million in it, we have the ability to have a little bit more leeway, we can use a little bit more advanced techniques to bump our odds up a little bit. I know there’s a couple you use and I thought maybe this month we’d pull back the curtain a little bit and let people see some of the more advanced techniques that we may use in managing our portfolios. Do you want to talk about that a little bit, James?
James: You know, Michael, we make a great deal about fundamental trading simply using the 200% rule and, if you’re trading along with the fundamentals, I think a portfolio would do very well over a 1, 2, 3 year period. As far as making a more sophisticated exit level and risk parameters, we do utilize more parameters than just the 200% rule. Basically, we’re going to sell options on what the fundamentals dictate. If there’s too much cocoa in the world then we’re going to look to sell calls. 9 times out of 10, the fundamentals in cocoa that brought us to get into that position won’t change over the next 6 months. Generally speaking, a rally against the fundamentals is technical in nature and we can watch open interest, we can see who’s actually doing the buying and who’s doing the selling, and if it’s technical in nature and possibly the option did reach a double level or even more so, I’m going to look at the landscape of the cocoa market or the gold market, whatever the case may be, and if the fundamentals remain the same we will give that trade more leeway. If, for example, we were talking about gold earlier, and all of a sudden we are getting inflation and inflation is at 2, then 2.2 and 2.4 and 2.6, that is a change in fundamentals and you would definitely want to use the 200% rule. As a matter of fact, in a case like that you may not wait for it to reach that level. Being nimble selling options, there’s nothing wrong with that. If you simply want to use the 200% rule, I think, over a 3-5 year period you’ll do extremely well. We follow the fundamentals in commodities so closely that often it’s a technical rally or a technical decline in the market and, for that reason, we’ll stay with a position longer than just a simply percentage rule.
Michael: So, you’re saying that’s why you sell options so far out-of-the-money. You give it so much space to move and you have a little bit more leeway because you may have a little bit more insight into what’s actually going on with prices. For the guy out there on the street that’s saying, “I like this 200% rule, but what if I want to employ something else? What if I am looking at some other things?” I know you’ve used a couple of things, but one of them is at times if the fundamentals stay the same you may roll part of that position. Can you talk a little bit about that?
James: Absolutely. If you’re selling puts because you’re bullish the market and it’s falling, you might want to scale back a half of your position that you have in the puts and then just roll down to the next 1 or 2 strikes below that. Generally, the selling or the buying based on technicalities will be short-lived. You don’t necessarily just want to leave your position because of something a headline that was in the Wall Street Journal or one of the business channels. Rolling your position allows you to stay with your initial fundamental analysis.
Michael: That makes a lot of sense, too, James, because I know when you get into rolling and, another strategy you mentioned is gradually scaling out a position rather than just closing out the whole thing, that gets into a little bit more art than science. It gets into kind of a feel for the market kind of to know what’s moving it. For the person that has just joined us on their own, they may not have the skills to employ that art, whereas the 200% rule is very scientific, it’s very numerical, it’s very definite. Yeah, you’re probably going to get out of a few trades that at the end of the day they’ll still expire, but it’s the only way to keep you out of the ones that are going to cause you trouble down the road. That’s a great point to make and for those of you listening, if you would like to learn some of our more advanced risk techniques, we mention a couple in The Complete Guide to Option Selling, as well. We also talk about them in some of our upcoming videos that you’re going to see this fall. So, if you watch our videos on our blog, we’re going to be talking a little bit more about the risk management, as well. Just a little housekeeping here before we go this month. For those of you interested in discussing a potential new option selling account for the 4th quarter, we are fully booked for October. Rosemary is currently scheduling consultations for our available openings in November. We do have a few of those left. If you would like to schedule a consultation, feel free to call her at the main number… 800-346-1949. If you’re calling from outside the United States, you can reach her at 813-472-5760. You can also inquire on availability by e-mail… that is Office@OptionSellers.com. James, thank you for your insights this month.
James: My pleasure, Michael. Always enjoy being part of the show.
Michael: We will talk to you all next month. In the meantime, have a great month of option selling. Thank you.
Good afternoon. This is James Cordier of OptionSellers.com with a market update for September 19th. Well, as the 3rd quarter of 2017 starts coming to a close, and we start looking at the 4th quarter, believe it or not, are we happy with our performance so far in 2017? I can absolutely say yes; however, with 3 full months left to go, we are certainly going to try and add to that and make 2017 a very good year to remember. A lot going on in the market now, of course, Kim Jong Un is stealing all the headlines by lighting off his rockets yet again. The Republican President is making deals with Democrats right now – quite interesting.
Normalization of interest rates, not only in the United States but also in Europe, looks like it’s just around the corner. If you’re ever going to raise interest rates, let’s do it while the stock market is at all-time highs. Certainly, causing as little flutter to the economy and market as possible, let’s normalize interest rates and get that over with. I think that’d be a very good idea for everyone involved. With a $20 trillion deficit, I don’t think that we are going to be having interest rates go up very fast, but raising them a quarter here and there, I think, is a very good idea. We’ll have to wait and see if everyone else feels the same way, especially Janet Yellen and her team.
Going forward into the months of September and October offer seasonal trades that we like very much. Long term fundamentals in both natural gas and coffee, in our minds, is either neutral or neutral to bearish. The coffee supply in the United States is at all-time record highs at a time when Brazil is basically making their crop. The months of October and November is when the coffee crop there flowers, they turn into cherries, and then will probably become the largest crop ever in history harvested from the great nation of Brazil. That will probably add more coffee beans to the market in the next 6-12 months, and we think selling options there 70% above the current price is probably a good idea.
In natural gas we have practically the same timing. The market usually rallies in September and October, building supplies for the winter, and then we do like the idea of being short with that market by selling calls in natural gas 80% above the current price. With all the drilling right now going on in the United States, with $50 oil and the ability to produce oil up to $35 a barrel, we think that the offset of oil production, of course, is natural gas – the bi-product of all that drilling.
Natural gas probably costs anywhere from $0.90-$1.10 to produce right now and the more drilling that goes on, especially in Texas, the more natural gas we’ll have over the next 6-12 months, as well. Natural gas is in the low to mid $3 range. We think selling it at $6-$7 is going to be an excellent idea and we think we’ll be taking profits on that trade before year’s end.
Anyone wanting more information from OptionSellers.com can visit our website. If you’re not already a client and wish to become one, you can contact Rosemary at our headquarters in the great city of Tampa, Florida in order to possibly become one. As always, it’s a pleasure chatting with you and looking forward to doing so again in 2 weeks. Thank you.
Michael: Hello, everyone. This is Michael Gross from OptionSellers.com here with your August edition of the Option Seller Podcast and Radio Show. James, welcome to the show this month.
James: Hello, Michael. Glad to be here and always fun to do.
Michael: We find ourselves here in the middle of summer and, of course, summer weather often times can take headlines in the agricultural commodities. That’s what we’re going to talk about this month. We have several things going on in some of our favorite agricultural markets. In the Northern Hemisphere, of course, we have growing seasons for crops, such as corn, soybeans, and wheat. Down in the Southern Hemisphere, we have winter time, which is actually an active time for some of the crops they grow down there because you have crops like coffee and some of the other countries, cocoa, that aren’t planted every year. There’s trees or bushes that tend to bloom every year, so winter can often be a time to keep an eye on those, as well. James, maybe to start off here, we can talk a little bit about weather markets themselves, what they entail, and why they can be important for option writers.
James: Well, Michael, many, many years ago, my introduction to commodities investing/trading came along in the summer. There was an incredible hot spell and dry conditions in the Midwest in the United States right during pollination time. That was my introduction to commodities and commodities trading. Weather markets, especially in sensitive times like July and August for the Northern Hemisphere, certainly does bring a great deal of volatility to prices and great opportunity for a weather market to grab hold of particular prices, and that was my introduction into the commodities trading. I’m quite sure that, as summer heats up, of course, here in the United States, so does trading and certain commodities and it looks like we’ve hit that start up again in 2017.
Michael: Okay. Being in these markets as long as you and I have, we’ve seen our share of weather markets. After a while, most of them tend to follow a typical pattern. You see a weather scare, you see prices rise in some commodities, and prices tend to immediately price-in a worse case scenario and then you get the real report or then it rains or whatever happens, and then prices tend to force the back-pedal… not always, but most of the time that tends to be the case. If there is a price adjustment upwards necessary, prices will often do that, but often times that spike often comes in that initial wave of buying, and that tends to have an affect on some of the option prices. Would you agree?
James: Well, certainly a lot of investors who trade seasonally, or perhaps had taken advantage of weather rallies years before, they will look at the option market. Generally, they are not futures traders, so what they might do is they’ll say, “Well, if the price of cotton or the price of corn or soybeans might be going higher because of dry conditions, lets see what options are out there for me to buy.” I would say that the biggest spike, not only in prices, but in prices for call options, particularly, often happen during these weather phenomenons, and so be it. The call buying that comes into the market during these weather patterns. Usually, as you mentioned or alluded a moment ago, it usually winds up being the high as the public pours into the market. It has happened many times in the past and seems to repeat itself time and time again.
Michael: Yeah, that’s a great point, too. You’re talking about that you have a lot of the general public who love to buy options, the media loves to pick up on weather stories and the public reads it, and it tends to feed on itself, and you have public speculators coming in that are buying up options, often times deep out-of-the-money options. These are often times that people who know the fundamentals want to take a look at that and say, “We could take a pretty good premium here with pretty reasonable risks”, and that’s obviously what we are trying to do and what people listening to us are trying to do. So, why don’t we go ahead and move into our first market because we do have a few other markets to talk about this month. First market we’re going to talk about is, actually a couple markets, is the grain markets as a whole, corn, soybeans, wheat, all being affected to some degree by some of the weather. These aren’t raging weather markets, it’s not on the national news, but they’re enough to get those option values up and certainly enough for people listening, or our clients, to take advantage of. When we talk about these, I think we’ll probably focus on soybeans and wheat for this session. As we talked about in our newsletter and in our blog, there has been some drier weather, especially in some of the northern growing regions up in the Dakotas. Recently, I read a little bit about it possibly moving down into Illinois and further into Nebraska. So, they’ve had some dry weather and this has had a particular affect on wheat, but also on soybean prices. Maybe you can just explain how that worked and what transpired there to push those prices higher.
James: Michael, it seems that a weather market can come in just practically any portion of the United States. Years ago, Illinois, Indiana, and Iowa, that was the extent of the corn-belt, with fringes of Wisconsin and Minnesota. With high prices in commodities over the last several years, some of the other areas of the United States, people started planting corn, soybeans, and wheat, as you mentioned. This year, the extreme heat and dryness is in the Dakotas, usually not an area that moves the market as much, but this year it did. I know the media really got a hold of the dry conditions and discussed North Dakota and South Dakota, some of the hottest, driest conditions in over half a century. I know I had CNBC calling practically every day to talk about the weather. That is what gets these markets moving, and it usually happens this time of the year. You alluded, once again, to something that happens often is you’ll have these headlines really create havoc with some of the markets and pushing them higher, but, lo and behold, some 95% of the crop is really untouched as it is in decent growing areas as far as the weather goes. As you get into harvest time, a lot of that talk is now behind them and people forgot about the weather in North Dakota and South Dakota 6 months later. That seems to be developing again this year. We’ll have to wait and see how that plays out.
Michael: That’s a great point. Probably we should point out here the backdrop of what this weather market is operating in. Exactly what you described is happening, of course, you have speculators buying soybeans off of the dryer weather, buying call options off the dryer weather. As of the last USDA report, 2017-2018 ending stocks are pegged at 460 million bushels, which is going to be the highest level since 2006-2007. So, we’re going into this with a pretty burdensome supply level. Now, if there is some reduction in yield, yes, that could come down a little bit - something to keep an eye on. You also have global ending stocks 93.53 million tons. That’s pretty substantial, as well. You’re operating on it being a pretty hefty supply environment. At the end of the day, when we go into harvest, prices tend to decline, regardless of what the actual supply is because that’s when the actual supplies are going to be the highest regardless. We’re fighting that big picture of, “We already have hefty supply and we have a seasonal working against the prices here.” So, two reasons why people listening may want to consider selling calls when you do get weather rallies like this because the bigger picture is not that bullish. Secondly, one thing to point out here is we’ve had problems with dryness up in North and South Dakota, possibly coming a little bit further south, latest weekly crop condition report is a 4% decline in good-excellent rating. They’re starting to reflect some of that damage, but one thing to remember is this happens often. It happened last year. It happened a couple years before that where it was dry in July and everybody was talking about weather. Then, they’re talking about pushing yields back a bushel or two an acre and then it rains in August, then all the sudden we have above average yields. So, you have prices right now that can, you can get a little pop or you can also see them roll over. I know you have a favorite strategy for playing markets like that.
James: Well, Michael, we wait for volatility to come into the different markets that we follow. Certainly, a weather market in summer is one of those. Probably the best way to approach selling options, whether it be calls or puts in a weather market, is to do it with a covered position. Basically, a strategy that we cover in Chapter 10 in The Complete Guide to Option Selling: Third Edition, it’s really an ideal positioning for weather markets. Basically, what you’re doing is you’re selling a credit spread where as you are selling whatever item you think that the market can’t reach, for example, soybeans this year trading around $10 a bushel based on supply and demand probably won’t be reaching $12.50 or $13 a bushel. What you might look to do is do a credit spread where you buy one call closer to the money and sell 3, 4, or 5 calls further out. The one long position is basically insurance on your shorts so that while the weather is still in the news and while there is still quite a bit of jitters as to how much crop potential we might lose this year, that holds you in the position. You’re basically short with just a little bit of protection and that really does a great job in riding the investor through weather markets and if you are fundamentally sound on your picture of what the market will likely be, as you mention, we have some of the largest ending stocks in some 10 years, you do want to be short this market at harvest time. By applying a credit spread in July and August is a great way to get involved with the market and protect yourself while you’re waiting for the market to eventually settle down.
Michael: When you’re talking about and referring to the ratio credit spread, that really eliminates the need to have perfect timing. Of course, all option selling you don’t really need perfect timing, but that really helps out. If you do get a rally, those can be opportunities for writing spreads just like that. If you’re already in it and the market rallies, you have that protection, a lot of staying power there, and when the market eventually does turn around there is a number of different ways you can make money with a ratio spread. Of course, at the end of the day, we want them all to expire. Talking about soybeans right now, this does not look like any type of catastrophic yield loss or anything like that. This looks, at the most, if we get something, they might get a few bushel break or reduction prices may need to adjust a little bit higher, but in that case sometimes a ratio spread can work out even better. Is that correct?
James: Well, Michael, it’s interesting. Your long position, for example, in soybean calls or corn calls or wheat calls, there’s a chance that that thing goes in-the-money and your short options stay out-of-the-money. That certainly is an ideal situation for the ratio credit spread, where, basically, the market winds up being between your long options and your short options. That happens rarely, but, boy oh boy, is that a great payday when it does happen. That’s not why we apply the ratio credit spread, but every once in a while you get quite a bonus. That describes one extremely well.
Michael: All right. Let’s talk about wheat just a little bit. A lot of the same things going on in wheat, but wheat is affected a little bit differently than the beans, primarily because we have a lot more wheat grown up in those regions where they’re having the trouble. In fact, I read here, as far as the drought goes, North and South Dakota, I don’t have the stat here in front of me, but it’s somewhere between 72-73% of the acreage up there is considered in drought right now. So, a lot of wheat is grown up there. At the same time, that’s one of those markets that may have priced in a worse case scenario and now backing off. What do you think?
James: You know, the wheat market probably, it does have different fundamentals than corn and soybeans, clearly, it has rallied over $1 a bushel, which would have been about practically 25% when a lot of the discussion about the Dakotas was taking place. The wheat market looks like it’s priced, you know, the heat and dryness already in. Of course, one thing about the wheat is it’s grown in so many locations around the world that if you do have a loss in production in the Dakotas in the United States, there are many places around the world ready to fill in for any loss in production. All around the world wheat is grown in probably near 100 countries… certainly different than corn and soybeans.
Michael: You made a great case for that in the upcoming newsletter, too, the piece about wheat, where all this talk about loss of yield to the spring wheat crop, but that only represents about 25% of the overall U.S. crop. Most of the crop grown here is winter wheat, which wasn’t as heavily affected. The bigger point is the one you made just now. This thing is grown all over the world. The United States only produces about 9% of the wheat grown in the whole world. Right now, world wheat ending stocks are going to hit a record level in 2017-2018. So, again, you’re looking at a little news story here, but when you look at the bigger picture we are going to have record world supply of wheat this year. Again, these can be opportunities for writing calls for when those bigger picture fundamentals start to take hold. It can certainly help your position.
James: Exactly. This year, I think, was another great example of that. Ending stocks possibly being records. It’s almost an ideal situation when weather problems arise because later on that year, lo and behold, we have more wheat than we need and the price goes back down. Weather rallies, whether it’s the Southern Hemisphere or Northern Hemisphere, really often plays into the hands of option sellers because the buyers come out of the woodwork and normally, you know, holding the short end of the stick come harvest time.
Michael: We should find out where everything plays out in the next USDA supply/demand report. I believe that is on or around August 10th. That’s really going to reflect what the real picture is, if there was yield loss, and how much of it was. If it’s less than traders thought, prices probably roll over and we’re probably done because you have soybean podding in August and markets typically start declining after that anyway. If we do get a little bullish surprise, we’re not saying the market can’t rally if you’re listening at home and saying, “I need to go hands-in short right now”. The market can rally, especially on or around this report if you get a bullish surprise. What we are saying is those can be opportune times to write options, because that’s when that volatility will jump and, overall, the bigger picture fundamentals remain bearish. James, we’re going to talk here a little bit about our next market, but before we do that, anybody listening to our conversation here about the grain markets this summer, you’ll want to read our August issue of the Option Seller Newsletter. That comes out August 1st. It will be received electronically and it will also be available on hard copy newsletter in your mailbox if you’re on our subscriber list. We have a feature article in there on wheat. We talk about credit spreads, some of the things James and I just discussed here, and how you can apply them. It is a great strategy for this time of year and you can read all about it in the August newsletter. If you aren’t a subscriber yet and you’d like to subscribe, you can subscribe at OptionSellers.com/newsletter and read all about it. James, we’re going to move into our next market here this month, which is one of your favorite markets to trade, that is, of course, the coffee market. I know you’ve been doing work with Reuters World News this month back and forth on the coffee market and what’s going on there. Maybe give us an overview of what’s happening in the coffee market right now.
James: Michael, it’s interesting. As all of our intelligent readers and watchers already now, as temperatures heat up in the United States, they are definitely cooling off in the Southern Hemisphere, Australia and Brazil for example. What so often happens for traders in the coffee market, they look at winter approach in the Brazilian growing regions and they remember back to when coffee supplies were really cut based on a freeze that developed in Southern Brazil. During those periods, some 1/3 the coffee crop that Brazil makes each year was grown in very southern areas of Brazil, which are prone to cold weather. Chances are freezes don’t develop in the coffee regions of Brazil, but just like the dry weather in the United States a lot of investors and traders want to trade that idea of it happening. That’s what’s going on recently as we approach the coldest times of the season in the Southern Hemisphere. Traders and investors are bidding up the price of coffee and, likewise, buying calls in the coffee market, planning on maybe some adverse weather taking place. I think we all hear about El Niño and La Niña and what that can do to temperatures, both north as well as south, and a lot of investors, if something like that takes place, they want to be in on it. Often, how they do get involved with that is by buying calls in coffee, cocoa, and sugar, and it looks like that’s what’s pushing up some of those soft commodities today.
Michael: Okay. So, they’re buying it primarily on freeze-type thing… same type of thing going on here in reverse. Instead of hot weather, they’re betting on cold weather. Talk a little bit about the bigger picture there as far as what supplies are like, what they are buying here.
James: Well, Michael, it’s kind of interesting. It’s almost like a carbon copy of what we just discussed on the grain and grain fundamentals. Coffee supplies in the United States, which, of course, is the largest consumer of coffee in the world, are counted each month. Here in the United States, we have something called green coffee stocks. Obviously, that is the coffee that is then sent to roasters. Roasters roast the bean and then turn it into everyone’s favorite morning brew. Green coffee stocks in the United States are at all-time record highs. That fundamental is something that just is very discernable and is not going to go away no matter how many coffee shops spring up in your city or your town. We have record supplies in the United States. As far as the fundamental of new production, especially in Brazil, last year we had a rally in coffee prices because it was dry conditions during some of the cherry season in Brazil, and this year is just the opposite. We’ve had extremely favorable weather conditions. We have an excellent coffee crop that’s being harvested right now in many parts of Brazil and Columbia, and coffee supplies that will be coming in from the producing nations will be more than plentiful as we get into August, September, and October when those harvests wrap up. So, we have practically record supplies around the world, we have excellent growing conditions in the largest producer in the world, being Brazil. This year is what’s called an off-cycle year. A coffee bush, if you will, produces more cherries on one year and then slightly less the following year. This being an off-cycle year, still we are expected to have a record production figure in Brazil for an off-cycle year. There are already estimates for next year’s crop being in excess of 62 million bags, which would be an all-time record. For those of you who are unfamiliar with what 62 million bags of coffee might represent, Columbia, always thought to be the largest coffee producer in the world, they only grow approximately 10-12 million bags each year. So, all of the extra demand for coffee recently over the last several years from all the coffee shops springing up, Brazil has taken care of that and then some, just basically blanketing the world with extra coffee beans. That is what has kept coffee prices, really, trading near-low levels. Many commodities have increased with Chinese demand that everyone is familiar with over the last several years, but coffee is not the case. Record supplies here in the United States and record production down there from our friends in Brazil.
Michael: Yeah. I saw that, too. Brazilian Ag-Minister was 62 million bags. That’s a huge crop. Another thing I should probably mention there is that coffee has a seasonal, as well. It tends to start coming off into when harvest starts and our springtime as they head into fall, which is March-May period. Is that correct?
James: It is. Generally, the coffee crop is so large and so widespread there the harvest lasts practically 4-5 months. Basically, what you’ll see them do is often sell coffee twice a year in great strides. One is as the end of harvest approaches and then when we’re looking at next year’s crop, May and June, when they can get a handle on how large that crop is going to be, they will then start forward selling that year’s production. So, really there’s two waves of selling from coffee producers in Brazil. Usually it’s August-September for the current harvest and then May-June for the upcoming harvest. Really two large swaths of sales from Brazil, something we’re expecting to happen probably for at least the next 2 years and then we’ll have to take a look at how the conditions look after that. The next 24 months, we’re going to see a lot of coffee hit the market twice a year, those 2 times especially.
Michael: I did notice, this year the coffee market does appear to be following seasonal tendency. You know, we started seeing this last round of weakness right about March and it has dropped, so far, into June. We get a little bouncier now maybe just because prices were just so oversold and then we had the weather issue that you spoke about, as well. I know, right now, with prices in the position they are similar to what we talked about in wheat and soybeans, where you had a little bit of a weather issue at the same time big picture fundamentals still looking pretty bearish. What type of strategy are you looking at in coffee right now?
James: Well, Michael, we have coffee prices in the mid 1.30’s, approximately $1.35 per pound. Chances are we are going to be rallying maybe 5-10 cents as we go further into the winter season in Brazil, as some investors take a chance on coffee price rally. We could see coffee prices in the mid $1.40 going into August and September. We are targeting contracts 6 months out- 9 months out to take advantage of the long-term bearishness. We never want to play a market on a short-term basis, we don’t want to predict where coffee’s going to go the next 2-4 weeks. What we want to do is take our long-term fundamental analysis of the coffee market, the production and supply that we’re looking at here the next 24 months, we’re going to take a long-term view of coffee… a long-term bearish view. We are able to now sell coffee calls at $2 a pound if you go out a little bit further, another 30-60 days, you can sell coffee options at $2.20 a pound. If we do get a decent rally here in the next 30 days, which is possible, we’ll be looking at selling coffee calls at $2.40 and $2.50 a pound. Later this year, we do expect coffee prices to be around $1.20-$1.25, and there’s a pretty good chance the options we sell are going to be double that level, certainly something we’re extremely comfortable with and we think is going to work out quite well. We’ll have to wait and see. There’s no guarantee in this market or any other, but we do like our chances at selling coffee at that level, for sure.
Michael: That far out-of-the-money is exactly the target options that we talk about in The Complete Guide to Option Selling. It’s our third edition of our flagship book. If you would like to get a copy of that, you can get it at OptionSellers.com/book. You’ll get it at a discount to Amazon or bookstore prices. James, for our lesson today, I’d like to directly address a question that we get periodically from newsletter readers and listeners to this show and some of our other videos. I know a lot of people listening to this, they’re watching what we talk about and then they are taking our trade and trying to do it on their own. That’s certainly fine and there’s nothing wrong with that. That’s part of the reason we’re here, is to help people learn what this is and how to do it. A question we get is, “I saw your video/read your article and you talk about selling a strike, and I went and looked at that strike and it’s not the same premium you said,” or, “ I went and looked at it and there’s no open interest there”, or “That platform doesn’t have it. I can’t see it. How are you selling these things?” There’s a couple different answers to that. I’m going to give one and I know you probably have a better one, but one of the first reasons is a lot of the platforms they’re on they don’t carry options that far out. I know some people have mentioned Thinkorswim platform or TD Ameritrade where they only go a few months out with the commodities options. So, first and foremost, you need to get yourself a better platform so you can get further out strikes, and secondly, James, the one thing you pointed out clearly in this month’s newsletter is a lot of times when you’re talking about these things, whether here or on your bi-monthly videos is, you’re giving examples of how this could work, how it should work, what might happen if prices rally, these are the areas we target. We’re not here to give specific trade recommendations for people to take and trade tomorrow. These are examples for people to learn either if they want to invest their money this way or if they want to take the information and think and reason it on their own what to do. So, when we talk about a strike, that could be a trade we’ve already done, could be that it’s passed now, or it could be a trade we’re hoping to do if the right situation sets up. So, you just gave some pretty good examples right now and you probably agree with me there, but there’s another reason that we can target those type of strikes that other people might not be able to do, and maybe you want to talk about that.
James: Michael, that is a great point that you bring up. When I’m speaking to new clients, when they first open their account, the one question that seems to come up very often is, “James, I understand how this works, I’ve read your book, I’ve read your material, but who in the world is buying these options?” That is certainly a question we often get. By no means do I claim to experience the very best way in selling commodities options. I’m not sure what the very best way is. I just know what works for us and really being the option selling leader, I certainly believe we are, we are selling options in quantities that practically no one else in the world is. We have the luxury of selling gold options to banks in London and New York, we have the luxury of selling options in the crude oil market to energy companies, and it’s quite possible that when we’re selling options distant strikes coffee, we are likely selling them to coffee companies, like Starbucks and the such, a lot of popular names that a lot of people now. When you’re selling to contracts for your particular own personal account, you’re probably not going to get a chance to deal with London banks or other large coffee companies, but when you’re selling options in very large gross volume, these companies do want to work with you and they do want to listen to you. That opens up these strikes to us.
Michael: That’s a great point. Maybe for just some of our listeners that may not be familiar with how that is, it’s not like James is getting on the phone and calling somebody in London and Citi Bank and asking them if they want to buy our options. These are still going through registered exchanges, it’s just a different path we are taking through them where we are working through specialized order desk. These people have relationships with other brokers for these organizations, but the trades are still done on the registered exchange, correct?
James: Yes, they definitely are. It’s just relationships that our clearing firm has established and it’s something that, I feel, just the pinnacle of option selling… having those relationships in place and when you need and want to sell options that are further out in time, as maybe some of our listeners or readers have asked about, that’s something we have the luxury to do and we certainly want to take full advantage of that by selling to some of the largest banks or some of the largest companies that are maybe end users in coffee or in sugar or in soybeans. It’s quite a luxury we have working with those relationships that our clearing firm has already built for us.
Michael: Something our listeners might want to consider, as well, we are usually here to help people learn how to do this. Whether you want to do it on your own or whether you are considering having it managed, one aspect of managed option selling, and excuse my little advertisement here, but it’s true that if you’re in a managed portfolio, such as this, you do get the advantage of economy of scale, where if you’re trying to sell 2-3 options on your own you could have them sitting out there all month and nobody ever looks at them. When you’re with an organization or a managed situation like this where you could be selling thousands at a time, those not only can get filled but often times at better fill prices than you’re going to get electronically. I know that’s something you have experienced first hand.
James: Michael, there is no question that we’re not market timers. We don’t know the exact time to get short soybeans, coffee, or get long some of the precious metals, but what we do want to have is just the best absolute liquidity available, the tightest bid-ask on these markets, and if that can change your entry by, say, 10%, which it often does, once again, it takes the need to be perfect timing entering these markets, which no one has, nor do we, but when you can get a fill 10% better getting in and then possibly getting out, that makes a world of difference.
Michael: All right. We’ve covered a lot of ground this month. I think we’ll hold up there for the month. We will be updating the coffee market and some of the other things we’ve talked about here over the next month and on our bi-monthly videos and also on our blog, so you’ll want to stay posted to that. If you are interested in learning more about managed accounts with OptionSellers.com, you can request our free Discovery Pack at OptionSellers.com/Discovery. As far as new account waiting lists, we are well into September right now as far as the waiting list goes for openings, so if you’re interested in taking one of those remaining openings for September you can contact Rosemary at the main number to schedule a perspective client interview. Those will be taking place during the month of August. You can reach her at 800-346-1949. If you’re calling from outside the United States, you can call 813-472-5760. James, thank you for a very insightful commentary this month.
James: As always, Michael, all 12 months of the year are interesting, but July and August certainly are one of our favorites.
Michael: Excellent. Everyone, thanks for listening and we will be back here with our podcast again in 30 days. Thank you.
James: Thank you very much.
Good afternoon. This is James Cordier of OptionSellers.com with a market update for August 4th. Recently, my wife and I were driving through Tampa and we were driving past the Tampa Port Authority. Christa says to me, “Look at all the cars.” I looked to my left and I saw the largest car lot of my life. All cars with the exact same emblem on the front, the only difference was the colors of the car. They were sitting looking for a home. It looked like a sea of automobiles waiting for the car dealer to possibly call them and say that they needed them. 30 days later, those cars are still there. I noticed that again today… Interesting.
Over the past week, automobile sales came out approximately 15% below what they were in this same period last year. Automobile inventories were approximately 40% higher than where they’re supposed to be during a healthy U.S. economy. Practically every barometer of the U.S. economy right now is showing either signs of stagnation or great weakness. It’s quite interesting… you have the U.S. dollar falling to a near 2-year low based on these facts, and yet the stock market continues to climb, making a new record-high practically every other day.
So what gives? It’s really hard to tell. Needless to say, interest rates in the United States were supposed to climb 3 or 4 times this year. It looks like they only maybe raised once or twice, and I guess that is all the ammunition the computers need to keep pushing the stock market higher. Eventually, the U.S. economy is going to have to show some growth for the stock market to continue to climb. We’ll have to wait and see exactly when that happens. Of course, some very special months of September and October are coming up, and maybe they’ll have something to say about it.
We certainly are rooting on the stock market, for any of our clients that do have equity holdings. We’re certainly not rooting against it, but by no means would we want to necessarily be pushing stock markets right now. It’s certainly at an extremely high level, practically new highs every day, and yet the U.S. economy continues to show signs of slowing, if not cracking, definitely making for an interesting scenario.
I was speaking to one of my clients recently in Florida. She mentioned that she is a closet bear in the stock market. As a matter of fact, a lot of her friends that do quite well for themselves are stock market bears, as well, she went on to say. I kind of like that phrase, and I asked her if I could possibly borrow that from her, and I just did.
Opportunities in commodities right now, we think, are extremely high, with a lot of uncertainty and a lot of investors trying to seek the ability to move their investments around and not be all allocated in just one implementation. Our looking at opportunities in commodities with the weaker dollar, I think, there will be many now and in the future. Energies and metals are two that we are following very closely. We think that they’re going to be making a pretty decent move over the next 6 months, and we’re going to be positioning ourselves accordingly.
Of course, we spoke of coffee recently. We’re currently putting positions on there. As August is often a cold-weather season in Brazil, and I’m looking at forecasts there and there is nothing happening anytime in the near future as far as southern Brazil, where cold temperatures can actually affect the crop. They don’t grow coffee in southern Brazil anymore.
Anyone wanting more information from OptionSellers.com can visit our website. If you’re not already a client of ours and would like to become one, you can certainly contact Rosemary at our headquarters here in Tampa about possibly becoming one. As always, it’s a pleasure chatting with you, and I’m looking forward to doing so again in 2 weeks. Thank you.
Good afternoon. This is James Cordier of OptionSellers.com with a market update for July 21st. For those of our clients in Dubai, Australia, New Zealand, France, and in South America who may not be familiar with the movie Trading Places, I apologize in advance. I’ve seen the movie probably 50 times and it always seems to turn out about the same way at the end. The Duke brothers are trying to corner the orange juice market. Supposedly, they have the crop report in advance and they were hoping for it to show that cold temperatures in Florida reduced the crop, which would then move prices higher.
Similar things happen every July and August. Many investors in the United States and elsewhere bid up the price of coffee with the idea that cold temperatures in Brazil will reduce the crop there, which then, of course, would propel prices higher. Many years ago, over a decade ago, we did have cold temperatures in Southern Brazil that did cut production that year and prices did jump dramatically. As a matter of fact, that volatility is still in coffee options, which we enjoy practically every year.
This year, once again, as we approach the very middle of winter in the southern hemisphere, coffee traders are starting to bid up the price of coffee. It has gone up about $0.20 a pound just recently. Options, some 60%, 70%, and 80% out-of-the-money, are now in play and that is something we’re going to try and take advantage of over the next week or two. The fundamentals in coffee, we feel, are extremely bearish. Supplies of coffee in the United States are at all-time record highs and the country of Brazil is going to be producing 2 record crops in a row. This year will be the off-cycle of crop and next year is the on-cycle crop, expected to surpass over 60 million bags. The second largest producer of Arabica coffee, being Columbia, only produces 10 or 11. This tells you the enormity of the Brazilian crop and will likely be flooding the market later this year and, of course, next year as well.
While cold temperatures do descend on certain levels and areas of Brazil in July and August, we feel that this sets up just a great sale in options going forward. If we do have some cold temperatures, we think the price of coffee will do something similar as the orange juice price did at the end of Trading Places, and we feel quite comfortable about going short some 80% out-of-the-money. Calls 220, 230, 240 a pound, when coffee we expect later this year to be trading around 110-120 per pound, basically one half of the price of the options that we are looking to sell. We think this is going to be an excellent opportunity going forward for this year, as well as next, and we plan on taking good advantage of it.
Anyone wanting more information from OptionSellers.com can visit our website. If you’re not already a client of ours and wish to become one, please feel free to contact Rosemary about doing just that. As always, it’s a pleasure chatting with you and looking forward to doing so again in 2 weeks. Thank you.
Good afternoon. This is James Cordier of OptionSellers.com with a market update for July 5th. It’s so interesting; practically none of our clients have ever traded commodities. They don’t have commodity accounts, nor have they had commodity accounts in the past, and yet they all saw fit to read our book, understand short options on commodities, and read some of our materials - enough to get them to open an account and sell options on gold, silver, coffee, and soybeans. It’s certainly an investment that you’re not going to hear discussions about when you’re out to dinner or at a barbeque with friends.
Options on commodities certainly is a new idea to many investors; but when you think about it, commodities like crude oil, gold, silver, and coffee, they’ve been around for a long time and will always be around for a long time. I get in front of this camera every 2 weeks and discuss opportunities in these different markets and selling options, you know, 50% out-of-the-money, how opportune strangles can be and such, understanding fair value of a commodity like soybeans or corn, and how that can interpret and be used as an investment.
Well, this past 6 months, the end of the 1st half just happened, and we’re quite pleased with the results of selling options on commodities for our clients. We do like the prospects and the landscape for short options on commodities over the next 2-3 years. It’s kind of difficult to see the landscape past that, but right now, with a lot of the things going on with the world economy, here in the United States, and a lot of interest in clients and investors getting diversified from the stock market, we think we’ll continue to deliver opportunities in doing exactly what we do.
This summer, of course, we have movements in energies and in grains. We look at taking advantage of some of those over the next 30-60 days. Hopefully, we’re looking forward to a very good second half of 2017 to cap what we already did so far this year, hopefully very good results then, as well. I hope everyone had a wonderful holiday, and I look forward to working for you in the second half of 2017.
If you’re not already a client and wish to become one, you can visit our website or contact Rosemary at our headquarters in Tampa, Florida. As always, it’s a pleasure speaking with you, and looking forward to doing so again in 2 weeks. Thank you.