Question: I've heard you speak on making money with commodity options. I really appreciated the fact you were not pitching some stupid course, product or trading software. Could you explain (again) one of the fastest ways to make money with commodity options?
Answer: Marc Charles:
Sure! Thanks for the compliment too.
I've always been frustrated by people who dangle carrots in front of entrepreneurs in order to "get them" to buy products, services, and back-end stuff.
There's NOTHING wrong with selling back-end products. But I don't like deception or smoke and mirrors!
So I try to help business owners and entrepreneurs unconditionally...it's worked for me.
Some of you will love this.......
Most people will just shake it off....
But when I applied this commodity option strategy the first time in 1994 -- I was hooked.
I've taught hundreds of entrepreneurs and money managers how to apply this strategy since then.
The financial markets are a multi-trillion dollar wellspring of cash. Everyday trillions of dollars in transactions are completed in the stock, commodity, precious metals, derivative and interest rate markets.
But most people do not understand how to tap into these markets for quick cash profits.
One of the fastest ways to make money and have it deposited into your brokerage account is by “writing options”.
Writing options on commodity futures is a relatively easy thing to do.
Granted, you should never enter a transaction or commodity trade with money or capital you are unwilling or unable to lose. Risk management is the lifeblood of the most successful (and richest) traders in the world.
However, I’ll explain a simple tactic trader’s utilize to acquire money quickly.
The tactic is writing “out of the money” options on agriculture commodity futures.
An option contract gives a buyer the right, but not the obligation, to buy or sell a specified quantity of a commodity at a specific price within a specified period of time, regardless of the market price of that instrument.
An option buyer is a person who buys a call or put option, or any combination of calls and puts.
An option writer is a person who originates an option contract by promising to perform a certain obligation in return for the price or premium of the option. They are also known as an option grantor or option seller.
There are only two types of options: put and call.
A put option contract gives the holder the right but not the obligation to sell a specified quantity of a commodity at a given price (the "strike price") prior to or on a future date. An investor or trader would buy a put option if they believed the price of a particular commodity was going down.
A call option contract gives the buyer the right but not the obligation to purchase a commodity or to enter into a long futures position. An investor or trader would buy a call option if they believed the price of a particular commodity was going up.
Most investors and traders understand the concept of buying put or call options.
But the tactic of selling (or “writing” as it is often referred) a put or call option is often missed.
Here is how to apply this tactic in real time….
Review the commodity futures prices on your favorite financial website. I like BarChart.com because it’s easy, fast and concise, and includes charts.
I’m simplifying this example.
There is a risk when trading commodity futures. You should never trade with money you are unwilling to lose. Every investor must perform the proper due diligence whenever they trade commodity futures and/or options.
We’re going to “write” an “out-of-the-money” call option on the September Soybean futures contract.
If you do not fully understand commodity futures or options trading you should stop reading and take time to educate yourself. The space in this month’s issue does not allow me to go into greater depth or detail.
We’re selecting an “out-of-the-money” call option in the September Soybean futures contract because the likelihood this option will be exercised in the next few weeks is very low.
On BarChart.com we locate the September Soybean Meal Futures contract – the symbol is ZMU09.
This is what you will see:
September '09 (ZMU09) 302.4 -8.1 312.0 318.8 301.6 8230 26490
You can grab a chart of the September Soybean Meal Futures contract at BarChart.com.
When of the tricks to trading commodity futures is to understand charts so you can determine the “likelihood” or “probable” direction prices should take.
Another trick is to have a basic understanding of cycles in the market.
One of the best cycles with regards to soybean futures are prices tend to fall into the harvest.
So, keeping this in mind we’re going to “write” (sell) five “360” September Soybean Meal call options at the market.
The strike price “360” means $360 per bushel.
The premium or price you receive for selling one “360” call option is currently $160. By selling five “360” September Soybean Meal call options you would receive $800 into your account immediately (less brokerage commission and exchange fees – or about $25).
If the September Soybean Meal Futures contract does not reach $360 by September 14th you get to keep the entire premium (less brokerage commission and exchange fees – or about $25).
Think about this strategy for a few minutes......and you'll see the beauty of it.
Grab a copy of George Angell's Agriculture Options too. It's a GREAT primer for this type of trading.
I hope that helps!