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Tuesday, January 22, 2013

A Little-Known Market No One Told You About by Marc Charles

A Little-Known Market No One Told You About

5:01 AM

Dear Entrepreneur:
This is going to surprise you.
First of all, I’m confident NOBODY has ever told this money making opportunity.

Oh sure….you’ve probably heard fourth hand information from an in-law, uncle or co-worker.
But I’ll show you this baby in all its glory.

And YES….I’ve made money with this opportunity.

The opportunity is coffee options.

I’m not offering investment advice.

I’m simply offering a basic understanding of coffee futures and options trading. 

My column this week is NOT intended to provide specific financial or investment advice for you. 

On top of that, you should not act (or rely) on the information in this issue of without seeking the advice of a qualified financial adviser or futures broker.  They can discuss your specific circumstances and objectives. 

Great… now that I’ve managed to scare you senseless… let’s move on.

There are Risks When Trading Coffee Futures and Options

In deciding whether or not you want to become involved in any type of futures trading you should be aware you could both gain and lose large amounts of money. 

In other words, you risk losing money because………

(a) You could lose the margin funds you deposit with the futures broker to establish or maintain a futures position 

(b) If the market moves against your position, you may be required to deposit with the futures broker further monies as margin in order to maintain your position. If you fail to provide those additional funds within the required time your position may be liquidated. You will be liable for any shortfall in your account resulting from the liquidation.

(c) You could lose all monies deposited with the futures broker, and in addition be required to pay the futures broker further funds representing losses and other fees on your open and closed positions.

(d) Under certain conditions, it could become difficult or impossible for you to liquidate or close a position (this can happen when there is significant change in prices over a short period).

(e) The placing of contingent orders (such as a "stop-loss" order) may not always limit your losses to the amounts that you may want. Market conditions may make it impossible to execute such orders.

(f) The high degree of leverage obtainable in futures trading because of small margin requirements can work against you as well as for you. The use of leverage can lead to large losses as well as large gains.

(g) Futures and options trading are not appropriate for everyone. There is a substantial risk of loss associated with trading futures and options on futures. Only risk capital should be used.

(h) No representation is being made that futures and options on futures trading is appropriate for everyone. It should not be viewed as an alternative, replacement or supplemental form of income.

You should discuss these matters with a commodity broker prior to commencing any trading.

A Trader’s View of This Market…

A futures contract is an agreement (obligation) to buy or sell a given quantity of a particular asset at a specified future date at a prearranged price. 

Futures contracts have standard delivery dates, trading units, terms, and conditions. They can be based on any one of a number of underlying assets. 

There are futures contracts available in individual shares and stock market indices, bonds, interest rates, coffee, sugar, orange juice, and other agricultural commodities. 

You can even trade catastrophe futures (they have to do with insurance) at CME!

Futures contracts are usually traded on government-regulated exchanges like the Chicago Board of Trade (the largest futures exchange), ICE, and the New York Mercantile Exchange.

There are also commodity and currency futures exchanges in most industrialized countries.
You’ll find futures prices on most of the top financial websites and business newspaper websites.

The total number of contracts traded on the CME in 2010 was valued at more than $645 trillion!
You heard right…..645 TRILLION.  That’s a lot of lattes!

Now…as I said….You can "open" a futures position by either buying or selling a contract.
You can "close" a futures position by doing the exact opposite either selling or buying the same contract. 

If you believe the price of the underlying asset will rise, you would buy a futures position. This is referred to as being "long." 

When you buy a futures contract and hold it to expiration, you would be required to take delivery of the underlying asset, or equivalent cash value, at a prearranged price and by a certain date.

Don't worry though…..only a small percentage of futures contracts are held to expiration. 

Most of the money in this market is made during the life of a contract.

If you believe the price of the underlying asset will fall, you would sell a futures position. This is referred to as being "short." 

When you sell a futures contract and it is held to expiration, you would be required to deliver the underlying asset, or equivalent cash value, at a prearranged price and by a certain date. 

Beginning traders often have difficulty grasping the concept of selling something they don't own. What you are doing is simply selling something on paper - via the contract. 

There is a risk of substantial losses when trading any kind of futures contract. 

How to Reduce Risk with Options

One way to reduce risk is by using options.

You won’t eliminate risk…but you’ll greatly reduce it.

I can’t get into all the specifics of option trading in this week's issue but it wouldn't hurt for you to do some research on the topic.

But know this…….when you buy an option your risk is defined – upfront.

For example, if you buy an option for $500 that is the most you can lose.  

Your downside risk is limited to the “premium” or the price you pay for the option.

When I started trading this simple lesson was worth a fortune to me!

How to Make $10,000 While Sipping Chocolate Lattes at Starbucks

There is thousands of trading systems, techniques, and software programs on the market today.
Most of them are designed to help you make money in futures market. 

Obviously, some programs and techniques are better than others.

But George Angel taught me an option strategy many years ago which I still use to this day.
In fact, when I learned this simple technique I was so excited I couldn’t sleep.

Important Point: Unlike real estate, coins, brick-and-mortar businesses, and hundreds of other investments, the futures and options market is immediate. These is especially true for markets with large volume and open interest (open contracts). The worldwide futures market is huge. When you place an order to buy or sell, it's filled almost instantly! No lawyers, accountants, appraisers, government workers, or employees are required.


So here we go…..

Coffee options are contracts in which the underlying asset is a coffee futures contract. 

The holder of a coffee option possesses the right (but not the obligation) to assume a long position (in the case of a call option) or a short position (in the case of a put option) in the underlying coffee futures at the strike price. 

This right will cease to exist when the option expires after market close on expiration date.
If this doesn’t make sense….my advice is to STOP. Take some time to research and study the fundamentals of coffee options so all of this makes sense.

The Options Guide is a good place to start.

Here’s a hypothetical example….

Okay… let’s say the March Coffee futures contract is trading at $235 (per pound). A coffee futures contract is 37,500 lbs.  The total value of a coffee futures contract is approximately $88,125 ($2.35 x 37,500 lbs).

Great….now we’ll sell or “write” a put option on the March coffee futures contract.

This is also a nice strategy because coffee prices do not tend to fall coming into March and April.

The basic idea behind selling or “writing” a put option on a coffee contract is to profit if prices remain steady or increase. If coffee prices fall you would lose money by selling or “writing” a coffee put option.

We’ll sell one March coffee 220 put at the market. 

220 is the strike price. It means $2.20.

Let’s say the premium or cost of this option is 11 which mean 11 cents. The value of this particular option would be 11 x 37,500 or $4125.

If you sold this coffee option $4125 would be deposited into your account immediately! If you sold two options $8250 would be deposited into your account instantly.

Now…if the price of coffee remains under $2.35 or goes higher within the next 5 weeks when the option contract hypothetically expires, the full premium is yours.

You see….option contracts have a time element to them. There will always be an expiration date.

The trick is to write options as close to expiration as possible so the time element works in YOUR favor. 

In reality most options expire without being exercised, which makes selling or “writing” options a profitable opportunity.

There you have it!

A simple strategy for selling coffee options while sipping chocolate lattes with extra cream at Starbucks.

Have fun and play nice!

Your humble host,


Marc Charles



***** Action Strategy *****

Grab a $20,000 Paper Trading Futures Account Absolutely FREE – here

You can paper trade futures without risking a dime!

Test my coffee option formula or strategy to see if it works in the real world.

You can find a commodity future quotes everywhere – just Google it.

Select coffee option you want to trade, obtain a current market price (quote) and start trading “on paper”. 

Commodity future and option quotes are displayed with an opening price, high, low, settle, or closing price.

Selling or “writing” options is what savvy, street smart commodity traders use to make money with very little downside risk.

******** Valuable Resources ***********

Top World Commodity Futures Exchanges


Recommended Books
Trade Your Way to Financial Freedom, by Van K. Tharp
Market Wizards: Interviews with Top Traders, by Jack Schwager
The New Market Wizards, by Jack Schwager
Reminiscences of a Stock Operator, by Edwin Lefevre
Winning in the Futures Markets, by George Angell
Elliott Wave Principle by Robert Prechter Jr
The Complete Turtle Trader: The Legend, the Lessons, the Results by Michael Covel

A Trader's First Book on Commodities: An Introduction to the World's Fastest Growing Market by Carley Garner

Commodity Brokerages

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