I’m excited to announce that I just activated my
brokerage account to trade options.
Now, I know options might seem like a departure from my commodities
background. And the overwhelming public perception of options is that
they’re risky.
Of course, public perception of stocks is that they’re safe, and the public
barely seems to understand the bond market at all – so I think you’d be
best advised to ignore public opinion, if not take the opposite position of
whatever the public may believe.
The biggest trick the devil ever pulled was to convince the world that he
doesn’t exist. And the biggest mistake an investor can make is to
underestimate risk in any asset class.
Stocks, as we know, can be incredibly risky. Bonds too. And so are
commodities. Options are not inherently riskier than any of these other
asset classes.
The propensity to behave foolishly might be higher than with these other
asset classes, but you can just as easily go broke buying stocks as you can
trading options.
Okay, I’m off of my soapbox now.
I’m excited about opening up my options account because with stock market
volatility as high as it is right now, your potential to make money selling
options is necessarily higher.
Higher volatility means higher options prices. It’s as simple as
that.
Now, what you might not realize is that you can use options as part of a
commodity investing strategy.
Thanks to the advent of Exchange Traded Funds, you can easily take
advantage of commodity price swings with options. There are ETFs covering
just about every commodity out there that you might want to invest in:
gold, silver, oil, natural gas, softs, uranium, etc. – and most of them
have enough options contract liquidity to let you reproduce any strategy
(long or short) on commodities that you might care to.
Now, most investors will buy or sell straight puts or calls. And if you do
so, you can either win big, or lose big.
But I’ve been working closely with an options guru named Andy Crowder, and
he’s been teaching me some slightly more advanced options trades that yield
income, but aren’t nearly as risky as a straight put or call
strategy.
For instance: say you want to produce income from options using the gold
ETF SPDR Gold Shares (NYSE: GLD). If you believe gold will
go down in price, you can execute what’s known as a “credit spread”:
Sell the GLD Sep11 181 call
Buy the GLD Sep11 183 call
That gives you a 26 cents net credit. One options contract trades 100
shares, so your credit would be $26 for this specific trade.
Gold can go up 6.5% between now and expiration and you’ll still make money.
In fact, even if GLD hits 180, you would still make 13.0% on this
trade.
You are not required to have a precise direction on the market. No crystal
ball necessary. In fact, you can make money on a trade even if GLD moves in
the opposite direction of your belief as long as it does not exceed your
short strike at expiration. In this example, it would be the 181
strike.
If you believe gold will go up in price, you can execute a similar credit
spread buying and selling out of the money puts to similar effect.
I’m excited to get started using a small portion of my portfolio to use
similar options trades to bolster my income on a regular basis.
I’m not going it alone though. As I said, I’ve been learning from Andy
Crowder – a seasoned options pro.
If you’re interested in learning more about options, send Andy an email at
[email protected].
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