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June 02, 2017 06:24 AM PDT

Good afternoon. This is James Cordier of OptionSellers.com with a market update for May 19th. Well, the VIX has been in the news recently. All-time lows for the stock index barometer that talks about the volatility and, basically, there has been absolutely no fear whatsoever. The stock market, of course, has been rallying to practically new highs nearly each week for the first quarter or two of this year, 2017, and absolutely VIX trading below 10, the lowest level seen in decades. Basically, investors want to simply go long the stock market, and for many reasons – 0% interest rates and really nowhere else to look for any type of return.

Well, a lot of ideas -- was the U.S. was the best house in the neighborhood? Always stronger than China, always stronger than Japan, and always stronger than the European nations. That changed dramatically this past week. U.S. auto sales and other parts of the housing market here in the United States are starting to show signs of easing. At the same time in Europe, many nations, France, Italy, and Germany, are actually doing quite well. What is this doing? This is causing a little bit of mayhem, not only on Wall Street, but also a lot of investors thinking about possibly taking money out of the U.S. and going into Europe and other instruments. Of course, what’s happening in Washington D.C. recently isn’t really helping matters. Just before visiting with you today, I was watching the DOW fall practically 400 points today. I think that’s the largest sell-off since last September.

Things do seem to be changing. The U.S. economy does seem to be cooling off somewhat. The stock market, of course, near record highs practically constantly every time you look at the newspaper. That seems to be changing. A lot of investors are starting to think that simply closing your eyes and simply going long stocks may not be the best investment in the world. At OptionSellers.com, we’re not rooting for the stock market to fall, but what we are rooting for is a little bit of volatility. We had very large positions in short options over the last 6 months, allowing decay to happen in mainly gold and silver calls as well as coffee calls. With volatility coming down and the price of those markets falling, we’ve been able to book great profits so far in 2017.

We’ve gone to quite a bit of cash recently if you look at your account. We are margined less at what our target level is, basically trying to be patient and waiting for volatility to come back into the market. Well, we just received that. We are going to be, I think, rewarded quite well in not selling options when volatility is at all-time lows, but trying to be patient and having some powder dry so that when volatility does come back to the market we are able to take advantage of it. That’s what we see happening here in the next 2-3 weeks. Volatility is back. It’s back in a big way.

As you know, for all of you that have read our book and followed our valuable materials, you know that volatility is the catalyst of higher premiums and that is, of course, what we are looking forward to selling. We will be looking at putting an additional 15-20% of your capital to work over the next 30 days as volatility has now begun to pump up premiums on both puts and calls. Again, our two favorite trades going into the summer of 2017 is short natural gas and short soybeans. Not only are these two of our favorite seasonal trades, but the fundamentals bear that position to work quite well going into the 2nd and 3rd quarter of this year.

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 speak to Rosemary about possibly becoming one. As always, it’s a pleasure chatting with you. I’m looking forward to doing so again in 2 weeks. Thank you.

June 01, 2017 01:32 PM PDT

Good afternoon. This is James Cordier of OptionSellers.com with a market update for May 5th. Coming into 2017, we were slightly over-weighted in precious metals, energies, and short coffee. Both seasonal factors and fundamental factors that we’ve been following, especially a slight weakening out of China, has caused these trades to go quite well for portfolios, so far, in the beginning of 2017. We have a bit of a rotation right now.

As you look at your accounts and your positions that we send you once a month, you’re going to notice that our precious metal position has now dwindled because of a great decay on options that we were hoping for. Likewise in crude oil and in coffee. The rotation in May and June is going to be more of a short position in grains. Anyone who has followed seasonal factors that we talk about from time to time, the grain market usually rallies in May and June only to look at plentiful supplies in September and October.

Argentina and Brazil are in the process of producing record amounts of soybeans and, here in the United States, we’re going to be doing the same. We recently rotated out of some of our positions that have done extremely well for us so far in 2017. Into a short position in soybeans, we think that there will be plentiful supplies come this fall and we think that the calls we’ve sold quite highly recently are going to do very well.

Natural gas is another market that we’ve been rotating into. Natural gas, of course, the supplies are plentiful. The market right now is trading around $3.00-$3.50. Here in the United States, the Permian Basin is producing record amounts of natural gas each and every single month. They’re producing natural gas for about $0.90 per million BTUs. We are short that market from approximately $6.50. We think we rotated into the correct market.

We hope to see good returns both in the second and third quarter of this year. We see very good opportunities that we’re into right now and expected to be in coming in the next 30-60 days. We hope to see nice profits and potential return from the positions we’re in going through the rest of the second and third quarter.

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 Tampa about becoming one. As always, it’s a pleasure speaking with you and looking forward to doing so again in 2 weeks. Thank you.

June 01, 2017 01:28 PM PDT

Michael: Hello everyone. This is Michael Gross of OptionSellers.com here with head trader, James Cordier. This is your monthly Option Seller TV Show. James, welcome to the program this month.

James: Always a pleasure, Michael. Glad to be here.

Michael: We have a lot to talk about this month. We have turmoil in Washington, we have some activity coming back to the VIX, and we have OPEC announcements, so there’s some volatility coming back into a lot of the markets. We’re going to talk to James about how that might affect some of the commodities we’re looking at. James, what’s your take on the new burst of volatility we’ve seen?

James: Well, Michael, there is a lot of uncertainty right now. The stock market continues to meander and make new highs practically once a week, it seems, to get a new sell-off, and then buyers come back into the market. The VIX, which has been in the news recently, under 10, which I believe is about a 2 or 3 decade low, basically is saying that there’s no fear amongst investors, continue to pile into the stock market and continue to buy. The volatility index is just starting to pick up, however, in commodities. We’ve seen a dramatic move up in basically the energies and some of the metal VIX indexes, and it tells us that there is some ideas that some large moves in either the stocks or in the dollar denominated commodities might be approaching soon. Of course, we like the VIX going up – that increases premiums on both puts and calls that we follow.

Michael: Now, is that spilling over from equities or anything going on in Washington, or is that happening on its own accord for different fundamentals going on in the commodities?

James: I think a lot of investors are taking the cue from what’s happening from Washington and abroad. We have North Korea, we have a situation with Russia and the election, we have things going on in the Middle East right now along with Washington D.C. and a lot of the proposed changes are meeting some stone walling right now that’s going on. It is causing a lot of uncertainty and, of course, that’s something we enjoy following. Some investors don’t care for that very much but it’s certainly something that we like to see happening and it pumps up premiums on commodity options.

Michael: Well, with that background setting for the month, let’s move into our first market. We are going to talk about the grain markets this month. June is a big month in U.S. agricultural markets. This is typically the month where planting is completed in markets like corn, soybeans, to a lesser extent wheat, cotton, and those type of things. When you look at seasonal factors, the end of planting season can play a big role in that. James, maybe you want to talk a little bit about what that often means for certain grain prices?

James: Michael, a lot of our viewers and listeners here today hear us talk about seasonal factors. Corn and soybeans, a lot of people don’t realize, are practically everything that’s consumed. Whether it’s in China, Europe, or here in the United States, it comes from a kernel of corn or from a soybean. Practically everything we eat, dining out or cooking at home, that’s what takes place. Corn and soybeans are an absolute essential to the food system for practically everyone on the planet. It’s a huge market. The corn and soybean market basically has some type of fear or anxiety going into planting season. The planting season has to be just right or a lot of investors feel that we’re going to have smaller yields and possibly a smaller crop. Generally, it’s either too wet or too dry or too hot in May or June, and that does bid up prices often. Generally speaking, at the end of that rally and once the corn and soybeans are planted in the United States, of course, prices then come back down to earth and, lo and behold, the U.S. farmers are some of the best in the world and sometimes a bumper crop. (4:18)

Michael: Now, when we talk about a market like soybeans, we didn’t really see that big run-up this year. We had relatively stable planting season and I think that kind of moves us toward what the fundamentals were this year. There’s a reason we didn’t really see a big run-up in the spring. Would you agree with that?

James: We certainly haven’t seen that run-up yet. Right now, we have soybeans and corn planting just about on schedule. There was some ideas that there would be delays because of too much rain, but boy… too much rain makes a lot of grain later on this year. There still might be one or two rallies in June or July, possibly, there’s a dry spell in there somewhere. People are also talking about El Niño, which can certainly change weather patterns here in the United States. For the most part, the fundamentals are already in gear for low grain prices at the end of this year. Ending stocks, of course, are extremely high and production out of Brazil is at all-time record highs. So, if we get this weather rally sometimes in June or July, that would probably be a selling opportunity. Of course, for our clients, we are already short the grain market based on the fact that, like you said, the fundamentals right now are going to probably overwhelmed seasonal factors this year. I think we’re on the right side of that market.

Michael: I know you were a proponent of selling calls this month. As far as ending stocks go, as you said, global ending stocks are “over 90 million metric tons”, which would be an all-time record for world ending stocks for the ‘16-‘17 crop year. When we’re going into this seasonal time of year where prices often start to weaken in the summer, as you were talking about, we’re going at with a backdrop of record global supplies. Even though prices have come down, I know you were very interested in selling call options on soybeans, not necessarily because you think the bottom’s going to fall out just because you think it’s going to have a hard time rallying in this type of environment. Is that correct?

James: Exactly, Michael. Of course, as option sellers, we’re not exactly trying to predict where the market’s going to go but, of course, where it’s not going to go. With world ending stocks at all-time record highs, record production out of Brazil and Argentina, record production likely here in the United States. Do soybeans fall 5-10%? We’re not sure, but then going up 30%, of course, seems very unlikely. Of course, as option sellers, we are basically betting where the market is not going to go as opposed to where it has to. This year, with record ending stocks and just huge supplies from everywhere, a 30% rally in prices seems quite unlikely.

Michael: Great. If you want to read James’ feature article on the soybean market for May it is on the blog. You can go back and take a look at that where he really outlines the case for selling calls this month. For those of you that would like to read more about seasonal tendencies and the agricultures or other commodities, you can also read about it in our book, The Complete Guide to Option Selling: Third Edition. That is available on our website at OptionSellers.com/book. James, lets move into our second market this month, which is the crude oil market, which we’ve certainly seen a lot of developments there. A lot has been in the news about crude this month. There’s big talk of OPEC. In fact, today right before we came on camera, we just had a big announcement for OPEC. Do you want to talk a little bit about that and what’s going on there?

James: Well, Michael, ever since you and I have been in this business there has been the old adage of buy the rumor and sell the fact. I think that happened in great text today as the OPEC nations and non-OPEC nations decided, and certainly have been discussing for a long time, to extend the production cuts that were announced approximately 6 months ago. They were going to now announce that there were going to be 9 months of further production cuts. Certainly, that has been well advertised. The market did rally on those ideas over the last few weeks. I think crude oil went up from around 48 to 52 recently based on the fact that they would be extending cuts. Today, the cuts were announced that 9 months would be prolonged into the smaller production of many OPEC and non-OPEC nations. The market answered that with a resounding $2 down and the price of oil went from 52-50. Basically, the world is awash in oil, and if the fact that production cuts are going to be extended, they weren’t really that bullish to begin with. Of course, what’s happening in the United States that we might want to talk about is really the deciding factor and what’s changing oil prices.

Michael: I know, even going into these cuts, you weren’t really bullish on crude and that was because of the supply and the production situation in the United States. Is that correct?

James: Correct. Going into the large announcement from OPEC and non-OPEC nations some 6 months ago, very few people are familiar with the fact that weeks leading up to the announcement, OPEC ramped up production to levels never seen before. Though they did cut for the first time in 10 years, or something like that, production just prior to that went up a million and a half barrels. So, cutting and announcing a 1.5 million barrel cut really doesn’t move the needle at all. Of course, here in the United States, mainly the Permian Basin in Texas, production is now ramping up into all-time record highs. If in fact the U.S. does start producing 10 million barrels a day, which is looking like it will happen late this year or early next year, that completely erases the cuts from OPEC, which were thought to be so bullish, and the bottom line is if we have one more barrel of oil than we need the prices go down. Right now, it looks like we’re going to have approximately 1-2 million barrels more per day than we need going into 2018. The real key is going to be can OPEC stay together, be cohesive with these cuts when prices start to fall in the 4th quarter of this year. They’re going to have to hang tough because if they start cheating, this thing can really snowball and come down. We don’t’ see that happening. There’s something going on in Saudi Arabia as far as their first IPO of the largest extent ever seen before, and they’re going to do everything they can to keep oil prices high.

Michael: That in the backdrop of last energy report here this month, still looking at record supplies for this time of year in the states. I think were 528 million barrels or something like that, which is an all-time record for this time of year. All this news, they’ve really been playing up this OPEC deal in the media for the last couple of weeks. Yet, here we are with a backdrop of record supply. A good point you brought up as well in the newsletter was how U.S. frackers have really ramped up production. I think we’re at 9.3 and I think you said we’re headed to 10 here at the end of the year. You can see right where they made those cuts and you put a good chart in the newsletter of where U.S. production starts trekking up again, just making up for what OPEC wants to give away.

James: Exactly right. It is an absolutely gift to the frackers here in the United States that OPEC and non-OPEC nations are cutting production. It’s keeping prices still relatively high, giving new developments here in the United States chances to lock-in hedges. We were reading in the Wall Street Journal today that no longer are producers in Texas and North Dakota and everywhere in between, they’re not so susceptible to the large moves in the price of oil. They’re getting very sophisticated. A lot of areas, especially in the south, they’re able to produce oil anywhere from $20-$25 a barrel, some as high as maybe $30-$35, but they are now locking in future production using the futures market. When you can produce oil for $25 and sell it for $50 and lock that in, that’s what they’re doing. They’re taking advantage of that. As prices do fall, possibly in the 4th quarter this year, they don’t feel any pain. They just keep pumping because they’re locked into futures price at $50 printing money basically. What that’s going to do is exasperate the overproduction and the large supplies, we think, and then we could look at some prices possibly in the low $40’s to $40 later this year.

Michael: Now, one more thing to talk about here as far as the seasonal tendency goes. We talk a lot about seasonals. Seasonals have kind of been knocked a little bit out of whack since the OPEC announcement back in November, but you are thinking that with the latest OPEC moves, we might see that kind of knock the market back into alignment with the seasonal tendencies.

James: We really see that happening. What OPEC will be likely be doing at the very least is coming close to balancing the market again. We’ve had this boom bust every 6 months for oil production and oil prices over the last 2 or 3 years. That did change with the last production cut announcement 6 months ago. We see a slight balancing of oil production versus consumption, and that should throw us right back into the seasonalities that we enjoy so much. We love going short crude oil just as we’re coming out of driving season going into what we call the shoulder season, which means no longer driving season and yet too warm to have to heat homes and businesses in the Northeast. That is shoulder season. The market rolls over in the 4th quarter of the year so we take advantage of selling calls here in the summer and then reverse that position later this year and beginning of next.

Michael: So, although we are bearish crude, neutral to bearish, we are not positioning money that we need the market to necessarily fall. Let’s maybe talk about for our viewers that maybe aren’t that familiar with option selling yet how you would position to take advantage of this type of market.

James: When we heard of the announcement 6 months ago, we thought that would probably neutralize both bullish and bearish factors. We have too much supply, however we have production cuts from OPEC. We immediately put on a strangle in the crude oil market. We did think that the seasonality would probably take a pause until the end of this year. We basically took the excitement by selling $75 calls, meaning we are betting the market can’t get to $75, at the same time putting on a strangle, and by doing that we sold $33 puts – an absolute enormous window for the market to stay inside. That position has worked extremely well. Both of those positions are approximately 20% of what we sold them for. We should now go back into a seasonal pattern where we top-out in summer. What we mean by that is if oil is trading around 50-51 currently, what we would do is look at the winter contracts, say January, February, March, and look to sell options there. If we sell a $70 call while price of oil is at $50, we are basically betting where the market won’t be. This winter, we do expect the smaller demand season of January-February to take hold of 40% rally in crude oil prices during the weakest season of the year. That’s a bet we like to make and with oil at 50 selling calls, for example, around 70, basically what you’re doing is you’re playing football. You’re not necessarily passing to where the runner is or the receiver is, you’re passing it to where you think the market is going to go. Everyone is bullish in the summer and that’s where you go short. What you do is you throw it to the receiver who is running in January when demand is going to be at its least.

Michael: As far as the market goes, the bulls seem to be running out of arguments here. OPEC was a big thing a lot of them were hanging their hats on and that hasn’t taken place. Now we are into summer driving season, which they will probably be talking up a little more, but with the supply where it is right now, prices tend to actually top in early to mid summer. We are just betting it’s not going to go up. It seems like anything can happen, of course, but it certainly seems like pretty high odds position from that point of view.

James: I think with what’s happened to the market here in the last 6 months, we will have some equilibrium. You have producers locking in hedges, you have smaller production, so these moves from 30 to 70 are probably behind us. Crude oil prices 40 to 55 are more likely going to be the norm here for the next few years. Selling puts and going long in the low 30’s, and selling calls in the mid to upper 70’s, I think, is going to be a cash cow the next several years. As you said, anything can happen. We will have to wait and see. Selling options 40% and 50% out-of-the-money in crude oil, I think, is going to be ideal. That market is going to start finding equilibrium and some sort of balance, and what we call historic volatility is still in when you price options. The new norm is going to be more of a $40-$50 price and the volatility that was created over the last several years allows us to sell options 40%-50% out-of-the-money. That’s why we talk about volatility. That is the life-blood of what we do. From time to time, whether it’s fear of turmoil in North Korea, something going on in the Middle East, that is ideal for us is something that pumps up energy price options and we like to take advantage of that.

Michael: Hopefully the media keeps helping out with that and keeps public buying those distant option premiums.

James: That’s the hope.

Michael: For those of you that like to learn more about the crude oil market and our strategy there, it is our feature article in the June newsletter. That will be out at or around June 1st in your mailbox. Keep an eye out for that. Obviously, in addition to our outline for crude, we also have some lessons in there about how you can sell options and manage risk is our feature this month. So, there’s quite a bit of new information there. You don’t want to miss the June issue. James, lets move into our lesson this month. This is one we haven’t done on video yet, but it is one we have talked about in our booklets if you have received our booklets in the mail. A lot of people that call in will ask us, “How do you pick the option you’re going to sell?” It’s really a short question with a very long answer, but we thought what we could do is just provide a few bullet points that if you are looking at trying to understand how this is done, the type of things we look at when we’re selecting a trade in commodities. There is really 5 things that we look at, James, that you and I have discussed. We’ll just kind of go down that list and talk a little bit about each of them. The first one on that list is something we are very big on which is the supply-demand fundamentals of that individual commodity. Do you want to talk about how you approach that when you’re looking at a commodity?

James: Michael, I think a great analogy is years ago when people were investing in dot-com companies and these are names that you’re seeing on TV, they’re names that people are talking about, and the market started falling and people are looking at dot-com companies… “My gosh, I can buy it at 50% of what the price was just a few months ago. It has got to be a great buy.” They buy XYZ dot-com company, it’s down 50% from its highs, it sounds like a great buy. Then it is down 75% from its high and people are just getting white-walled here back in the crash of 2006, 2007, and 2008. You ask that investor, “What are you getting beat up in?” … “Well, I bought this dot-com company.” “What do they make?”… Not sure. “What do they do?”… Not sure. It is very difficult to stay with a position like that. We do fundamental analysis on about 10 commodities. I’ve been trading silver since when I got my driver’s license. I’ve been trading coffee for the last 20 years. We count barrels of oil constantly to try and understand what the value might be. When selecting short options based on fundamentals, when the market moves a dollar against you or people are on TV yelling about OPEC announced the cut or the market is up or down, for an investment to work you have to have staying power. You can’t get bumped out of the market on a small move. So often, if you have fundamental research and analysis, you’ll know that when the market moves slightly against you it is just noise. Computerized trading is moving the markets a lot more than it used to. We love computerized trading, it’s making our options more liquid to trade, but it also does send gyrations through the market from time to time. Having the fundamental research already in place allows you to be patient with your position. We sell options based on fundamentals. If they are not there, or we’re not sure what they are, we simply wait 6 months for them to maybe become more clear in a particular market. We want to sell options far enough out in time and price so that small gyrations in the market doesn’t disturb our position. How often does someone who does look at selling options on commodities or stocks? They’re attracted to selling the short-term option, selling a 30-day option or a 60-day option thinking, “Well, I only have a short period of time. That’ll have to wait.” But what ends up happening is a small move knocks you out of that position. Of course, what happens once month later is that market’s doing exactly what you thought it would do, except you don’t have your option anymore. We look at selling options 6-12 months out. If we thought the sweet spot for short options was closer in than that, that’s what we would do, but I have found that selling options 6 months out-12 moths out allows you the selling power to stay in your position. We were based on fundamentals when the market goes slightly against us, we just aren’t able to have patience and let the market come to us.

Michael: When you know the underlying fundamentals, it’s really giving you the confidence to stay in a position and not get shaken out by this or that or what’s on the news today, which, you know, we talk about over and over and over again in everything we do.

James: Writing short options, you are one thing – you are paid to wait. If you know what the fundamentals are and if they’re on your side it makes it much easier to do that.

Michael: When we’re looking at trade, we look at fundamentals first. Second thing we’re going to look at is seasonal factors, which we’ve already touched on a little bit here today with some of our other things, but seasonals kind of play into the fundamentals because they’re really just reflecting certain fundamentals that tend to happen at different times of year.

James: Exactly right. With the grain market, seasonal factors are there’s fears of planting, too hot or too dry conditions in the summer, and then you go right back to supply and demand in the fall. What seasonals do is they are basically fundamentals. It tells you exactly when the demand might be the most for gasoline, when the demand for natural gas might be the least. What it does is it helps us decide whether we should be long or short that particular market. If you combine that with a supply and demand, basically you are putting everything in place to allow you to put on a position and to stay with it.

Michael: So, those are going to be the 2 core factors we look at when selecting a market. Obviously, the third thing on the list is volume and open interest. We have to find a market that not only is seasonally or fundamentally favorable, but there has to be enough options in there for us to go in and sell some. If there isn’t sufficient volume rope and interest, it’s not a viable market, so that’s the third selection process. That’s kind of self-explanatory, you probably don’t need to expand on that I wouldn’t think.

James: Just the algorithms and the computerized trading is just making option selling just such a pleasure right now. The volume and open interest is increasing dramatically, even on far-out options. Making sure that there’s the ability to get in and out of the market is, of course, of the utmost importance. With computerized trading it is certainly helping a lot.

Michael: We are using those 3 things to really select our market. The last 2 things on the list we are using for timing. What you’ll find is the last 2 things on our list are usually the first things that most option books will tell you to look at, or option gurus or option traders. That’s volatility and the technical setup. Those are the last things we’re looking at because by the time we are looking at those we’ve already picked the markets we want to be in. we are just using those 2 things for our timing, correct?

James: Exactly right, if you’re trading a 2 week or 4 week option, you do need to have perfect timing. We have done all of our homework basically telling us whether we want to be long or short a particular market. Once we’ve made that determination, we try to blend in a little bit of timing to help us sell options when they might be at their peak or close to it. The desire or the need to have perfect timing with our form of option selling isn’t there, but certainly when we can see some technical buying or selling it can increase options that we’re looking to sell maybe 10-15%. We will certainly take advantage of that when we can.

Michael: For those of you that are interest in this, we do get a lot of questions on this so we are probably going to be doing some new upcoming videos on these things, how you can use them, how we incorporate them when we’re managing portfolios as well. You’ll kind of learn from both sides of that. As far as just a little update here for this month, our waiting list for accounts is booked into July now, so if you are interested in possibly working with us directly, you can call Rosemary to schedule a consultation and she is filling the final slots we have now for July openings. If you haven’t heard about our accounts yet and you’d like to learn a little bit more about them, you can request our Discovery Pack, which looks like this, and that will tell you all about OptionSellers.com managed accounts, requirements, and how you can get started in them. You can request that on our website OptionSellers.com/Discovery. We thank everyone for joining us this month. James, thanks for your analysis this month.

James: My pleasure, Michael. Always enjoy it.

Michael: We’ll look forward to talking to you again in 30 days. Thank you.

April 24, 2017 09:54 AM PDT

Michael: Hello, everyone. This is Michael Gross, Director of Research here at OptionSellers.com. I’m here with Head Trader, James Cordier, with your monthly Option Sellers Audio/Video Podcast. James, welcome to the show.

James: Thank you, Michael. As always, it’s a pleasure.

Michael: we are going to talk a little bit about what’s going on in the world right now and we are going to get into some of our key markets for this month. James, obviously anybody watching the news this month has had quite a bit to look at. We have North Korean missile test, we have Russian bombers flying over the Alaskan Coast, so there’s a lot of geo-political things going on in the world right now. It’s bringing a lot of instability into a lot of people’s thoughts about what may be going on over the next several months in the markets. The VIX and the S&P is up 24% in one week here in April as a result of a lot of this. So, just overall, what’s your take on the month of April as far as the markets go?

James: It’s interesting, Michael. Over the last 6-8 years we’ve had very little of the news that we’re looking at recently. There’s a lot of muscle flexing going on by both Russia and the United States, and maybe China coming up soon. It does have Wall Street a little bit jittery. As you said, the VIX is up some 24% recently and, actually, I think the VIX was testing multi-year lows. So, it always seems that something comes down the pipe to give everyone jitters and I saw the stock markets sold off here recently on some of the concerns going on around the Middle East and throughout Syria and North Korea. I think that’s a necessity to keep traders on their toes and to make sure the stock market and other markets aren’t always on a one-way street. A lot of the traders like the hustle and bustle of the markets going up and down and I guess we do, too.

Michael: Well, we’ll see what happens. I know there’s been a lot of articles as of late. Ron Insana of CNBC, they recently had an article on their website talking about the two things that most often start bear markets and one of them was rising interest rates and the other one was the onset of war. So, let’s hope we don’t have anything like that, but something to keep in mind as you’re planning your stock portfolio or stock option portfolio for the spring and summer months here. Over on this side, we’re going to get into some of the commodities that we feel may be offering some opportunity this month. First on our list is we’re going to talk about the natural gas market. Obviously energy markets is some of the most seasonal markets in commodities. Natural gas, during the month of May, can be a very seasonal commodity. James, you want to give your take on that right now and what you see happening there?

James: Michael, thank you. It’s very interesting throughout the year of the 12 commodities we follow. There will be certain times, sometimes the 1st quarter and sometimes the 2nd quarter of the year, that a certain commodity has the propensity to go up or down based on seasonality. Natural gas is certainly one of those. Generally, natural gas prices will rally during the months of March, April, and May, and then we start building supplies for summer cooling needs. What a lot of people are not familiar with is the fact that to cool vs. to hear requires only 10% of the natural gas that it does during the winter months. So, quite often, natural gas has a rally going into spring and summer thinking, “Well, it might be a hot summer” and it turns out that natural gas usage to cool homes and businesses in the winter is like 10% of what it takes to heat homes and businesses in the winter. Subsequently, the rallies in spring and summer do falter. Supplies of natural gas coincide this year with the seasonality of the market falling. We’re approximately 16% here in the United States over the 5-year average. What’s so interesting right now, Michael, is areas like the Permian Basin, which has new drilling for oil, new production for oil, and a lot of people talk about energy that way. The Permian Basin has supplied new production records for the first 5 months of this year. That’s expected to continue. Natural gas production in the United States to pull a million BTUs cost approximately $1. We have natural gas prices trading around $3-$3.50 per million BTUs. That’s a whole lot of anchor pulling this market down when you can produce something for 1/3rd of what you can sell it for. That’s a lot of downward pressure. We think that natural gas at around $3.50 right now per million BTUs is probably fair value for this time of the year. Going on to summer and fall, we probably expect natural gas to tweak down to around $3, and for seasonality traders and for what we’re doing for our clients right now is we’re positioning for weaker natural gas prices for the fall and winter of this year. We are selling natural gas options, right now, double the price of the current value. This is one of our favorite seasonal plays for 2017. We just started walking into it recently and, I think, later this fall and winter, a lot of these natural gas calls that we’re selling will likely be worthless and should definitely add to one’s portfolio this year.

Michael: James, that’s a good point. You’re talking about those contract months that are going a little bit further out and you’re already looking at winter 2017-2018. When we’re looking at the supplies right now, as you talked about, we are 14-16% above the 5 year average for natural gas supplies, and when you’re talking about the seasonal and you have a situation right now where this winter is over, supply is starting to build again. As the supplies start to build, obviously that means you have higher supply in storage that also coincides with lower prices because as supply rises price often goes down. So, what you’re saying is we’ll go to the back contract months and take advantage of what we expect to be lower summer prices. That doesn’t mean we’re going to be getting those options all the way to December or January. If we do get to that decline, we could get out of these quite a bit sooner.

James: Exactly, Michael. A lot of our clients, and some of the people following us today, are very familiar with what we call the early buy-back. Generally speaking, if you are writing options in a portfolio, of course, if you have a portfolio with us you’re familiar with this, if you’re selling options for $700-$800 per contract and you see them trading 6 months later at $70-$80 per contract, that’s a perfect candidate for an early buy-back. We will very unlikely hold these options until they mature this December and January. Of course, they mature or expire, should I say, a month before they’re named. Odds probably in October or November, a lot of the options that we’re selling now will probably be worth 10% of their initial price-- very good candidates for early buy-backs. A lot of investors who sell options in their portfolio, they are talking about selling 60-90 day options. We feel that the sweet spot for selling options if further out than that. The small movements that happen in the market, technical buying, technical selling, if you sell too short period of time, these small moves can knock you out of your position. We don’t want a headline to knock us out of our position, and that’s why we sell further out in time and price. If the sweet spot for selling options was a tighter amount of days, like 30 or 60 days, that’s what we would do. We feel that the opportunities for very high probability option selling is further out in time. We’re paid to wait and that’s what we do. Patience is the name of the game. When you’re selling based on fundamentals, it gives you the patience to stay into a market. When you’re selling an option simply because, “Well, the decay is supposed to be the quickest between 60 and 90 days” and the market goes against you, you don’t know why you’re in that position and that makes it very difficult to have patience and the wherewithal to stay with a market. If you’re selling options based on fundamentals like this position would be, when the market goes against you a little bit, it allows you to hang onto the position. Quite often, they’re going to expire worthless. You need to be patient. As long as the fundamental is on your side, you don’t mind waiting.

Michael: Okay. Let’s talk a little bit more about that buy-back. We were going to do this at the end, but since you got into it now let’s go ahead and talk about it now. It’s an important point a lot of people, when they’re first getting into selling options, especially commodity options, they’re thinking that same point you brought up—“Oh, I need to sell 30-60 days.” Obviously, we prefer to sell longer than that because, often times, you’ll get a primarily portion of that decay long before those options are every scheduled to expire. So, a question I often get is, “Well, how do you know when to buy it back? What level do you wait for before you buy it back?” That’s probably a good question for you to answer. What do you look for?

James: Sure. Once an option has decayed 85-90%, the majority of that premium is pure risk. When you’re collecting $700, the option is trading at $70, you really need to do very little homework after that. You’ve collected 90% of the potential premium. Buying back an option with 90 or 100 days still remaining on it, we do this, as you know, quite often. If the option is trading at 60 or 70 and there’s 100 days left on it, that option’s going to sit at that price for a long time. At that point, you’re really not getting paid to keep that risk involved in your account by holding that position. 9 times out of 10 that option is going to go to zero. 9 times out of 10 it would have been an okay idea to hang onto it. When managing portfolios, the risk/reward is always what you base all of your ideas on. You’ve collected 90% of the premium, you no longer have to watch the weather, you don’t have to watch the supplies, you don’t have to look at the calendar, you just need to place the order and buy the option back.

Michael: Yeah, that’s a good question. Before the show here today we actually had a client visit. One of the things he was asking was, he was looking at his account saying, “Boy, I see we have a lot of expirations scheduled for September, October, November. Will it be then I can expect to realize the profits on these options?” That was the exact point I was explaining to him- no, not necessarily. You could be taking profits on these things in June, July, August if everything is going well. That was a point, especially if you’re new to commodities option selling or option selling in general, it’s a big point to realize- we’re not always holding these things to expiration. In fact, most of the time, you probably can buy them back early and cut that risk and put that capital into a different investment. If you’d like to learn more about the early buy-backs and looking at the fundamentals in some of these markets, the best resource we can recommend is our book, The Complete Guide to Option Selling: Third Edition. You can get it on our website at a little bit less than you’re going to pay at a bookstore or on Amazon. The link is www.optionsellers.com/book if you’d like to get your copy there. James, let’s move into our second market for this month. One of your all-time favorite markets: the coffee market. Right now, we’re at a key point in time where we’re right ahead of the Brazilian harvest. That can bring a very interesting seasonal into play, one that option sellers can use to their advantage. James, you want to give the overall synopsis of that market right now?

James: Certainly, Michael. In 2016, parts of Brazilian’s coffee belt did experience extremely dry conditions and here’s where you need to do your homework just a little bit. Brazil is basically just a ginormous farm, whether it’s cocoa or soybeans or coffee or sugar, basically that’s what the Brazilian nation is made of. The coffee belt is enormous. In 2016, there were dry conditions in a lot of the coffee growing regions. It was primarily in the Robusta region of Brazil. We trade primarily Arabica coffee. The Arabica crop was doing extremely well last year, but all you heard about was the driest conditions in 15 years in Brazil. It primarily was hurting the Robusta crop. The Arabica crop did receive plenty of rain. That volatility and that news headlines that coffee was getting last year pumped up, especially coffee calls, giving it historic volatility that will now create extremely expensive coffee options this year, next year, and probably 3-4 years out. Believe it or not, it does hang on that long. This year, 2017-2018 crop, is the off-cycle year; however, Brazil is expected to produce nearly 50 million bags of coffee this year. Next year, the on-cycle for production would be approximately 60 million bags. This type of production doesn’t mean that coffee will never rise in price. Sometimes it will fall and sometimes it will go up. This prevents the really large move in a certain direction. When you’re able to make coffee beans to that extent, to kind of give you a focus idea, not that long ago Columbia was the largest producer of coffee, producing 10 or 20 million bags of coffee. Everyone counted on Columbian beans to supply the world. Brazil is now making 50 and 60 million bags of coffee. This year’s expected to be an off-cycle crop record year. Next year will likely be a record production year in Brazilian coffee. That is production that we see coming down the pike. How are supplies now? In the United States, it was just broadcast this past Monday that coffee supplies in the United States are at the largest level since they’ve been counting coffee beans starting in 2002. So, supplies here in the United States are at all-time highs. Production in the next 2-3 years is expected to be a record. Seasonality for coffee, as it normally rallies in April or May, the Brazilian starts in earnest in June, July, and August, these coffee beans then are looking for a home. That’s when prices tend to fall. Coffee recently has rallied up to 140-145 level. Selling coffee calls for late this year, beginning of next year, is just a sweet spot and an ideal candidate for option selling going forward for this year. The natural gas looks like a very good opportunity. Coffee is just a great way to diversify your account. We really love the aspects for coffee to be having probably an overabundance supply over the next year or two. We’ll be looking at selling coffee calls this year and next. Generally, you sell them in March and April and the market starts to fall as Brazilian products come in June and July. This year looks like it’s a good setup, as well.

Michael: James, we’ve already had a pretty good downward move in coffee and I know you’ve been selling these most of the month. One thing I noticed is even with that downward move in prices, that volatility that we got from the drought you talked about back in the fall, that’s still in the market. So, you can see, even though you’ve had a downward move in prices, you can still sell coffee calls so much further above the market. That’s just the added value of that volatility that’s still working in there.

James: The volatility is something, as we were discussing earlier, the VIX on Wall Street rallied some 24%. Volatility allows someone who maybe has missed a position or I missed a buy or I missed a sell on options, or basically anything else. On commodity options, that volatility allows the person who did get in on the low and the market’s rallying, you still have time to sell puts. A market that’s falling and you didn’t get in on the sell on gold calls or coffee calls or whatever it happened to be, that volatility allows you to not have to be in on the high or low day. The volatility still stays there and really gives the person the ability to take their fundamental analysis, put the position on even though you didn’t catch the low, you didn’t catch the high. The coffee market did weaken recently, just like we expected it to. We think that selling calls in coffee on subsequent rallies is still going to be a very good idea.

Michael: So, the market’s over sold right now and we get a little bump, that might be an opportunity for some people that are watching this that might want to look to enter. That might be a good opportunity for doing that.

James: We’ve been selling coffee calls with both hands here recently and it did just slide over the last week or so. The months of May usually has some up-turns in coffee, so we’re not expecting that coffee is going to be down and out for the rest of the year. We would expect some higher priced days in the coming month of May. We will be looking at that to add into our short position in coffee, yes.

Michael: So, much like in the grain market, as the harvest begins supply start to rise and as supply rises that often contributes to an overall lower gravitational pull of prices. That’s what James is talking about taking advantage of here. If you would like to learn more about this trade and the coffee market, you can look at our blog post on coffee that was posted earlier this month. That is available on the blog. If you’re interested in learning more about the natural gas market, that is going to be the feature in our upcoming May Newsletter. You can certainly take a look at that. That should be in your mailbox and e-mail box somewhere on or around May 1st. Keep a look out for that. We also have a good feature in there this month on proper diversification and some of the best ways high-net-worth investors can use to diversify into alternative investments. Keep an eye out for that. James, I believe we’ve covered the topics we wanted to cover this month. For those of you who are interested in a potential managed portfolio with our firm, we do have no openings left available in May. We do have a handful still remaining for June, so if you’re interested in one of those remaining openings in June feel free to call the office this month. You can call Rosemary at 800-346-1949. She will schedule you a free consultation. Those will take place during the month of May for June openings, so if you’re interested in that please feel free to give her a call. James, any last words on the markets this month?

James: Diversification really seems to be the word of the year right now. So many investors that seek our guidance and seek accounts with us, that is the word that everyone is using. No one is really quite sure what’s going to happen with the stock market or the economy, for that matter, and diversifying away from stocks is something, I think, a lot of investors are doing. We’re not sure if this economy is a 4% economy or a 1% economy. Lately, it’s going to be the latter, and it’s interesting to see how the stock market’s going to continue its ascent while that’s the case if the economy is slowing. Maybe demand for stocks and certain real estate and such might be waning. This is certainly a sweet spot for us and we certainly enjoy what a lot of investors are seeking right now.

Michael: Well, it should be an interesting summer for stocks. Here in commodities, though, I think it’s business as usual and I think we’ll just keep doing what we are doing. Well, everybody, we’ve appreciated you watching this month and we will be back in 30 days. Have a great month of premium collection. We will talk to you in June.

March 31, 2017 09:12 AM PDT

Michael: Hello everybody. This is Michael Gross of OptionSellers.com. I’m here with head trader James Cordier of OptionSellers.com with your February Option Seller Radio Show. James, welcome to the show this month.

James: Thank you, Michael. As always, enjoy doing these and brining more and more information and educating investors out there to what we do.

Michael: Excellent. We’re going to start off this month, to all of you listening, we’re going to answer some common questions we get through the blog or online. One of the most common questions people ask us is “I really like your stuff. Is there a way I can sign up for your course? Do you offer seminars I can attend? If I pay you, can you coach me how to do this?” … or various forms of that question. We get so many of those and we wanted to answer that question today and maybe shed some light on that for you as a listener. James, do you want to go ahead and maybe take a stab at answering that?

James: You know, what’s interesting, Michael, we definitely enjoy getting feedback from everyone listening to this podcast each month. Please continue asking questions and any feedback is always accepted and we enjoy receiving that. Primarily, we don’t mind and enjoy educating the public. So often, investors are looking for alternative ways to take care of their nest egg or try and build the one that they’re trying to create. Basically, there’s a few investments out there. There’s being long in the stock market, there’s buying real estate, and as long as both of those are going up I think they’re very sound, great investments. But for people looking out 5, 10, and 15 years to expect everything to keep rallying indefinitely certainly is not the way. Educating yourself as to how to help manage your own portfolio, I think, is a great idea. We continue to give information and help teach people how to sell options and take in premium and, hopefully, make really good returns each year whether we’re in a bull or bear market. However, the majority of our clients and the most of the work that we enjoy doing is taking and investing with high-net-worth capitalized investors. That is our niche. That is what we do. The fact that we are a relatively small company and we don’t have thousands of clients, we’re able to be more nimble getting in and out of the market for some of these high-net-worth investors. As far as anyone wanting to follow along with what we do, educate themselves to selling options and taking in premium as we do, we’re going to continue educating people and allow them to do that on their own, if they wish. For the investors who are more apt to hire a manager to do it, certainly, that is our bread and butter and that’s what we’re doing here.

Michael: It’s a good point, James. To shorten what James said a little bit and maybe sum it up a little bit is yeah, we do appreciate those offers and we do appreciate your questions, but we’re not in the education business here. We are money managers. That is the service we provide. We do provide a lot of educational material to anyone, the general public. We like to make it as high quality as we can. I think some of the things you’ll find on our website or that we send out to prospective investors is comparable to what you might pay thousands for in a course somewhere. That is something we provide for free. We enjoy that, we enjoy brining that message to the public and helping people understand this investment, because there really isn’t a lot of information out there on selling options in general but, especially, selling options in commodities. We’re simply out to help people understand that better and get more people involved in this because it can be a great investment if you understand how to do it. James, let’s move on a little into our main discussion here this month. We’re going to address what’s going on in the stock market because all investor’s eyes are on stocks now. They’ve been soaring. Some people are calling it still a post-Trump surge, but we’ve got some grayer clouds on the horizon. We’ve got North Korea and Iran shooting missiles off, we’ve got a lot of discord here in the United States. What’s your take on what’s going on right now in stocks? How do you feel about the market?

James: Michael, I think that a lot of investors have just been waiting for the greatest country in the world to be run like a company and not like a politically correct viewpoint. Lowering corporate taxes, bringing money back to the United States, lowering personal income taxes, de-regulation, making it easier for companies to hire and re-invest, and it’s simply a near perfect platform right now for economic growth here in the United States. If you look at some of the European countries, they are starting to finally lift off. PMI numbers today out of Europe was some of the best in over a handful of years. We are certainly the boat that everyone follows. As the tide comes up, it comes up for everybody. People are extremely optimistic about the U.S. economy right now. Usually, the stock market is 6-12 months ahead and right now the stock market is telling us that the U.S. economy is about to start improving more than a 2% GDP… maybe a 3-4% GDP. So many people have been waiting for an economically friendly environment. Right now we have one and people are voting with their pocketbook.

Michael: So, are you concerned at all about the lofty levels that we’re at? On Barron’s last week, Kopin Tan was talking about 76% of world stock markets are now over-bought. Does that concern you at all?

James: You know, it’s interesting, Michael, overbought doesn’t mean over. I could see this exuberance probably lasting for a period of time. Right now, investors, I think, are so excited about getting into the market. Will profits match the soaring stock prices? That remains to be seen. There definitely needs to be some catch up. The market is either ahead of itself or very close to that; however, I think investors have been waiting for this for a long time. I could see 2017 probably being a decent return on the stock market, but there is no question that second or third quarter of this year a few people start taking profits and then all of the sudden there’s no one left to buy. For us to get a 5-10% correction on the stock market at some point this year is probably quite likely.

Michael: Thus the need for sound diversification and that’s what we’re going to be talking about next here. James, we’re going to talk about one of your favorite markets next which is the gold market. You have a nice commentary this month on your bi-weekly videos where you’re talking about gold and a strategy investors can use right now in that market. Let’s talk a little bit about gold, what you like about it right now, and why you think that’s such a cash cow for investors.

James: It really is. We have been following the gold market for a couple decades. It seems to be such a mystery as to what the value of gold should be. Sometimes it trades like a currency, sometimes it’s flocking to gold because of inflation or because of political concerns. It is absolutely, in our opinion, trading right now at fair value and yet there are so many questions about gold. “What will higher interest rates in the United States do? Will that push gold back down? I heard that there might be some inflation”, an investor might say. “That’s usually bullish for gold.” Talk about a goldilocks environment right now for gold. We have a stronger U.S. economy, which should provide some inflation, and yet we are definitely, in the United States, looking straight at at least 2, if not 3, interest rate hikes. That should keep the dollar firm. So we have people just absolutely wondering how high gold might go and you have an equal number of people saying, “With higher interest rates, gold is going to go down.” That uncertainty is the bread and butter of selling options. Gold right now, trading around $12.50 an ounce, there are people very interested in buying calls 50% above the market right now. Similar interest in people buying puts, believe it or not, 30-40% below the market. If you add up those two percentages, you’re talking about practically 100% strangle around the value of gold and, in my mind, trading gold now for some 25 years, that is about the best trade on the board. We think that’s going to probably carry on into 2018, as well. We’re just really happy about the enthusiasm that people have buying options on both sides and we’re going to take advantage of that.

Michael: So, a lot of this political turmoil in the news right now is really helping that trade is what you’re saying, because that’s really bringing the public in. Gold is a great market to speculate in for the general public. When you get news of things that make people uneasy, when you see Iran shooting off missiles, when you get the daily news, people don’t agree with what Donald Trump’s doing sometimes, those are the type of things that can bring a lot of investor interest into a market like gold, and that’s why you get these wide strikes. That’s what James is explaining. If you’d like to learn more about the strategy of strangling the market, The Complete Guide to Option Selling gives a thorough explanation. That is the Third Edition. You can get that on our website- www.optionsellers.com/book. You’ll get it at a little bit of a discount there than if you get it at the bookstore or at amazon. James, let’s move on here to our next market this month, that’s the natural gas market. As most of you listeners know, we due follow seasonals very closely here. If you’re trading options in commodities, seasonals are a prime thing you want to look at first, especially in cyclical markets like natural gas. James, you want to take us through where we are with natural gas here in late February 2017 and what tends to happen there cyclically in that market over the next 30-60 days?

James: Michael, natural gas is probably the most interesting of all the seasonals, I think, that we follow. Generally speaking, the investor public comes into natural gas to buy it for possible cold winter, they buy natural gas and natural gas calls in November and December. For those who are our clients or listen to some of the recommendations we made, generally speaking, you do the exact opposite. You fade what the public is doing. They’re buying calls, they’re buying natural gas going into winter season. We did that again this year. We saw about a 1 cent spike in natural gas prices. Natural gas generally tops out in December with cold temperatures going through the Northeast and the Midwest, only to come back down in February and March as the winter never seems to be quite as severe as they thought. Then, investors will think, “Well, if the market didn’t rally in this winter then it’s probably going to go down some more in the spring.” That’s just the opposite of what the seasonality is. Generally speaking, supplies of natural gas are their smallest as we come out of the winter heating season, then they start to build supplies and purchases need to be made and natural gas prices normally start heading up in March, April, and May. That is what we’re going to take advantage of the next week or two, is we will be selling put premium below the natural gas levels that we’re hitting right now. We’ve had an extremely mild February, probably March as well. We’re looking at very low prices right now for natural gas and we see the chance for 10, 15, 20% rally in prices starting in March and April. We’re going to be positioning in the coming weeks getting long this market. Seasonally it goes up in spring and we’re going to try and take advantage of just that.

Michael: What’s the volatility like there now? Can you sell spreads there or is it primarily naked positions that you’re looking at?

James: Well, natural gas used to trade at $10, $12, and $15 per million BTU’s. Now it’s trading around $2.50. It’s so interesting that this is probably the fuel of the future and right now it’s practically being given away. We would be selling naked natural gas puts primarily because the market is so low right now. If the volatility continues, and it has just recently, we’ll be looking at doing credit spreads on the put side, as well. So, basically taking a slightly conservative position and a slightly aggressive position because the market is so weak and so low right now. We’re looking at China’s involvement in natural gas imports for the first time since anyone can recall. At the same time, the U.S. is going to be exporting natural gas for the first time in decades. All of these items are going to be slightly bullish or very bullish for natural gas later this year. We think that’s probably the best seasonal to be getting involved with right now.

Michael: Right now, in talking about natural gas, James, about 48% of all U.S. homes use natural gas for heating in the wintertime. Another 37% use electric, which usually comes from power pants fueled by natural gas. So, you do have your peak demand season in the wintertime and what James was just describing is, and we’re going to put a chart up here for you to look at, but gas storage levels tend to hit their lowest levels of the year in March and April. That’s the reason for this. When supplies are lowest, prices tend to get the strongest and they continue to get strong as they rebuild inventory. James, what you were talking about though, selling naked, some people that sell options, some in stock options, they shy away from that; but, in commodities we’re able to sell them so far out-of-the-money that you get a pretty big cushion there and you don’t really have to pick the bottom in the market. You simply sell and even if your timing isn’t right you can still get it. Do you see, if you’re looking at selling naked, what’s your cushion like? Do you still have a pretty good cushion there to give you some leeway if you’re a little early or a little late on the trade?

James: Yeah, I think there’s a really good cushion and natural gas is probably one of the more historically volatile markets. When it was trading at $10 and $15, that volatility is still in the market, now it’s trading at $2.50-$2.75. For the spot contracts, we would be looking out September, October, possibly that far out. Those markets are well above $3.00 right now. Might be teetering on that in the week or so to come; however, some 20-25% below the market there’s excellent premium right now. That’s what we’d be looking at taking advantage of. If the market heads a little bit lower, probably selling premium 25-30% below the market. We think that’s an ideal way to get long the market. Natural gas, if you were to buy it at a certain level and fall slightly, that’s one thing. Selling puts some 25% below the market, I think, is an ideal way-- Actually, in my opinion, a conservative way to get into the market. Natural gas over the next several years is going to be in an up-turn based on Chinese demand, Chinese importation, and finally the U.S. getting to export natural gas for the first time in quite some time.

Michael: That and even supply right now looking somewhat bullish in natural gas. Supplies this month are 9% below last year at this time… almost 9% below at 8.9%. So, you have a strong seasonal tendency, you have a bullish supply setup, and what you’re saying, James, is you’re able to go 25-30% underneath the market. For an option seller/a put seller to win here, he can take in a premium of what, $500.. $600.. $700? Is that the range you’re typically looking at? Correct?

James: Yes. With the recent weakness in natural gas because of some very warm temperatures in the Northeast, yes a lot of options are trading right now between $600-$700 and that is certainly the sweet spot for where we like to write puts, especially in natural gas.

Michael: So, what that investor would be saying is that as long as natural gas doesn’t fall another 25-30% at its most bullish time of year with a bullish supply setup, the option is going to expire and he’s going to keep that premium?

James: Exactly. In addition, a lot of investors who are familiar with stock options selling and the high margin requirement, natural gas you’re looking at just 2-3 times the premium that you take in for margins. Your ROI looks really good, as well. Needless to say, we don’t know what natural gas is going to do the next 30 days, but we do know what the fundamentals are and the chance for natural gas to get a small or large rally this summer look quite strong to us.

Michael: Sounds good, James. For you listeners, I know a lot of you listening have heard us for a while and you know what we’re talking about, you know the strategy, but we are making an attempt to over-simplify things a little bit for our new listeners out there that may be unfamiliar with how commodities options work. So, we want to make sure we hit all the bases for everyone listening. We’re going to take just a minute here and give you a little preview of the upcoming March newsletter. If you are on our mailing list, you can expect this next week first couple days of March. You should also be getting an e-version of that in your e-mail box. We have a pretty full issue coming up. We have a lesson coming up on how to use leverage in commodities. We have a lot of stock options sellers that have never sold commodities options. This is a lesson in the newsletter that’s really going to bring you up to speed on how the leverage works and how to use it to your advantage the correct way. We also have a strategy, it’s another little bit more advanced strategy this month- we’re talking about an options spread. It’s entitled The Crack Squeeze. It is in the energy markets. We’ll have to wait for the newsletter to read that and see one of the strategies we’re employing right now in those markets. Look for that in your mailbox or e-mailbox first week in March. James, talking about energies, let’s move over to the crude market. We have a really interesting situation setting up there between the seasonal and existing fundamentals that often times you don’t see, kind of conflicting things going on there right now. Do you want to talk about that a little bit for our listeners?

James: Definitely. Crude oil is certainly one of the most liquid of all commodities as far as volume, open interest, and participation by investors all around. Not everyone is trading pork bellies and potatoes, but a lot of people know what the price of crude oil is. A lot of people bet with their pocketbooks what they think it’s going to do. Generally speaking, crude oil supplies are at their greatest in January and the market starts to rally as we approach driving season. As I think we all know, this year was different. OPEC together, along with non-OPEC nations, put together the first production cuts in over a dozen years and voila, we had a $15 rally. Crude oil is now sitting in the low 50’s to mid 50’s for the later months. I think right now is fully priced. Crude oil supplies in the United States are at all-time record highs. While the OPEC cut took a lot of people by surprise, and there are a lot of bullish factors right now from that, or at least a lot of analysts think so, it really is offering lots of opportunities now and coming up probably in April and May. Generally speaking, there’s a lot of interplay when you talk about energies. Generally speaking, what crude oil supplies and fundamentals might be might be different for heating oil or for gasoline or for natural gas. Probably the next 30-60 days we see crude oil prices very well supported by the idea that a lot of investors are pouring into that market because of OPEC production cuts. Some of the markets like heating oil generally are going to start heading lower after the winter season. So, often you’re going to see March, April, and May crude oil prices inching up while heating oil actually is falling. There is definitely an opportunity involved with that. For our clients, we manage that for them. For the novices, it can be a little bit much, but that’s another reason why you follow seasonality and why you keep well tuned into the market. We think that over the next 60-90 days we’re going to have really long lasting opportunities in energy. I would say in April and May is going to be the biggest one for the year, and that’s in the crude oil market. We’ll wait and see and talk about that when the time comes.

Michael: As far as the energy seasonal goes, that is a major seasonal tendency. What James is explaining is being counter-balanced this year by fundamentals. As you mentioned, James, crude stocks at record highs… over 508 million barrels. That’s an all-time high for crude oil stocks, not for this time of year, but forever. That’s the highest it’s ever been. Also, interesting article in the Wall Street Journal today talking about bullish long positions in crude oil. 10 to 1 – is that what we were talking about earlier, James?

James: Michael, every morning I have my favorite cup of Joe and I read the Wall Street Journal. This morning I read, and it has been well published recently, but today almost hit a crescendo, that fund traders in the world have amassed the largest long position ever in crude oil. It trumps their short position 10 to 1. That, in my opinion, is the most lop-sided position I’ve ever seen, especially in something as liquid as crude oil. While these speculators have time on their side right now, the months of March, April, and May are generally good demand for oil and smaller inter-production coming out of OPEC. That is definitely a wall that could come crumbling down. I would not want to be the last person to buy in that market and be holding on the last day because for crude oil to trade around $55 a barrel when in the United States, for example Texas, we can produce crude oil for around $15. You know that in many CEO offices right now and on napkins having a cocktail late at night in a bar there are business positions being put together where we’re going to produce oil at $15 and we’re going to sell it on the board of $55. There’s going to be an opportunity probably in April or May to take advantage of what the speculators have pushed up to probably over-valued heights right now.

Michael: So, that big long position like that, sooner or later, that’s going to have to be unwound. We’ll see how that plays out. For the time being, you still have that strong seasonal in place that has to be respected, so you may have a little bit of balance there in the near term. That being the case, we have outlined a strategy in the upcoming newsletter called The Crack Squeeze. We’ll show you how you can take advantage of that. The premium available in that market right now, that’s a trade for now and the coming 30-60 days we have one of your favorite trades coming up, James, but we’ll save that for next month. For those of you that are interested in learning more about working directly with us through an account for high-net-worth investors, you can request our investor information discovery pack. You can get that at OptionSellers.com/Discovery. We do have a recommended $1 million account size. If you are interested in something like that, feel free to request our information package. It does come with a DVD. James, let’s move into our final portion of the podcast this month. This is our lesson for investors. We’re going to talk about diversification of asset class this month. In our videos, we talk about two important types of diversification. One is diversification of strategy, which some investors are not familiar with. Then, there’s diversification of asset class, which some investors are familiar with; however, our commodities often are overlooked when it comes to that diversification. We’re going to talk about this month some of the advantages, especially for stock options sellers, who are used to writing options in stocks, you understand how that strategy works, some of the big advantages you have by applying that strategy to commodities. James, maybe you want to cover this first. There’s plenty, there’s a couple right at the top though of most interest. What would you consider the top advantage of a commodities option writer over a stock option writer?

James: Well, you know, stock option writers are a lot of our current clients. They eventually were introduced to short options through their stock account writing covered calls and such. A lot of investors started thinking, “Well, why don’t I sell options on stocks? That seems to be my best portfolio gains.” Generally speaking, selling options on stocks you’re selling approximately 5%, sometimes 10%, out-of-the-money, where in commodities when you educate the different ideas of applying short options to different asset classes, investors are absolutely amazed by the fact that you can sell premium 50%, 60%, 70% out-of-the-money. In some of the markets that we sell premiums it’s as high as 100% out-of-the-money with relatively low margin requirements to do so. A lot of investors that study for themselves what to do with their investment and what to do with their nest egg who discover short options, when they stumble across selling options on commodities certainly that is when our phone starts ringing. I think for the fact that we put ourselves out as the premier stock options sellers, rather commodity option sellers, it’s certainly an eye-opener to a lot of people who want to be diversified. Diversification is always the number one goal for a sound investment portfolio. The fact that the stock market right now is in a bull market, it’s at all time highs. At any moment, it can start a 5 year bear market and selling options on commodities allows you to be profitable in bull or bear markets. That’s what’s the real beauty of what we do.

Michael: These don’t just come from us. A lot of these come from our readers/prospective clients that repeat this and these are the reasons we hear the most. That’s why we’re repeating them here. As James was saying, the biggest advantages here is, one, you can sell deep, deep out-of-the-money strikes. Two, you get a potentially high RI because the margins are so much lower than they are for stock options. I know the margins, most of the time, we pay are sometimes 100-150% of the premium. So, you sell an option for $700 and maybe you only put up $700 or $1,000 in margin to hold that. Is that what you’re seeing right now, James, in this condition?

James: That’s exactly what we have right now. We have some of the lowest margins to hold short options on commodities that I’ve seen since I’ve been doing this. Not all of them are that way, but some of the most lucrative ones like the gold option strangle that we’re doing and the crude oil trade position that’s coming up. I’m looking at that already trying to get our ducks in a row for that. You’re looking at about 150% of the premium that you take in is what’s required for margin. That is really not tying up a lot of money to hopefully have very good results at the end of the year.

Michael: We’re talking about selling deep out-of-the-money. That natural gas trade you described earlier, we’re talking about selling 25-30% out-of-the-money. That’s probably about the closest we’ll be to the money when selling options. Would you say that’s a fair assessment?

James: Generally so. Any time someone is selling options on commodities on their own or with us, you’ll notice that the calls are always or most often can be further out-of-the-money for a simple reason. A market can only go to zero, it can’t go below that. When natural gas, which used to trade at $10, $15 per million BTU’s, is trading with a two-handle it can only go so low. The fact that we’re 25% below this market currently, I think, that’s way out-of-the-money. If the market inches a little bit lower, we’ll just continue to sell puts on that market. Often, we’re looking at puts some 40-50% below the money. The fact that natural gas is so cheap right now and the fundamentals look anywhere from friendly to bullish later this year, we think that’s selling them quite a bit out-of-the-money. We think that’s going to be a great position for later this year.

Michael: Of course, one more thing I want to point out… you mentioned a diversification aspect. Commodities in general tend to be uncorrelated to stocks as a whole, but when you introduce the option selling aspect to it it’s a portfolio that’s completely uncorrelated to anything. It’s not going to correlate to equity, it’s not going to correlate to interest rates, the positions aren’t even going to correlate to each other because a market like silver’s going to have nothing to do with the price of corn and the price of corn will have nothing to do with the price of coffee. So, it’s a completely diversified portfolio that isn’t even going to correlate to the commodities indexes. That’s simply because you have the ability to sell options on either side of it. Those would be the three big benefits for you stock option sellers listening. You’re thinking about giving it a try, giving it a look. Those are the three biggest draws to this type of investment. Of course, they’re described in depth in our book or any of our materials on our website. James, I think we’ve had a pretty full session this month and I do thank you for your insights and your sharing of some of your thoughts on the markets this month.

James: My pleasure. Talking about commodities and, not only that, but the approach of selling options on commodities is definitely an eye-opener to many investors and we look forward to doing more so in the future.

Michael: Just an announcement here at the end of our podcast, for those of you considering applying for new accounts, we are closed for March. We are fully booked for March. If you are interested in one of our remaining April openings, please contact Rosemary. You can call her at the 800 number… 800-346-1949. You can also, if you’re an international caller, 813-472-5760. You can also e-mail her at office@optionsellers.com. That is to schedule a phone consultation. We do have a few of those left for March and they would be for April openings. Feel free to give her a call if you are interested in discussing one of those remaining openings in April. Everybody have a great month of option selling. We’ll be back here in March and we’ll talk to you then. Thank you.

March 31, 2017 09:11 AM PDT
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Michael: Hello everybody. This is Michael Gross of OptionSellers.com. I’m here with head trader James Cordier of OptionSellers.com with your February Option Seller Radio Show. James, welcome to the show this month.

James: Thank you, Michael. As always, enjoy doing these and brining more and more information and educating investors out there to what we do.

Michael: Excellent. We’re going to start off this month, to all of you listening, we’re going to answer some common questions we get through the blog or online. One of the most common questions people ask us is “I really like your stuff. Is there a way I can sign up for your course? Do you offer seminars I can attend? If I pay you, can you coach me how to do this?” … or various forms of that question. We get so many of those and we wanted to answer that question today and maybe shed some light on that for you as a listener. James, do you want to go ahead and maybe take a stab at answering that?

James: You know, what’s interesting, Michael, we definitely enjoy getting feedback from everyone listening to this podcast each month. Please continue asking questions and any feedback is always accepted and we enjoy receiving that. Primarily, we don’t mind and enjoy educating the public. So often, investors are looking for alternative ways to take care of their nest egg or try and build the one that they’re trying to create. Basically, there’s a few investments out there. There’s being long in the stock market, there’s buying real estate, and as long as both of those are going up I think they’re very sound, great investments. But for people looking out 5, 10, and 15 years to expect everything to keep rallying indefinitely certainly is not the way. Educating yourself as to how to help manage your own portfolio, I think, is a great idea. We continue to give information and help teach people how to sell options and take in premium and, hopefully, make really good returns each year whether we’re in a bull or bear market. However, the majority of our clients and the most of the work that we enjoy doing is taking and investing with high-net-worth capitalized investors. That is our niche. That is what we do. The fact that we are a relatively small company and we don’t have thousands of clients, we’re able to be more nimble getting in and out of the market for some of these high-net-worth investors. As far as anyone wanting to follow along with what we do, educate themselves to selling options and taking in premium as we do, we’re going to continue educating people and allow them to do that on their own, if they wish. For the investors who are more apt to hire a manager to do it, certainly, that is our bread and butter and that’s what we’re doing here.

Michael: It’s a good point, James. To shorten what James said a little bit and maybe sum it up a little bit is yeah, we do appreciate those offers and we do appreciate your questions, but we’re not in the education business here. We are money managers. That is the service we provide. We do provide a lot of educational material to anyone, the general public. We like to make it as high quality as we can. I think some of the things you’ll find on our website or that we send out to prospective investors is comparable to what you might pay thousands for in a course somewhere. That is something we provide for free. We enjoy that, we enjoy brining that message to the public and helping people understand this investment, because there really isn’t a lot of information out there on selling options in general but, especially, selling options in commodities. We’re simply out to help people understand that better and get more people involved in this because it can be a great investment if you understand how to do it. James, let’s move on a little into our main discussion here this month. We’re going to address what’s going on in the stock market because all investor’s eyes are on stocks now. They’ve been soaring. Some people are calling it still a post-Trump surge, but we’ve got some grayer clouds on the horizon. We’ve got North Korea and Iran shooting missiles off, we’ve got a lot of discord here in the United States. What’s your take on what’s going on right now in stocks? How do you feel about the market?

James: Michael, I think that a lot of investors have just been waiting for the greatest country in the world to be run like a company and not like a politically correct viewpoint. Lowering corporate taxes, bringing money back to the United States, lowering personal income taxes, de-regulation, making it easier for companies to hire and re-invest, and it’s simply a near perfect platform right now for economic growth here in the United States. If you look at some of the European countries, they are starting to finally lift off. PMI numbers today out of Europe was some of the best in over a handful of years. We are certainly the boat that everyone follows. As the tide comes up, it comes up for everybody. People are extremely optimistic about the U.S. economy right now. Usually, the stock market is 6-12 months ahead and right now the stock market is telling us that the U.S. economy is about to start improving more than a 2% GDP… maybe a 3-4% GDP. So many people have been waiting for an economically friendly environment. Right now we have one and people are voting with their pocketbook.

Michael: So, are you concerned at all about the lofty levels that we’re at? On Barron’s last week, Kopin Tan was talking about 76% of world stock markets are now over-bought. Does that concern you at all?

James: You know, it’s interesting, Michael, overbought doesn’t mean over. I could see this exuberance probably lasting for a period of time. Right now, investors, I think, are so excited about getting into the market. Will profits match the soaring stock prices? That remains to be seen. There definitely needs to be some catch up. The market is either ahead of itself or very close to that; however, I think investors have been waiting for this for a long time. I could see 2017 probably being a decent return on the stock market, but there is no question that second or third quarter of this year a few people start taking profits and then all of the sudden there’s no one left to buy. For us to get a 5-10% correction on the stock market at some point this year is probably quite likely.

Michael: Thus the need for sound diversification and that’s what we’re going to be talking about next here. James, we’re going to talk about one of your favorite markets next which is the gold market. You have a nice commentary this month on your bi-weekly videos where you’re talking about gold and a strategy investors can use right now in that market. Let’s talk a little bit about gold, what you like about it right now, and why you think that’s such a cash cow for investors.

James: It really is. We have been following the gold market for a couple decades. It seems to be such a mystery as to what the value of gold should be. Sometimes it trades like a currency, sometimes it’s flocking to gold because of inflation or because of political concerns. It is absolutely, in our opinion, trading right now at fair value and yet there are so many questions about gold. “What will higher interest rates in the United States do? Will that push gold back down? I heard that there might be some inflation”, an investor might say. “That’s usually bullish for gold.” Talk about a goldilocks environment right now for gold. We have a stronger U.S. economy, which should provide some inflation, and yet we are definitely, in the United States, looking straight at at least 2, if not 3, interest rate hikes. That should keep the dollar firm. So we have people just absolutely wondering how high gold might go and you have an equal number of people saying, “With higher interest rates, gold is going to go down.” That uncertainty is the bread and butter of selling options. Gold right now, trading around $12.50 an ounce, there are people very interested in buying calls 50% above the market right now. Similar interest in people buying puts, believe it or not, 30-40% below the market. If you add up those two percentages, you’re talking about practically 100% strangle around the value of gold and, in my mind, trading gold now for some 25 years, that is about the best trade on the board. We think that’s going to probably carry on into 2018, as well. We’re just really happy about the enthusiasm that people have buying options on both sides and we’re going to take advantage of that.

Michael: So, a lot of this political turmoil in the news right now is really helping that trade is what you’re saying, because that’s really bringing the public in. Gold is a great market to speculate in for the general public. When you get news of things that make people uneasy, when you see Iran shooting off missiles, when you get the daily news, people don’t agree with what Donald Trump’s doing sometimes, those are the type of things that can bring a lot of investor interest into a market like gold, and that’s why you get these wide strikes. That’s what James is explaining. If you’d like to learn more about the strategy of strangling the market, The Complete Guide to Option Selling gives a thorough explanation. That is the Third Edition. You can get that on our website- www.optionsellers.com/book. You’ll get it at a little bit of a discount there than if you get it at the bookstore or at amazon. James, let’s move on here to our next market this month, that’s the natural gas market. As most of you listeners know, we due follow seasonals very closely here. If you’re trading options in commodities, seasonals are a prime thing you want to look at first, especially in cyclical markets like natural gas. James, you want to take us through where we are with natural gas here in late February 2017 and what tends to happen there cyclically in that market over the next 30-60 days?

James: Michael, natural gas is probably the most interesting of all the seasonals, I think, that we follow. Generally speaking, the investor public comes into natural gas to buy it for possible cold winter, they buy natural gas and natural gas calls in November and December. For those who are our clients or listen to some of the recommendations we made, generally speaking, you do the exact opposite. You fade what the public is doing. They’re buying calls, they’re buying natural gas going into winter season. We did that again this year. We saw about a 1 cent spike in natural gas prices. Natural gas generally tops out in December with cold temperatures going through the Northeast and the Midwest, only to come back down in February and March as the winter never seems to be quite as severe as they thought. Then, investors will think, “Well, if the market didn’t rally in this winter then it’s probably going to go down some more in the spring.” That’s just the opposite of what the seasonality is. Generally speaking, supplies of natural gas are their smallest as we come out of the winter heating season, then they start to build supplies and purchases need to be made and natural gas prices normally start heading up in March, April, and May. That is what we’re going to take advantage of the next week or two, is we will be selling put premium below the natural gas levels that we’re hitting right now. We’ve had an extremely mild February, probably March as well. We’re looking at very low prices right now for natural gas and we see the chance for 10, 15, 20% rally in prices starting in March and April. We’re going to be positioning in the coming weeks getting long this market. Seasonally it goes up in spring and we’re going to try and take advantage of just that.

Michael: What’s the volatility like there now? Can you sell spreads there or is it primarily naked positions that you’re looking at?

James: Well, natural gas used to trade at $10, $12, and $15 per million BTU’s. Now it’s trading around $2.50. It’s so interesting that this is probably the fuel of the future and right now it’s practically being given away. We would be selling naked natural gas puts primarily because the market is so low right now. If the volatility continues, and it has just recently, we’ll be looking at doing credit spreads on the put side, as well. So, basically taking a slightly conservative position and a slightly aggressive position because the market is so weak and so low right now. We’re looking at China’s involvement in natural gas imports for the first time since anyone can recall. At the same time, the U.S. is going to be exporting natural gas for the first time in decades. All of these items are going to be slightly bullish or very bullish for natural gas later this year. We think that’s probably the best seasonal to be getting involved with right now.

Michael: Right now, in talking about natural gas, James, about 48% of all U.S. homes use natural gas for heating in the wintertime. Another 37% use electric, which usually comes from power pants fueled by natural gas. So, you do have your peak demand season in the wintertime and what James was just describing is, and we’re going to put a chart up here for you to look at, but gas storage levels tend to hit their lowest levels of the year in March and April. That’s the reason for this. When supplies are lowest, prices tend to get the strongest and they continue to get strong as they rebuild inventory. James, what you were talking about though, selling naked, some people that sell options, some in stock options, they shy away from that; but, in commodities we’re able to sell them so far out-of-the-money that you get a pretty big cushion there and you don’t really have to pick the bottom in the market. You simply sell and even if your timing isn’t right you can still get it. Do you see, if you’re looking at selling naked, what’s your cushion like? Do you still have a pretty good cushion there to give you some leeway if you’re a little early or a little late on the trade?

James: Yeah, I think there’s a really good cushion and natural gas is probably one of the more historically volatile markets. When it was trading at $10 and $15, that volatility is still in the market, now it’s trading at $2.50-$2.75. For the spot contracts, we would be looking out September, October, possibly that far out. Those markets are well above $3.00 right now. Might be teetering on that in the week or so to come; however, some 20-25% below the market there’s excellent premium right now. That’s what we’d be looking at taking advantage of. If the market heads a little bit lower, probably selling premium 25-30% below the market. We think that’s an ideal way to get long the market. Natural gas, if you were to buy it at a certain level and fall slightly, that’s one thing. Selling puts some 25% below the market, I think, is an ideal way-- Actually, in my opinion, a conservative way to get into the market. Natural gas over the next several years is going to be in an up-turn based on Chinese demand, Chinese importation, and finally the U.S. getting to export natural gas for the first time in quite some time.

Michael: That and even supply right now looking somewhat bullish in natural gas. Supplies this month are 9% below last year at this time… almost 9% below at 8.9%. So, you have a strong seasonal tendency, you have a bullish supply setup, and what you’re saying, James, is you’re able to go 25-30% underneath the market. For an option seller/a put seller to win here, he can take in a premium of what, $500.. $600.. $700? Is that the range you’re typically looking at? Correct?

James: Yes. With the recent weakness in natural gas because of some very warm temperatures in the Northeast, yes a lot of options are trading right now between $600-$700 and that is certainly the sweet spot for where we like to write puts, especially in natural gas.

Michael: So, what that investor would be saying is that as long as natural gas doesn’t fall another 25-30% at its most bullish time of year with a bullish supply setup, the option is going to expire and he’s going to keep that premium?

James: Exactly. In addition, a lot of investors who are familiar with stock options selling and the high margin requirement, natural gas you’re looking at just 2-3 times the premium that you take in for margins. Your ROI looks really good, as well. Needless to say, we don’t know what natural gas is going to do the next 30 days, but we do know what the fundamentals are and the chance for natural gas to get a small or large rally this summer look quite strong to us.

Michael: Sounds good, James. For you listeners, I know a lot of you listening have heard us for a while and you know what we’re talking about, you know the strategy, but we are making an attempt to over-simplify things a little bit for our new listeners out there that may be unfamiliar with how commodities options work. So, we want to make sure we hit all the bases for everyone listening. We’re going to take just a minute here and give you a little preview of the upcoming March newsletter. If you are on our mailing list, you can expect this next week first couple days of March. You should also be getting an e-version of that in your e-mail box. We have a pretty full issue coming up. We have a lesson coming up on how to use leverage in commodities. We have a lot of stock options sellers that have never sold commodities options. This is a lesson in the newsletter that’s really going to bring you up to speed on how the leverage works and how to use it to your advantage the correct way. We also have a strategy, it’s another little bit more advanced strategy this month- we’re talking about an options spread. It’s entitled The Crack Squeeze. It is in the energy markets. We’ll have to wait for the newsletter to read that and see one of the strategies we’re employing right now in those markets. Look for that in your mailbox or e-mailbox first week in March. James, talking about energies, let’s move over to the crude market. We have a really interesting situation setting up there between the seasonal and existing fundamentals that often times you don’t see, kind of conflicting things going on there right now. Do you want to talk about that a little bit for our listeners?

James: Definitely. Crude oil is certainly one of the most liquid of all commodities as far as volume, open interest, and participation by investors all around. Not everyone is trading pork bellies and potatoes, but a lot of people know what the price of crude oil is. A lot of people bet with their pocketbooks what they think it’s going to do. Generally speaking, crude oil supplies are at their greatest in January and the market starts to rally as we approach driving season. As I think we all know, this year was different. OPEC together, along with non-OPEC nations, put together the first production cuts in over a dozen years and voila, we had a $15 rally. Crude oil is now sitting in the low 50’s to mid 50’s for the later months. I think right now is fully priced. Crude oil supplies in the United States are at all-time record highs. While the OPEC cut took a lot of people by surprise, and there are a lot of bullish factors right now from that, or at least a lot of analysts think so, it really is offering lots of opportunities now and coming up probably in April and May. Generally speaking, there’s a lot of interplay when you talk about energies. Generally speaking, what crude oil supplies and fundamentals might be might be different for heating oil or for gasoline or for natural gas. Probably the next 30-60 days we see crude oil prices very well supported by the idea that a lot of investors are pouring into that market because of OPEC production cuts. Some of the markets like heating oil generally are going to start heading lower after the winter season. So, often you’re going to see March, April, and May crude oil prices inching up while heating oil actually is falling. There is definitely an opportunity involved with that. For our clients, we manage that for them. For the novices, it can be a little bit much, but that’s another reason why you follow seasonality and why you keep well tuned into the market. We think that over the next 60-90 days we’re going to have really long lasting opportunities in energy. I would say in April and May is going to be the biggest one for the year, and that’s in the crude oil market. We’ll wait and see and talk about that when the time comes.

Michael: As far as the energy seasonal goes, that is a major seasonal tendency. What James is explaining is being counter-balanced this year by fundamentals. As you mentioned, James, crude stocks at record highs… over 508 million barrels. That’s an all-time high for crude oil stocks, not for this time of year, but forever. That’s the highest it’s ever been. Also, interesting article in the Wall Street Journal today talking about bullish long positions in crude oil. 10 to 1 – is that what we were talking about earlier, James?

James: Michael, every morning I have my favorite cup of Joe and I read the Wall Street Journal. This morning I read, and it has been well published recently, but today almost hit a crescendo, that fund traders in the world have amassed the largest long position ever in crude oil. It trumps their short position 10 to 1. That, in my opinion, is the most lop-sided position I’ve ever seen, especially in something as liquid as crude oil. While these speculators have time on their side right now, the months of March, April, and May are generally good demand for oil and smaller inter-production coming out of OPEC. That is definitely a wall that could come crumbling down. I would not want to be the last person to buy in that market and be holding on the last day because for crude oil to trade around $55 a barrel when in the United States, for example Texas, we can produce crude oil for around $15. You know that in many CEO offices right now and on napkins having a cocktail late at night in a bar there are business positions being put together where we’re going to produce oil at $15 and we’re going to sell it on the board of $55. There’s going to be an opportunity probably in April or May to take advantage of what the speculators have pushed up to probably over-valued heights right now.

Michael: So, that big long position like that, sooner or later, that’s going to have to be unwound. We’ll see how that plays out. For the time being, you still have that strong seasonal in place that has to be respected, so you may have a little bit of balance there in the near term. That being the case, we have outlined a strategy in the upcoming newsletter called The Crack Squeeze. We’ll show you how you can take advantage of that. The premium available in that market right now, that’s a trade for now and the coming 30-60 days we have one of your favorite trades coming up, James, but we’ll save that for next month. For those of you that are interested in learning more about working directly with us through an account for high-net-worth investors, you can request our investor information discovery pack. You can get that at OptionSellers.com/Discovery. We do have a recommended $1 million account size. If you are interested in something like that, feel free to request our information package. It does come with a DVD. James, let’s move into our final portion of the podcast this month. This is our lesson for investors. We’re going to talk about diversification of asset class this month. In our videos, we talk about two important types of diversification. One is diversification of strategy, which some investors are not familiar with. Then, there’s diversification of asset class, which some investors are familiar with; however, our commodities often are overlooked when it comes to that diversification. We’re going to talk about this month some of the advantages, especially for stock options sellers, who are used to writing options in stocks, you understand how that strategy works, some of the big advantages you have by applying that strategy to commodities. James, maybe you want to cover this first. There’s plenty, there’s a couple right at the top though of most interest. What would you consider the top advantage of a commodities option writer over a stock option writer?

James: Well, you know, stock option writers are a lot of our current clients. They eventually were introduced to short options through their stock account writing covered calls and such. A lot of investors started thinking, “Well, why don’t I sell options on stocks? That seems to be my best portfolio gains.” Generally speaking, selling options on stocks you’re selling approximately 5%, sometimes 10%, out-of-the-money, where in commodities when you educate the different ideas of applying short options to different asset classes, investors are absolutely amazed by the fact that you can sell premium 50%, 60%, 70% out-of-the-money. In some of the markets that we sell premiums it’s as high as 100% out-of-the-money with relatively low margin requirements to do so. A lot of investors that study for themselves what to do with their investment and what to do with their nest egg who discover short options, when they stumble across selling options on commodities certainly that is when our phone starts ringing. I think for the fact that we put ourselves out as the premier stock options sellers, rather commodity option sellers, it’s certainly an eye-opener to a lot of people who want to be diversified. Diversification is always the number one goal for a sound investment portfolio. The fact that the stock market right now is in a bull market, it’s at all time highs. At any moment, it can start a 5 year bear market and selling options on commodities allows you to be profitable in bull or bear markets. That’s what’s the real beauty of what we do.

Michael: These don’t just come from us. A lot of these come from our readers/prospective clients that repeat this and these are the reasons we hear the most. That’s why we’re repeating them here. As James was saying, the biggest advantages here is, one, you can sell deep, deep out-of-the-money strikes. Two, you get a potentially high RI because the margins are so much lower than they are for stock options. I know the margins, most of the time, we pay are sometimes 100-150% of the premium. So, you sell an option for $700 and maybe you only put up $700 or $1,000 in margin to hold that. Is that what you’re seeing right now, James, in this condition?

James: That’s exactly what we have right now. We have some of the lowest margins to hold short options on commodities that I’ve seen since I’ve been doing this. Not all of them are that way, but some of the most lucrative ones like the gold option strangle that we’re doing and the crude oil trade position that’s coming up. I’m looking at that already trying to get our ducks in a row for that. You’re looking at about 150% of the premium that you take in is what’s required for margin. That is really not tying up a lot of money to hopefully have very good results at the end of the year.

Michael: We’re talking about selling deep out-of-the-money. That natural gas trade you described earlier, we’re talking about selling 25-30% out-of-the-money. That’s probably about the closest we’ll be to the money when selling options. Would you say that’s a fair assessment?

James: Generally so. Any time someone is selling options on commodities on their own or with us, you’ll notice that the calls are always or most often can be further out-of-the-money for a simple reason. A market can only go to zero, it can’t go below that. When natural gas, which used to trade at $10, $15 per million BTU’s, is trading with a two-handle it can only go so low. The fact that we’re 25% below this market currently, I think, that’s way out-of-the-money. If the market inches a little bit lower, we’ll just continue to sell puts on that market. Often, we’re looking at puts some 40-50% below the money. The fact that natural gas is so cheap right now and the fundamentals look anywhere from friendly to bullish later this year, we think that’s selling them quite a bit out-of-the-money. We think that’s going to be a great position for later this year.

Michael: Of course, one more thing I want to point out… you mentioned a diversification aspect. Commodities in general tend to be uncorrelated to stocks as a whole, but when you introduce the option selling aspect to it it’s a portfolio that’s completely uncorrelated to anything. It’s not going to correlate to equity, it’s not going to correlate to interest rates, the positions aren’t even going to correlate to each other because a market like silver’s going to have nothing to do with the price of corn and the price of corn will have nothing to do with the price of coffee. So, it’s a completely diversified portfolio that isn’t even going to correlate to the commodities indexes. That’s simply because you have the ability to sell options on either side of it. Those would be the three big benefits for you stock option sellers listening. You’re thinking about giving it a try, giving it a look. Those are the three biggest draws to this type of investment. Of course, they’re described in depth in our book or any of our materials on our website. James, I think we’ve had a pretty full session this month and I do thank you for your insights and your sharing of some of your thoughts on the markets this month.

James: My pleasure. Talking about commodities and, not only that, but the approach of selling options on commodities is definitely an eye-opener to many investors and we look forward to doing more so in the future.

Michael: Just an announcement here at the end of our podcast, for those of you considering applying for new accounts, we are closed for March. We are fully booked for March. If you are interested in one of our remaining April openings, please contact Rosemary. You can call her at the 800 number… 800-346-1949. You can also, if you’re an international caller, 813-472-5760. You can also e-mail her at office@optionsellers.com. That is to schedule a phone consultation. We do have a few of those left for March and they would be for April openings. Feel free to give her a call if you are interested in discussing one of those remaining openings in April. Everybody have a great month of option selling. We’ll be back here in March and we’ll talk to you then. Thank you.

March 31, 2017 09:06 AM PDT

Michael: Hello everyone. Welcome to the April edition of the OptionSellers.com Podcast. This podcast will be both video and audio podcast. This is our first video podcast. James, welcome to the podcast.

James: Thank you, Michael. Very excited about doing both video and audio – get our mugs out there!

Michael: I think first on the agenda this month is what we have going on in the stock market right now. Is this going to be the long awaited correction everybody’s been awaiting or is this just a little blip? What do you think?

James: It’s interesting, Michael, the stock market has just been on a historic tear here ever since the election – and with good reason. If we have deregulation and we have a lot of pro-business ideas coming out of Washington along with a U.S. economy that’s doing fairly well right now, a lot of investors have been pouring into the stock market. We had the first shot across the bow, of course, with the healthcare issue being quite a bit of a swing and a miss for Mr. Trump this past week. A lot of investors right now are thinking, “Well, if we can’t get that passed maybe the deregulation and lower taxes and interest rate help may not be as much of a slam dunk as a lot of investors thought.” This could finally be the catalyst for the long-awaited 5-10% correction in the stock market. Everyone was absolutely factoring in the best-case scenario. Now, Washington D.C. quite isn’t as put together as people thought. The whole idea of a strong U.S. economy along with a very business-friendly administration, some of that’s being taken off the table right now. I wouldn’t be surprised that a lot of investors do take some chips off the table. Some of the largest investors in the world right now have thought about that and Goldman Sachs and large banks like that are talking about making their position smaller. That tells me maybe the long awaited correction probably in the 2nd quarter this year might not be such a big surprise after all.

Michael: Yeah, I’ve noticed a lot of the news channels are still bullish, they’re still cheering it on, but you can’t underestimate that public sentiment. If it starts to go, everybody’s pricing in this big economic boom. If that doesn’t happen, you can’t underestimate what that can do to prices, as we’ve seen in commodities, as well.

James: Absolutely. We start getting just a little more selling than buying. We keep buying the dips, buying the dips, buying the dips, and one of these times we’re going to cross a certain moving average that’s going to cause the computer to do some selling. Then all of a sudden, everyone’s racing for the door. The stock market’s not going to collapse. We’re not going to have an epic fall of 20-30%, but this long awaited correction that gets people to re-think their investment, that’s overdue. I think we could see that happen in maybe April or May.

Michael: All right, well, lets talk about some ways people can get diversified, obviously what we specialize in. This month we’re going to talk about the cotton market. Some things are starting to take place there. It’s been on a pretty good bull market here for the last year or so. We’ve had lower supplies and cotton has just been gradually trending up. You and I have been talking about this over the last several weeks about we could be seeing a shift here, we think there’s some opportunities for selling premium. Talk a little bit about it. What do you see happening here?

James: Generally, the ten commodities that we follow will have a spurt of buying from an importing nation and then will have a spurt of selling from producers that have an abundance of whatever the commodity is. What’s happened this past 12 months is we’ve seen Chinese imports have gone up dramatically over the 5-year average. That, of course, rallies the market. Cotton right now is at practically a 1-2 year highs. What’s so interesting, Michael, is that a lot of investors will hear that the Chinese consumption last year was up like it was and they’re going to pile in on this long position. I know we were talking a little while ago about the SPEC position in cotton. It’s at near all-time highs. It’s basically the herd driving into a market that sounds like it has bullish fundamentals, only to have the Chinese buying. Watch this- all of the sudden it will turn off the beginning of 2017. This timing coincides with plantings in the United States. They’re expected to be up some 10% this year. So, you have all this bullishness, you have all the speculators piling in. China is one of the greatest traders of commodities in the world. Obviously, they have the largest population and they need to feed them, clothe them, and provide energy. They seem to be some of the best traders, so they were buying cotton last year when cotton prices were low. Now, they’re at multi-year highs. Speculators pour in and now the U.S. farmer plants 10% more cotton than they did last year and now you watch the market turn back down. It’s a seasonal trade and it lines up with the fundamentals. Doing the opposite of what everyone else is doing right now in commodities has been quite a great trade over the last 12-24 months. Speculators race into the cotton market. All of the sudden, the fundamentals turn and all of the sudden you have them heading for the door probably this 2nd or 3rd quarter of this year, as well.

Michael: Yeah, that’s an interesting point. You’re talking about prices going up on SPEC buying and demand. We were looking at the ending stocks for cotton and they are low by maybe historic standards but relatively over the last 4-5 years they are fairly high. I’m going to check my stat over here- I know I don’t want to get the figure wrong. Ending stocks for cotton this year at 4.5 million bales, that’s still the highest in 8 years. Now, what you’re talking about is you have farmers because prices are so high they are planting in 9-10% more cotton this year. We’ll know for sure here in our report at the end of the month. We’ll get planting intentions reports, but early estimates – if we’re planting 9-10% more cotton, plus we have that seasonal tendency for prices to start declining this time of year, those call premiums have really escalated up above the markets. You’re thinking this might be a good time to start picking some of those off?

James: We do. It’s a great way to diversify a portfolio. Cotton right now is overpriced. The supplies worldwide are high enough to not cause any type of shortages over the next year or two. The Chinese buying is probably going to slow down and the United States is probably going to produce quite a bit more cotton than the last several years. It almost turns out to be a perfect seasonal play. We’ll wait and see if that’s the way it turns out.

Michael: All right. Now, in our piece, we did write a piece on this earlier in the month, you can see it on the blog if you haven’t seen it yet, you were looking at the Dec 90 calls. Is that still a strike that you like right now?

James: The Dec. 90 is like our dream call right now. We’re hoping that the market can edge up a little higher to reach that level. Selling cotton in the high 80’s is probably what we’re going to wind up doing. If we can walk into the 90 calls a little bit later in maybe April or May certainly we’d put our tuxedos on and jump into that trade. That one looks like a good one.

Michael: That’s one we put out there for when we write our public articles. Obviously, when you and I are trading we’re doing this, often times a series of strikes, a series of months, sometimes even a series of strategies all in the same market for our clients. I think you kind of picked that one as a good example for people that may not be clients and are just reading this and seeing a typical type of strike we would look at.

James: That’s how we would play it, both for our clients and anyone trading and taking advantage of short options or riding out there. That’s why I would steer them that way, yes.

Michael: Obviously, for any of you listening to this that are interested in how we put these fundamentals together and select this type of trade, like in cotton, you’ll want to get a copy of our book, The Complete Guide to Option Selling: Third Edition. That is available on our website at www.optionsellers.com/book. You’ll get it at a better price there than you will at Amazon or your local bookstore. All right, so let’s move on and talk about one of your favorite markets, the crude oil market. We have been addressing this market over the last month or two, but we’ve come to a point now in crude oil where you think there’s some major fundamental shift going on and I think that’s presenting some pretty good opportunities for option writers. Do you want to give your overview of crude oil right now and what’s happening there?

James: Michael, one of the markets that we follow most closely is because it has the most trading volume and open interest. We were earlier talking about speculative buying or selling and different commodities. Often, it’s based on headlines. We noticed that when OPEC announced production cuts earlier this year speculators raced in to the long side of crude oil. Headlines The Wall Street Journal: First OPEC Production Cuts in over a Dozen Years. Clearly, the market is going to rally, clearly it’s a great buy, it’s just a matter of how much money you’re going to make buying crude oil. That’s what speculators did. They accumulated the largest SPEC position in history right after the production cut announcement. What’s so interesting is that this herd mentality so often is wrong. Needing to peel back the onion just a little bit just prior to the production cuts, especially from OPEC, non-OPEC nations cut production as well, that’s not as important, with the exception of Russia, of course, which is the second largest producer in the world. The 3 months prior to the production cut announcement, OPEC ramped up levels of new supplies to the largest level ever. As a matter of fact, the production cut that was announced was basically equal to the increase in production the previous 30 days to 60 days just prior to the cut. Nobody hears about that. All people talk about is production cut from OPEC and the market’s going to go to the moon. Investors start buying calls and buying crude oil futures and crude oil companies, for those of you who are investing in stocks, at an all-time record pace. This past week, we’re now starting to count barrels and we’re looking for the supply cuts. Certainly, with all these production cuts by OPEC announced, we’re going to have smaller amounts of crude oil worldwide, right? Didn’t work out that way. Here in the United States, of course, the Permian Basin, the Dakotas, different parts of Oklahoma and Texas are ramping up oil production to all-time, all-time highs. The investors and speculators that push prices up to north of $60 a barrel for far-out contracts built in the greatest hedge that the people in Texas have ever believed that could absolutely happen. Texas production is approximately $16-$18 per barrel to pull it out of the ground. They were just allowed to hedge their production over the next 2-3 years at approximately $60 a barrel, a.k.a. printing money. So, the old adage of low prices curing low prices may not take place this year. Production in the United States is expected to make all-time highs at a time where OPEC is going to start probably becoming slightly fragile. OPEC production cuts, everyone is doing a fairly good job of following along with the cuts that they talked about and oil prices start to fall. OPEC nations then start to cheat and at that point we have a snowball effect. It’s probably too early for that to happen. June and July are very strong demand months here in the United States. We don’t expect to see prices really crater this summer, but this fall if we have a slight tick up in prices in June and July of this year then we’re going to be looking at call selling opportunities for December, January, February, March, the weakest time frames of the year, at the same time when supplies will probably be at their all-time greatest. We are watching with both eyes very closely for a small tick up in energy prices this June and July. Clearly, they’ve fallen off dramatically. We were talking about selling a crude oil when we did not believe production cuts to be so bullish, crude oil fell $7 shortly after that. I remember talking to clients and other people that are in the industry that don’t trade with us. I said, “Watch out! Don’t listen to this OPEC production business. It’s not bullish, the market’s going to likely fall.” We had a couple of colleagues that said, “James, why are you telling me this?” I said, “I’m just warning you because we think that the market’s going to fail here”, and he was basically saying, “Well, the whole world is bullish. We’re going to have less production.” It didn’t turn out that way. Oil fell some $6-$7 a barrel. We’re hoping for a slight up tick with strong demand for driving season this year in the United States. If we get that, we think call selling in crude oil could be good for 6-12 months out. Oil this fall and winter could be in the low 40’s, it could actually have a 3-handle on it, and we’re going to be taking advantage of that when that happens.

Michael: Yeah, I just put together out summary. We sent our summary to CNBC this week on the oil market. Hopefully, they’ll want to have us on and talk about it, but if you’re listening, CNBC, we’re ready for you with our quarterly oil analysis. Feel free to give us a call. I know you, James, talking about the cuts, have not affected supply. In fact, right now, all-time record highs in the United States- 528 million barrels. That’s 27% over the 5-year average. So, I would think that still qualifies as a glut. Would you?

James: Michael, that’s definitely a glut. If we have one more barrel in the world than we need, prices go down. We have just a dramatic over-supply in the United States. Ever since we’ve been counting barrels of oil in the United States, we have never had a higher supply than we do right now. At a time where production in the United States is now going to ramp up, it is a bearish scenario. Am I saying that oil is going to fall every day and it’s going to go down to zero? We’re not saying that, but as far as the investors that like the herd mentality, this June and July we’re probably going to have more ramblings out of OPEC. They’re going to say, “We’re going to extend the cuts. We’re happy with the way it’s working but we’re going to proceed to extend these cuts further.” We’ll probably get another pop from that on the bullish news, and that’s the one we’re going to use to probably lay out some calls out 6-12 months and I think that’s going to work out pretty well.

Michael: For those of your listening that may not be that familiar with option selling, what James is really saying is we don’t need prices to fall, although we think that’s a distinct possibility, we just don’t need them to go skyrocketing up in this environment. With this type of supply we don’t think that’s likely, that’s why we go high above the market and sell calls. As long as the market doesn’t get there, those calls expire and investors keep the premium. Did you have your eye on any strikes you want to share right now or do you want to save that for another podcast?

James: We’re going to be selling crude oils calls with a 7 on them, and I don’t mean 7 or 17, I mean 70. If they’re producing oil in Texas at 17, we’ll go short at 70. We’ll take our chances on that and I think it’ll turn out pretty well.

Michael: All right. For those of you who want to read our full forecast and analysis of the crude oil market, along with some potential trades you can look at, that is coming up in our April newsletter. It’s going to be coming out within the next couple of days. Look for it in your mailbox. If you’re not a subscriber yet, you can subscribe at our website. If you come to our website and order anything you’ll be on our subscription list. We do have a special crude oil feature this month because this is the trade we’re going to be looking at now for the next several months. One thing about option selling is if you’re taking premium out of a market, you don’t just have to sell it once and take it, you can often keep mining premium into that market for months at a time. Am I right?

James: That’s how we do it.

Michael: Okay. In addition, in your upcoming April newsletter there’s also a special feature this month on some of the top mistakes high-net-worth investors make, particularly 1 percenters... people that are in that higher-net-worth strata, that even though we tend to be sophisticated investors, at the same time there are some blind spots there. We did a lot of research here, a lot of different reports we found, and I think you’re really going to be fascinated to see some of these things. A lot of them, James, you wouldn’t even think of as high-net-worth investors making these type of mistakes, and they do. We really put that in perspective and I think a lot of our readers will enjoy it.

James: You know, money doesn’t come with instructions. So often, you hear about investors that are making their money in whatever line of work their business or company that they had, and when they go to invest on their own they don’t quite have the success. A lot of our investors, the clients of ours, made their fortunes being experts at what they do and hiring someone to do it for you is probably a pretty good idea.

Michael: Well, the first hint is don’t keep it all in the stock market. I’m sure most of you probably know that. So, we’re going to move on to our lesson portion of the podcast this month. James, this month we’re going to talk about an aspect of risk management. We did a piece on some more advanced ways to manage risk this week on the blog and we got a lot of feedback and a lot of questions. Thank you, all you viewers, for that. One of the things and questions we got there was, “Well, that’s great for naked options, but what about if I’m doing a strangle? How do I manage my risk on a strangle? I’ve sold a put and I’ve sold a call on the same market- how are you managing risk on those?” I think that’s something we want to talk about and address some of our readers who maybe want to learn how we do that.

James: One of our most attractive commodity options sale that I find when I’m scouring the 10 markets that we’re closely watching, and that is identifying fairly valued markets. Quite often, you will have CNBC or Bloomberg go to the pit and the gold market is down $20 or it’s up $20 and people are talking, “Oh, the gold market got hammered today. The gold market’s soaring today.” A $20 move in gold makes a headline. It makes a headline on T.V. and they go to the pits and they’re talking to the traders and what have you. A $20 move in gold doesn’t move the needle for the options that we sell. When we sell options on crude oil or coffee or gold, often they are 50-60% out-of-the-money. So, these 1-2% blimps in commodity prices for the underlining contract makes a lot of headlines, but as an option seller, whether it’s yourselves doing it for your own account or we’re doing it for you, it very rarely even moves the needle. When selling a put and a call in gold or silver or crude oil, often the distance between the put and the call is the same value as the underlining contract itself. In other words, gold is trading around $1,200. We have option sales where we strangle gold and the strangle is $1,000 wide. So, identifying fairly valued markets, gold happens to be one of them right now, we think it’s pretty close to fairly valued, the put and the call they babysit each other while you’re waiting is basically the best way I can look at it. For example, if you’re short a gold strangle, your call is $500 above the market, your put is $400 below the market, this one is offsetting the other one at the same time. So, in other words, if the gold market moves $20-$30, your call position might go against your slightly, but your put is now taking care of the differential between from where you put the initial position on. If you use the 200% rule, and we do that ourselves, it is a very, not necessarily strategic, but it’s a very easy management tool that you can use. If you have 12 positions on in the year and 2 of them double in price, do the math. That still can be a very, very great return and it does hold your risk parameters in check. If you are selling a strangle in gold, you might take in $600 on the call, $600 on the put, you have $1,200 worth of premium. Not only will a naked call or put often double, unless the fundamentals change, but that $1,200 in premium that you take in on a strangle, that will almost rarely, practically never, double in value. So, if you have a $1,200 premium in strangle, the $1,200 level for it to double to $1,400, rather $2,400, just happens so rarely. The strangle is our best approach to markets that we find that are fair valued. If you do have your put or your call pinching you just a little bit you’ll notice that the opposite direction option is doing extremely well for your account. Needless to say, you have to have risk control parameters when you first enter a position. You can put in a 100% rule on your short put or your short call. I would put 100% rule on the entire premium itself. It gives your position a great deal of time and room to work. The strangle, I think, is the very best option sale going. If you want to keep a very close reign on your put or your call you can do that. If you wind up stopping yourself out of a strangle on most commodities, in my opinion, you’re not selling enough time. A lot of investors and a lot of books talk about writing options, they talk about a 30 day, 60 day, 90 day option. If you’re getting stopped out of your short position, those are probably the options that you’re selling. I would go further out in time and in price. Commodity options you are paid to wait, and patience is the name of the game. If you’re able to put on a strangle and you’re able to wait, more times than not you’re going to have very good results. You’re not hitting homeruns selling a strangle that far out, but for those of your who want to win the game and are okay with hitting singles all year round I think that’s a great way to do it. I think our investors certainly know about that and our viewers could find that out for themselves if they wanted to.

Michael: One way of looking at that, you’re talking about risking the whole premium of the strangle. In other words, you’re saying if you take in $1,200 you can risk up to $1,200 on either side. So, actually, you can be a little more aggressive on your risk management on both sides because you have that balancing affect on the opposite side. Correct?

James: Exactly right.

Michael: So, instead of risking your call to double value, you can almost risk it to triple value and still get away with it because you have some extra risk management with the strangle if you’re following that.

James: The stay ability in a strangle, and that is the key to option selling, is being able to ride out the small blips in the market that change the premiums. Patience and the ability to wait is the key and a properly placed strangle will give practically anyone the ability to stay with that market. That is something that we find at our office for our clients that we do a great deal. The proof is in the pudding. The strangle is a great way to go. You need to identify a fair value market. If you’re able to do that, the strangle is going to be very fruitful.

Michael: One of the things we talked about this week in our risk management lesson is the purpose of the risk management tactics often is just to slow the market down long enough to let them expire because time is always working in your favor. So, if you’re using a strategy like the strangle where you’re risking premium to a certain value, you can also incorporate things like a roll. You can use a roll in a strangle where you’re rolling up or if fundamentals change then maybe you just roll it into a one-sided trade instead of just a strangle. Getting a little more creative there, but all of those strategies that we talked about can also be applied to spread, even to a strangle, to get a little more advanced. James, when you’re talking about that, the 200% rule is a good basic rule that can be used either with naked or with a strangle you just described.

James: Correct. For all the times you put a strangle on, there’s a chance your put or your call will double in value. As long as the fundamentals in that market didn’t change, feel free to roll down the put or roll up the call. 9 times out of 10 that will not double again and you will be collecting 75% of the premium that you originally sold for instead of 100%, but that’s a very great investment.

Michael: Excellent. Well, I hope everyone’s enjoyed our first audio and video podcast this month. For those of you that are writing in asking questions and sending them, please keep those coming. We love to address those on our shows, such as this. For those of you interested in our accounts, unfortunately we are fully booked for April. We are working into our May availability now. We still have some availability for new accounts in May. If you’re interested in learning more about this, please call Rosemary at the office. It’s (800) 346-1949. She’s scheduling consultations, which will take place in April. So, if you’re interested in one of those, give her a call. She can get your scheduled. James, I appreciate your input this month. We’ll be back next month and we’ll update some of these trades and see what’s going on then. Thank you, James, for everything this month.

James: My pleasure. Always happy to do this.

Michael: For all of you out there, we will talk to you in 30 days. Thank you.

March 31, 2017 09:05 AM PDT
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Michael: Hello everyone. Welcome to the April edition of the OptionSellers.com Podcast. This podcast will be both video and audio podcast. This is our first video podcast. James, welcome to the podcast.

James: Thank you, Michael. Very excited about doing both video and audio – get our mugs out there!

Michael: I think first on the agenda this month is what we have going on in the stock market right now. Is this going to be the long awaited correction everybody’s been awaiting or is this just a little blip? What do you think?

James: It’s interesting, Michael, the stock market has just been on a historic tear here ever since the election – and with good reason. If we have deregulation and we have a lot of pro-business ideas coming out of Washington along with a U.S. economy that’s doing fairly well right now, a lot of investors have been pouring into the stock market. We had the first shot across the bow, of course, with the healthcare issue being quite a bit of a swing and a miss for Mr. Trump this past week. A lot of investors right now are thinking, “Well, if we can’t get that passed maybe the deregulation and lower taxes and interest rate help may not be as much of a slam dunk as a lot of investors thought.” This could finally be the catalyst for the long-awaited 5-10% correction in the stock market. Everyone was absolutely factoring in the best-case scenario. Now, Washington D.C. quite isn’t as put together as people thought. The whole idea of a strong U.S. economy along with a very business-friendly administration, some of that’s being taken off the table right now. I wouldn’t be surprised that a lot of investors do take some chips off the table. Some of the largest investors in the world right now have thought about that and Goldman Sachs and large banks like that are talking about making their position smaller. That tells me maybe the long awaited correction probably in the 2nd quarter this year might not be such a big surprise after all.

Michael: Yeah, I’ve noticed a lot of the news channels are still bullish, they’re still cheering it on, but you can’t underestimate that public sentiment. If it starts to go, everybody’s pricing in this big economic boom. If that doesn’t happen, you can’t underestimate what that can do to prices, as we’ve seen in commodities, as well.

James: Absolutely. We start getting just a little more selling than buying. We keep buying the dips, buying the dips, buying the dips, and one of these times we’re going to cross a certain moving average that’s going to cause the computer to do some selling. Then all of a sudden, everyone’s racing for the door. The stock market’s not going to collapse. We’re not going to have an epic fall of 20-30%, but this long awaited correction that gets people to re-think their investment, that’s overdue. I think we could see that happen in maybe April or May.

Michael: All right, well, lets talk about some ways people can get diversified, obviously what we specialize in. This month we’re going to talk about the cotton market. Some things are starting to take place there. It’s been on a pretty good bull market here for the last year or so. We’ve had lower supplies and cotton has just been gradually trending up. You and I have been talking about this over the last several weeks about we could be seeing a shift here, we think there’s some opportunities for selling premium. Talk a little bit about it. What do you see happening here?

James: Generally, the ten commodities that we follow will have a spurt of buying from an importing nation and then will have a spurt of selling from producers that have an abundance of whatever the commodity is. What’s happened this past 12 months is we’ve seen Chinese imports have gone up dramatically over the 5-year average. That, of course, rallies the market. Cotton right now is at practically a 1-2 year highs. What’s so interesting, Michael, is that a lot of investors will hear that the Chinese consumption last year was up like it was and they’re going to pile in on this long position. I know we were talking a little while ago about the SPEC position in cotton. It’s at near all-time highs. It’s basically the herd driving into a market that sounds like it has bullish fundamentals, only to have the Chinese buying. Watch this- all of the sudden it will turn off the beginning of 2017. This timing coincides with plantings in the United States. They’re expected to be up some 10% this year. So, you have all this bullishness, you have all the speculators piling in. China is one of the greatest traders of commodities in the world. Obviously, they have the largest population and they need to feed them, clothe them, and provide energy. They seem to be some of the best traders, so they were buying cotton last year when cotton prices were low. Now, they’re at multi-year highs. Speculators pour in and now the U.S. farmer plants 10% more cotton than they did last year and now you watch the market turn back down. It’s a seasonal trade and it lines up with the fundamentals. Doing the opposite of what everyone else is doing right now in commodities has been quite a great trade over the last 12-24 months. Speculators race into the cotton market. All of the sudden, the fundamentals turn and all of the sudden you have them heading for the door probably this 2nd or 3rd quarter of this year, as well.

Michael: Yeah, that’s an interesting point. You’re talking about prices going up on SPEC buying and demand. We were looking at the ending stocks for cotton and they are low by maybe historic standards but relatively over the last 4-5 years they are fairly high. I’m going to check my stat over here- I know I don’t want to get the figure wrong. Ending stocks for cotton this year at 4.5 million bales, that’s still the highest in 8 years. Now, what you’re talking about is you have farmers because prices are so high they are planting in 9-10% more cotton this year. We’ll know for sure here in our report at the end of the month. We’ll get planting intentions reports, but early estimates – if we’re planting 9-10% more cotton, plus we have that seasonal tendency for prices to start declining this time of year, those call premiums have really escalated up above the markets. You’re thinking this might be a good time to start picking some of those off?

James: We do. It’s a great way to diversify a portfolio. Cotton right now is overpriced. The supplies worldwide are high enough to not cause any type of shortages over the next year or two. The Chinese buying is probably going to slow down and the United States is probably going to produce quite a bit more cotton than the last several years. It almost turns out to be a perfect seasonal play. We’ll wait and see if that’s the way it turns out.

Michael: All right. Now, in our piece, we did write a piece on this earlier in the month, you can see it on the blog if you haven’t seen it yet, you were looking at the Dec 90 calls. Is that still a strike that you like right now?

James: The Dec. 90 is like our dream call right now. We’re hoping that the market can edge up a little higher to reach that level. Selling cotton in the high 80’s is probably what we’re going to wind up doing. If we can walk into the 90 calls a little bit later in maybe April or May certainly we’d put our tuxedos on and jump into that trade. That one looks like a good one.

Michael: That’s one we put out there for when we write our public articles. Obviously, when you and I are trading we’re doing this, often times a series of strikes, a series of months, sometimes even a series of strategies all in the same market for our clients. I think you kind of picked that one as a good example for people that may not be clients and are just reading this and seeing a typical type of strike we would look at.

James: That’s how we would play it, both for our clients and anyone trading and taking advantage of short options or riding out there. That’s why I would steer them that way, yes.

Michael: Obviously, for any of you listening to this that are interested in how we put these fundamentals together and select this type of trade, like in cotton, you’ll want to get a copy of our book, The Complete Guide to Option Selling: Third Edition. That is available on our website at www.optionsellers.com/book. You’ll get it at a better price there than you will at Amazon or your local bookstore. All right, so let’s move on and talk about one of your favorite markets, the crude oil market. We have been addressing this market over the last month or two, but we’ve come to a point now in crude oil where you think there’s some major fundamental shift going on and I think that’s presenting some pretty good opportunities for option writers. Do you want to give your overview of crude oil right now and what’s happening there?

James: Michael, one of the markets that we follow most closely is because it has the most trading volume and open interest. We were earlier talking about speculative buying or selling and different commodities. Often, it’s based on headlines. We noticed that when OPEC announced production cuts earlier this year speculators raced in to the long side of crude oil. Headlines The Wall Street Journal: First OPEC Production Cuts in over a Dozen Years. Clearly, the market is going to rally, clearly it’s a great buy, it’s just a matter of how much money you’re going to make buying crude oil. That’s what speculators did. They accumulated the largest SPEC position in history right after the production cut announcement. What’s so interesting is that this herd mentality so often is wrong. Needing to peel back the onion just a little bit just prior to the production cuts, especially from OPEC, non-OPEC nations cut production as well, that’s not as important, with the exception of Russia, of course, which is the second largest producer in the world. The 3 months prior to the production cut announcement, OPEC ramped up levels of new supplies to the largest level ever. As a matter of fact, the production cut that was announced was basically equal to the increase in production the previous 30 days to 60 days just prior to the cut. Nobody hears about that. All people talk about is production cut from OPEC and the market’s going to go to the moon. Investors start buying calls and buying crude oil futures and crude oil companies, for those of you who are investing in stocks, at an all-time record pace. This past week, we’re now starting to count barrels and we’re looking for the supply cuts. Certainly, with all these production cuts by OPEC announced, we’re going to have smaller amounts of crude oil worldwide, right? Didn’t work out that way. Here in the United States, of course, the Permian Basin, the Dakotas, different parts of Oklahoma and Texas are ramping up oil production to all-time, all-time highs. The investors and speculators that push prices up to north of $60 a barrel for far-out contracts built in the greatest hedge that the people in Texas have ever believed that could absolutely happen. Texas production is approximately $16-$18 per barrel to pull it out of the ground. They were just allowed to hedge their production over the next 2-3 years at approximately $60 a barrel, a.k.a. printing money. So, the old adage of low prices curing low prices may not take place this year. Production in the United States is expected to make all-time highs at a time where OPEC is going to start probably becoming slightly fragile. OPEC production cuts, everyone is doing a fairly good job of following along with the cuts that they talked about and oil prices start to fall. OPEC nations then start to cheat and at that point we have a snowball effect. It’s probably too early for that to happen. June and July are very strong demand months here in the United States. We don’t expect to see prices really crater this summer, but this fall if we have a slight tick up in prices in June and July of this year then we’re going to be looking at call selling opportunities for December, January, February, March, the weakest time frames of the year, at the same time when supplies will probably be at their all-time greatest. We are watching with both eyes very closely for a small tick up in energy prices this June and July. Clearly, they’ve fallen off dramatically. We were talking about selling a crude oil when we did not believe production cuts to be so bullish, crude oil fell $7 shortly after that. I remember talking to clients and other people that are in the industry that don’t trade with us. I said, “Watch out! Don’t listen to this OPEC production business. It’s not bullish, the market’s going to likely fall.” We had a couple of colleagues that said, “James, why are you telling me this?” I said, “I’m just warning you because we think that the market’s going to fail here”, and he was basically saying, “Well, the whole world is bullish. We’re going to have less production.” It didn’t turn out that way. Oil fell some $6-$7 a barrel. We’re hoping for a slight up tick with strong demand for driving season this year in the United States. If we get that, we think call selling in crude oil could be good for 6-12 months out. Oil this fall and winter could be in the low 40’s, it could actually have a 3-handle on it, and we’re going to be taking advantage of that when that happens.

Michael: Yeah, I just put together out summary. We sent our summary to CNBC this week on the oil market. Hopefully, they’ll want to have us on and talk about it, but if you’re listening, CNBC, we’re ready for you with our quarterly oil analysis. Feel free to give us a call. I know you, James, talking about the cuts, have not affected supply. In fact, right now, all-time record highs in the United States- 528 million barrels. That’s 27% over the 5-year average. So, I would think that still qualifies as a glut. Would you?

James: Michael, that’s definitely a glut. If we have one more barrel in the world than we need, prices go down. We have just a dramatic over-supply in the United States. Ever since we’ve been counting barrels of oil in the United States, we have never had a higher supply than we do right now. At a time where production in the United States is now going to ramp up, it is a bearish scenario. Am I saying that oil is going to fall every day and it’s going to go down to zero? We’re not saying that, but as far as the investors that like the herd mentality, this June and July we’re probably going to have more ramblings out of OPEC. They’re going to say, “We’re going to extend the cuts. We’re happy with the way it’s working but we’re going to proceed to extend these cuts further.” We’ll probably get another pop from that on the bullish news, and that’s the one we’re going to use to probably lay out some calls out 6-12 months and I think that’s going to work out pretty well.

Michael: For those of your listening that may not be that familiar with option selling, what James is really saying is we don’t need prices to fall, although we think that’s a distinct possibility, we just don’t need them to go skyrocketing up in this environment. With this type of supply we don’t think that’s likely, that’s why we go high above the market and sell calls. As long as the market doesn’t get there, those calls expire and investors keep the premium. Did you have your eye on any strikes you want to share right now or do you want to save that for another podcast?

James: We’re going to be selling crude oils calls with a 7 on them, and I don’t mean 7 or 17, I mean 70. If they’re producing oil in Texas at 17, we’ll go short at 70. We’ll take our chances on that and I think it’ll turn out pretty well.

Michael: All right. For those of you who want to read our full forecast and analysis of the crude oil market, along with some potential trades you can look at, that is coming up in our April newsletter. It’s going to be coming out within the next couple of days. Look for it in your mailbox. If you’re not a subscriber yet, you can subscribe at our website. If you come to our website and order anything you’ll be on our subscription list. We do have a special crude oil feature this month because this is the trade we’re going to be looking at now for the next several months. One thing about option selling is if you’re taking premium out of a market, you don’t just have to sell it once and take it, you can often keep mining premium into that market for months at a time. Am I right?

James: That’s how we do it.

Michael: Okay. In addition, in your upcoming April newsletter there’s also a special feature this month on some of the top mistakes high-net-worth investors make, particularly 1 percenters... people that are in that higher-net-worth strata, that even though we tend to be sophisticated investors, at the same time there are some blind spots there. We did a lot of research here, a lot of different reports we found, and I think you’re really going to be fascinated to see some of these things. A lot of them, James, you wouldn’t even think of as high-net-worth investors making these type of mistakes, and they do. We really put that in perspective and I think a lot of our readers will enjoy it.

James: You know, money doesn’t come with instructions. So often, you hear about investors that are making their money in whatever line of work their business or company that they had, and when they go to invest on their own they don’t quite have the success. A lot of our investors, the clients of ours, made their fortunes being experts at what they do and hiring someone to do it for you is probably a pretty good idea.

Michael: Well, the first hint is don’t keep it all in the stock market. I’m sure most of you probably know that. So, we’re going to move on to our lesson portion of the podcast this month. James, this month we’re going to talk about an aspect of risk management. We did a piece on some more advanced ways to manage risk this week on the blog and we got a lot of feedback and a lot of questions. Thank you, all you viewers, for that. One of the things and questions we got there was, “Well, that’s great for naked options, but what about if I’m doing a strangle? How do I manage my risk on a strangle? I’ve sold a put and I’ve sold a call on the same market- how are you managing risk on those?” I think that’s something we want to talk about and address some of our readers who maybe want to learn how we do that.

James: One of our most attractive commodity options sale that I find when I’m scouring the 10 markets that we’re closely watching, and that is identifying fairly valued markets. Quite often, you will have CNBC or Bloomberg go to the pit and the gold market is down $20 or it’s up $20 and people are talking, “Oh, the gold market got hammered today. The gold market’s soaring today.” A $20 move in gold makes a headline. It makes a headline on T.V. and they go to the pits and they’re talking to the traders and what have you. A $20 move in gold doesn’t move the needle for the options that we sell. When we sell options on crude oil or coffee or gold, often they are 50-60% out-of-the-money. So, these 1-2% blimps in commodity prices for the underlining contract makes a lot of headlines, but as an option seller, whether it’s yourselves doing it for your own account or we’re doing it for you, it very rarely even moves the needle. When selling a put and a call in gold or silver or crude oil, often the distance between the put and the call is the same value as the underlining contract itself. In other words, gold is trading around $1,200. We have option sales where we strangle gold and the strangle is $1,000 wide. So, identifying fairly valued markets, gold happens to be one of them right now, we think it’s pretty close to fairly valued, the put and the call they babysit each other while you’re waiting is basically the best way I can look at it. For example, if you’re short a gold strangle, your call is $500 above the market, your put is $400 below the market, this one is offsetting the other one at the same time. So, in other words, if the gold market moves $20-$30, your call position might go against your slightly, but your put is now taking care of the differential between from where you put the initial position on. If you use the 200% rule, and we do that ourselves, it is a very, not necessarily strategic, but it’s a very easy management tool that you can use. If you have 12 positions on in the year and 2 of them double in price, do the math. That still can be a very, very great return and it does hold your risk parameters in check. If you are selling a strangle in gold, you might take in $600 on the call, $600 on the put, you have $1,200 worth of premium. Not only will a naked call or put often double, unless the fundamentals change, but that $1,200 in premium that you take in on a strangle, that will almost rarely, practically never, double in value. So, if you have a $1,200 premium in strangle, the $1,200 level for it to double to $1,400, rather $2,400, just happens so rarely. The strangle is our best approach to markets that we find that are fair valued. If you do have your put or your call pinching you just a little bit you’ll notice that the opposite direction option is doing extremely well for your account. Needless to say, you have to have risk control parameters when you first enter a position. You can put in a 100% rule on your short put or your short call. I would put 100% rule on the entire premium itself. It gives your position a great deal of time and room to work. The strangle, I think, is the very best option sale going. If you want to keep a very close reign on your put or your call you can do that. If you wind up stopping yourself out of a strangle on most commodities, in my opinion, you’re not selling enough time. A lot of investors and a lot of books talk about writing options, they talk about a 30 day, 60 day, 90 day option. If you’re getting stopped out of your short position, those are probably the options that you’re selling. I would go further out in time and in price. Commodity options you are paid to wait, and patience is the name of the game. If you’re able to put on a strangle and you’re able to wait, more times than not you’re going to have very good results. You’re not hitting homeruns selling a strangle that far out, but for those of your who want to win the game and are okay with hitting singles all year round I think that’s a great way to do it. I think our investors certainly know about that and our viewers could find that out for themselves if they wanted to.

Michael: One way of looking at that, you’re talking about risking the whole premium of the strangle. In other words, you’re saying if you take in $1,200 you can risk up to $1,200 on either side. So, actually, you can be a little more aggressive on your risk management on both sides because you have that balancing affect on the opposite side. Correct?

James: Exactly right.

Michael: So, instead of risking your call to double value, you can almost risk it to triple value and still get away with it because you have some extra risk management with the strangle if you’re following that.

James: The stay ability in a strangle, and that is the key to option selling, is being able to ride out the small blips in the market that change the premiums. Patience and the ability to wait is the key and a properly placed strangle will give practically anyone the ability to stay with that market. That is something that we find at our office for our clients that we do a great deal. The proof is in the pudding. The strangle is a great way to go. You need to identify a fair value market. If you’re able to do that, the strangle is going to be very fruitful.

Michael: One of the things we talked about this week in our risk management lesson is the purpose of the risk management tactics often is just to slow the market down long enough to let them expire because time is always working in your favor. So, if you’re using a strategy like the strangle where you’re risking premium to a certain value, you can also incorporate things like a roll. You can use a roll in a strangle where you’re rolling up or if fundamentals change then maybe you just roll it into a one-sided trade instead of just a strangle. Getting a little more creative there, but all of those strategies that we talked about can also be applied to spread, even to a strangle, to get a little more advanced. James, when you’re talking about that, the 200% rule is a good basic rule that can be used either with naked or with a strangle you just described.

James: Correct. For all the times you put a strangle on, there’s a chance your put or your call will double in value. As long as the fundamentals in that market didn’t change, feel free to roll down the put or roll up the call. 9 times out of 10 that will not double again and you will be collecting 75% of the premium that you originally sold for instead of 100%, but that’s a very great investment.

Michael: Excellent. Well, I hope everyone’s enjoyed our first audio and video podcast this month. For those of you that are writing in asking questions and sending them, please keep those coming. We love to address those on our shows, such as this. For those of you interested in our accounts, unfortunately we are fully booked for April. We are working into our May availability now. We still have some availability for new accounts in May. If you’re interested in learning more about this, please call Rosemary at the office. It’s (800) 346-1949. She’s scheduling consultations, which will take place in April. So, if you’re interested in one of those, give her a call. She can get your scheduled. James, I appreciate your input this month. We’ll be back next month and we’ll update some of these trades and see what’s going on then. Thank you, James, for everything this month.

James: My pleasure. Always happy to do this.

Michael: For all of you out there, we will talk to you in 30 days. Thank you.

February 16, 2017 10:01 AM PST

Good afternoon, this is James Cordier of OptionSellers.com with a market update for January 13th. Well, welcome to 2017. This January, and most January’s in the past, has kicked off investing by normally looking at some of the most favorable seasonal positions that we get coming down the pipe the entire year.

This January, we have three of our most favorite seasonal trades coming up. One is going short wheat. The USDA this past week noted that world-ending stocks for wheat are at all-time highs, making a large rally going against some of our short call positions seem quite unlikely. Coffee supplies in New York are at 10-year highs, making a 60-70% rally against those fundamentals very unlikely, so we will be selling calls in coffee in the coming 30 days.

One of the positions that should work very well the next 3-4 months is long soybeans. The seasonality of soybeans to start rallying at the end of January until April and May seem quite high. This year, right now with the protein demands, especially out of Asia, we think that protein consumption is going to be extremely high and the demand for soybeans and soybean meal will be extremely high, as well. These three seasonal trades will wind up in your account in the coming week or two and, we think, will go a long way in diversifying accounts for 2017.

We’re expecting an exceptionally good year starting January and hopefully working all the way through December. We’re looking at having a very balanced portfolio utilizing a lot more than eight commodities that we often follow; however, in 2016 we just didn’t have the opportunities, so we were in mostly precious metals and in energy, as all of our clients know.

In 2017, we’re looking at utilizing practically all the eight commodities that we follow and these three new ones will be going a long way to diversifying your accounts to do just that. We’re looking for a much straighter equity curve this year and, hopefully, December 31st having a very nice return at year’s end. Anyone wanting more information from OptionSellers.com can visit our website. If you’re not already a client of ours you can contact our headquarters and speak to Rosemary about becoming one. As always, it’s great chatting with you and looking forward to doing so again in two weeks. Thank you.

February 16, 2017 09:54 AM PST

Good afternoon. This is James Cordier of OptionSellers.com with a market update for February 3rd. Well, with the new Trump Administration finally settling in, and the tweets keep coming, a lot of market participants continue to try and evaluate what exactly that means for both the U.S. economy, the global economy, especially with talks of terrorists and such, and what that could possibly mean to economic growth going forward. Is it going to be a little bit too much or is he going to fine-tune it just right?

I know the stock market is certainly making very interesting moves recently. We went to all-time highs since the new Trump presidency, and now we’ve backed off slightly as some of the indications are that maybe every proposal and every idea may not be business friendly. Fortunately, for us, January and February are the 2 months when we are normally trading seasonalities in the commodities that we follow.

The propensity for a particular commodity to go up or down is what a seasonal is defined as. During the month of January and February is when we find the majority of them for the entire year. It matters very little what is happening in Washington or in Wall Street. Some of the seasonalities that we enjoy following in the very beginning of the year is the wheat market usually starts to fall in price just slightly. We’ve seen that start to happen in the last week or so.

The price of soybeans, also a grain or oil seed if you will, normally rallies starting in January going into February and March, and that has begun as well. Of course, one of our fan favorites is coffee. The coffee market normally tops in price at the end of January as peak demand season ends and we start talking about large supplies coming in from Columbia, Vietnam, and Brazil, something we’re expecting in great amounts this year. February and March the coffee market starts to fall and we’ve noticed that happening already.

Generally speaking, you can’t just simply look at the calendar and invest in commodities. Certainly, there’s a lot of aspects that are involved in trading commodities along with the seasonality. For example, one of the commodities that we talked about late last year was going long in the crude oil market. Crude oil is normally just the depth of despair as we go into winter season when demand is at its least and supplies are at their most. Then, it normally starts crawling out of a bear market starting in January and February.

2017 is completely different. The producers in the world, of course, announced production cuts for the first time in over a decade. The $15-$20 rally basically took place over night. We now have what we think is a balanced market. A lot of participants out of the largest OPEC producing nations are talking about a balanced market, as well. What’s so interesting is people think that’s bullish, and a balanced market means exactly that. We have the exact amount of barrels needed to produce for production and consumption. As long as we have a balanced market, the market basically goes sideways. Crude oil, trading around $55 for later on this year, is exactly the middle of our strangle that we placed on about a month ago. If we have a balanced market, why would crude oil rally 40% in the coming months? If we have a balanced market, why would crude oil fall 40% in the coming months? We don’t see it happening and that is what our favorite strangle is right now.

Seasonally, we’re going to be buying crude oil in December and January, selling it in June and July. Seasonal factors did not kick in this year. We think that the crude oil market trading in the mid 50’s is fairly valued and we expect it to trade near that level. When we are identifying prices that are too low we sell puts, identifying markets that are too high we sell calls. The most lucrative trade of all is identifying fair value markets and then you put a strangle around it and collecting premium from both the put and call side is just a fantastic way to invest in commodity options. Something that we look forward to is identifying fair market values and then we apply the credit spread on both sides or a strangle on both sides, something we’re going to be looking to be doing a great deal in 2017.

Anyone wanting more information from OptionSellers.com can visit our website. If you’re not already a client and are interested in becoming one, contact Rosemary at our headquarters. As always, it’s a great pleasure speaking with you and looking forward to doing so again in 2 weeks. Thank you.

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