Commodities May Gain 10% a Year, Credit Agricole Says

Commodities May Gain 10% a Year, Credit Agricole Says
By Claudia Carpenter
April 13 (Bloomberg) -- Commodities may gain 10 percent a year this decade, outperforming the Standard & Poor’s 500 Index of stocks, according to Credit Agricole SA.
Raw materials will generate stronger returns than the annual 3.4 percent from 2000 to 2009, Jean-Francois Perrin, asset allocation analyst at Credit Agricole Corporate & Investment Bank, told reporters in London today. At the same time, though, the risk of losses will increase, he said.
The Dow Jones-UBS Commodity Index Total Return gained 19 percent last year as oil, sugar and copper climbed. The gauge slid 36 percent in the prior year as the world financial crisis cut into demand for raw materials. /
“Commodities could be more risky because they’re starting now at a point that’s not so undervalued as in 2000,” Perrin said. “While commodities are fairly priced, we think there are so many constraints on supply in the long run they will likely increase.”
Raw materials as represented by the Dow Jones-UBS gauge will be as risky as the S&P 500 through 2020 and riskier than nine other benchmarks including the MSCI BRIC Index of shares, Credit Agricole estimates. The MSCI index of shares in Brazil, Russia, India and China will rise 11 percent a year through 2020, compared with gains of 6.5 percent a year for the S&P 500, the bank said.

HOW TO TRADE COMMODITIES

The commodities market is essentially a wholesale market. It is comprised of many common, household items but the difference is that trading these commodities is done in large bulk. For example, when you go to the grocery store to buy sugar, it is usually in five-pound bags. In the commodities market, you can buy sugar too, except that it is for 112,000 pounds! Here's another example. When you gas up your car or truck, you pay for gasoline by the gallon and maybe purchase 10 or 20 gallons. In the commodities market, you can also buy unleaded gasoline but the standard transaction size is much larger; 42,000 gallons! That's a lot of gasoline!
Because of the large size of these "wholesale" transactions, very few people ever trade commodities with the intention of actually using or consuming the item if they bought, or delivering the item if they sold. There's just too much of it! The great majority of commodity traders buy and sell only to profit from price movements. They are called speculators. And they are drawn to the commodities market in search of high-yield investing opportunities.
So what are some of these commodities? Well, the oldest and perhaps best known are the grains like corn and soybeans. Then there are the meats such as live cattle and yes, pork bellies. There are contracts on the energies such as crude oil and unleaded gasoline, and on precious metals such as gold and silver. The softs include cocoa, coffee, sugar, cotton and orange juice. Finally, there are financial products such as bond futures, equity index futures and currency futures. Any one of these markets can provide an opportunity when commodity trading.
In addition to the wide selection, there is another great advantage to commodity trading: You can sell before you buy. Most investors are comfortable with the typical investment pattern of buying first and selling later. While useful during a bull market, you typically just have to sit on the sidelines if prices are falling. In the commodities market, though, you can sell first and later buy back. Selling first is possible with commodities because when you sell a commodity contract, you're not required to deliver anything. Delivery is required only when the contract reaches expiration which may be weeks or months down the road. As long as you buy back the contract before its expiration, then you will cancel this obligation to deliver. And if prices have fallen in the interim so that you buy back at a lower price, then you have made money!
Perhaps the greatest appeal of commodity trading is high leverage. This means that to buy or sell a commodity having a contract value of say, $100,000, the commodity trader need only hold a small portion of this value in a commodity trading account, maybe $3,000 or so depending upon the contract. Because of leverage, the trader gets a big back for every buck. In the example above, a one percent change in the market value of the commodity contract would be equal to $1,000 or 33% of the margin. Leverage is what makes commodity trading risky and is described in greater detail in Understanding Commodities at right.

Let’s take a look at how the strategy works with this position. For the sake of our illustration and to make our calculations easy let's establish the collar using the December 27.5 put and the December 30 call, with both trading at $1.00. Remember our future options price was $28.50. The cost of the collar will be $0 because you paid $1.00 for the put but you collected $1.00 from the sale of the call. How does the collar work in our usual three scenarios: the “up” scenario, the “down” scenario and the “stagnant” scenario? In the “up” scenario, we find that when the future options rise, the investor gains penny for penny until the future options reach the call strike. Once the future options reaches that level, the position no longer gains because the future options are at the point where they will be called away.Capital gains of the position are maximized when the future options reach the call’s strike price. Let’s take a closer look at what happens as the future options price goes up. With the future options at $29.00, both the Dec. 30 calls and the Dec. 27.5 puts are out of the money and thus worthless. Since there was no debit or credit incurred in the future options, the option profit (loss) is $0. Only the stock position remains. The future options purchased at $28.50 are now trading at $29.00 for a $.50 profit.Let's raise the future options price to $30.00. The puts and calls are again worthless so your profit (loss) is solely determined by the future options. The future options, which was purchased for $28.50 is now worth $30.00 and represents a gain of $1.50. This $1.50 gain is the maximum gain the position allows.Once the future options go over $30.00, the Dec. 30 call, which we are short, would become in-the-money and therefore the future options position would be called away at that price. When the future options price rises to $31.00, the puts would be out-of-the-money thus worthless but the calls would be worth $1.00.You received no money for the establishment of the collar so you would have a $1.00 loss in the options. Meanwhile, the future options that you purchased at $28.50 is now worth $31.00 at expiration, which is a $2.50 gain.Combine the $2.50 gain in the future options with the $1.00 options loss; you have a $1.50 profit again. You may do this calculation with higher and higher future options prices but the outcome will always be the same. This example shows how your upside potential is limited.Obviously, if the option portion of the collar incurred a debit or credit, that inflow or outflow of money must be added to or subtracted from the future options gain to get the overall return of the position.Normally, there will be a debit or credit incurred in the collar. It is usually difficult to find a put and a call that you want to use in the collar trading at an equal value. Let’s use our last example with some minor price changes.If the put had been trading at $1.25 instead of $1.00, then there would be a $.25 capital outflow that would have to be subtracted from the $1.50 gain to reduce it to only a $1.25 gain.On the other hand, if the call was trading at $1.25 then you would have collected an extra $ .25 which added to the $1.50 gain would produce a $1.75 gain. The cost of the collar always impacts the bottom line profit or loss of the position.

The Protective Put Strategy & Forex Options

As a reminder, a put gives an owner the right but not the obligation to sell a certain forex options, at a specific price, by a specified date.For this opportunity, the buyer pays a premium. The seller, who receives the premium, is obligated to take delivery of the forex options should the buyer wish to sell the forex options at the strike price by the specified date. A strategically used put offers maximum protection against substantial loss.The Protective Put, also referred to as a “married put,” “puts and stock” or “bullets,” is an ideal strategy for an investor who wants full hedging coverage for their position.Whereas the Covered Call Strategy will cover an investor down only as far as the premium he receives, the protective put strategy will protect the investor from the breakeven point down to zero.This strategy's philosophy is different from the covered call (buy-write) strategy in two major ways.The covered call is a premium selling strategy, while the protective put is a premium purchasing strategy; and the covered call is most effective in a less volatile situation while the protective put is more effective in high volatility situations.When an investor purchases forex options, he can either sell the call (buy-write) or buy the put (protective put) to provide a proper hedge. The construction of the protective put position is actually quite simple. You buy the forex options and you buy the put on a one to one ratio meaning one put for every one hundred shares.Remember, one forex options contract is worth 100 shares. So, if we have 400 forex options in IBM then you would need to purchase exactly four puts.
Number of Shares Owned
Put Contracts to Buy
100
1
300
3
1700
17
9200
92
14500
145
267000
2670From a premium standpoint, we must keep in mind that by purchasing forex options, we are paying out money as opposed to collecting money. This means that our position must “outperform” the amount of money that we put out which is the opposite side of what we did in the covered call strategy.If we were to pay $1.00 for a put and we owned forex options against it, we would need to have the forex options increase in price $1.00 just for us to break even. Unlike the covered call, the protective put strategy has the premiums working against it, thus the forex options need to move more to offset the cost of the put.This is why long option strategies need more volatility than short option strategies. Earlier we talked about the covered call strategy needing to be done over a decent period of time (a year or so) in order to take advantage of the odds.We stated that selling forex options and collecting the premium was the right thing to do 75% – 82% of the time. If this is true, then buying forex options and paying out premiums is only going to be right 18% – 25% of the time.Those are not good odds. So, you should try to stay away from employing this strategy over a long period of time to avoid having the odds fall against you. However, employing a protective put can be extremely effective in the proper situation.Let’s take a look at the risks and rewards of the protective put strategy over three different scenarios:...

How The Stock Replacement Covered Call Strategy Work For Fair-Value Stock Options

We have demonstrated how well options function in unison with a stock position. They enhance potential gains and provide profit protection. They enable us to manage specific risk for fair-value stock options as well as an entire portfolio. But, as good as options are in conjunction with fair-value stock options, they can be even better when traded against each other.There are many option strategies that do not involve the use of any security other than another fair-value stock options, like spreads, straddles and strangles, for example.A spread involves the purchase of one option in conjunction with the sale of other fair-value stock options. There are many types of spreads. Some take advantage of fair-value stock options movements while others are set up to take advantage of implied volatility movements. Some are even designed to take advantage of a fair-value stock options staying still. There are vertical spreads, calendar or time spreads, diagonal spreads and ratio spreads just to name a few. Spreads can provide large percentage returns with low risk and can be entered into with small capital outlay.Straddles involve the buying (long) or selling (short) of a call and a put (usually at-the-money) in the same fair-value stock options, in the same expiration month, and the same strike.Strangles involve the buying (long) or selling (short) of an out-of-the-money call and an out-of-the-money put in the same fair-value stock options and in the same expiration month.These are both trades in which you can take advantage of fair-value stock options or volatility movements (in the case of being long) or lack of fair-value stock options or volatility movements (in the case of being short) during the period of time until expiration. Both straddles and strangles are considered premium precision plays.These trades are considered more advanced and sophisticated than the strategies previously discussed. Certain spreads, such as 1 to 1 vertical spreads, can actually be less risky than some of the strategies discussed above, but spreads generally do have more variables to consider, and this makes them more difficult to trade.The straddles and strangles sometimes involve much more risk and many more variables to take into consideration. So, these trades are considered very sophisticated and should not be entered into by untrained novices.

Construction of a Vertical Spread For Expensing Stock Options

Again we set time forward to Friday, July expiration. We set the expensing stock options closing price at $60.00. At $60.00, both the July 45 puts and the July 60 puts will be out of the money and thus worthless. With both the July 45 puts and July 60 puts worthless, the spread is also worthless (July 60 put $0 – July 45 put $0). If the expensing stock options finish at $52.50, then the July 60 puts will be worth $7.50 while the July 45 puts will still be worthless. In this scenario the July 45 – 60 put spread will be worth $7.50 (July 60 puts $7.50 – July 45 puts $0). If the expensing stock options finish at $45.00, then the July 60 puts will be worth $15.00 while the July 45 puts will be worth $0.At this level, the spread will be worth $15.00 (July 60 puts $15.00 – July 45 puts $0). This is the maximum value of the spread. As you can see it is identical to the $15.00 difference between the strikes. As the expensing stock options go lower, the July 45 puts become in-the-money and gain intrinsic value. Now, for every penny that the expensing stock options decrease in value, the July 60 puts and the July 45 puts will gain value equally, keeping the $15.00 spread between the two strikes constant. To see this, refer to the table below.As stated, the maximum value of a vertical spread is the difference between the two strikes while the minimum value of the spread is, of course, $0. This means that in this expensing stock options strategy, both the buyer and the seller have a limited, fixed maximum loss. The buyer can only lose what he spent. So, if the buyer spent $2.20 to purchase the August 35 – 40 call spread, the most he can lose is the $2.20 he spent.For the seller, the maximum loss is the difference between the maximum value of the expensing stock options spread (difference between the strikes) and the amount of money received for the sale of the spread. For example, if you were to sell the August 35 – 40 call spread for $2.20 then your maximum loss will be $2.80. Remember, the maximum value of the spread is the difference between the two strikes or $5.00 (40 – 35).
Stock Price
June 60 put value
July 45 put value
Spread

Donalds & Their Covered Call Options

NOTES ON DONALD’S (MCD) covered call options1. Around June 2, 2003, MCD breaks out through a resistance level established back in late Nov. early Dec. 2002 after failing to break that resistance level in mid May 2003.2. MCD climbs up from $20.00 to the $25.00 range in a slow gradual uptrend step like pattern. This type of pattern is an opportunity for buy-writers because this type of gradual rise normally brings about a decreasing implied volatility period which is great for premium selling.3. Notice the size of the daily vertical lines during the period from mid-August 2003 to December 2003. The size of the lines represents the daily trading range of the stock. As you can see, the lines are very short which indicates that the stock does not move much intra-day. Again, this is an indication of decreasing volatility which is a positive sign for buy-writers.Conclusion: The two most prominent and noticeable patterns both bode well for buy-writers. The covered call options strategy does not need a lack of movement, as much as slow, consistent non-volatile movement.So, in the case of McDonalds above, the slow trending movement of the stock brings about a decreasing volatility for the covered call options. Added to this is the contraction of intra-day movement, as shown by the decreasing range of daily trading.These two factors each contribute to decreasing volatility and provide an opportune time to write a covered call for the covered call options. This is the type of pattern that offers both capital appreciation as well as premium returns.

How You Can Positively Affect Corporate Stock Options

Like other strategies, the collar can be leaned toward the investor's perception of a corporate stock options direction and strength.Let’s look at the potential leans that can be taken. Say that you have a very strong feeling the XYZ is going to go up. Instead of buying a put and selling a call with strikes that are roughly equidistant from the corporate stock options price, you would sell a call that is further out-of-the-money.This would allow more room for a larger increase in the corporate stock options price because the stock would not be called away as early. You retain ownership for a longer period of time during the increasing price period.Of course, by increasing the distance of the option’s strike away from the corporate stock options, the amount of the call's premium will decrease. The overall effect is that you’ll have to pay more to own the position. (You will pay out more money for the put than you will receive from the call.)Again, we'll start with the same prices as in our original case, (stock $28.00, Dec. 27.5 put $1.00 and Dec. 30 call $1.00) only now we will change the Dec. 30 call at $1.00 to the Dec. 32.5 call at $ .35.In our other examples, we incurred no debit or credit from our option position. This time, with the bullish lean, a debit is incurred. The purchase of the Dec. 27.5 put for $1.00 combined with the receipt of $ .35 from the sale of the Dec. 32.5 call produces a $ .65 debit.Remember, this debit must be subtracted from the bottom line profit or added to the bottom line loss of the corporate stock options capital result. This means that before you make any money from the position, the corporate stock options must trade up $ .65.If the corporate stock options stay stagnant you will lose $ .65, and any capital loss you incur will be $ .65 worse. Now back to the position in our previous example. With the selling of the Dec. 30 call, we had an upside potential of $1.50. In this example things change.As was stated, our maximum upside potential is calculated by setting the corporate stock options price at the strike price of the short call which is 32.5 in this case. With the corporate stock options at $32.50 at expiration, you would have a $4.00 stock gain since the corporate stock options were purchased for $28.50.Remembering your $ .65 debit to enter the position, we subtract that from the $4.00 and we have a total maximum profit of $3.35. This is significantly more potential reward than our original example using the Dec. 30 call.As in all trading situations that offer a higher potential reward, there comes a higher potential risk. If the corporate stock options stay at $28.50, (the stagnant scenario) you have a loss of $.65 in option costs. In the down “scenario,” calculating the maximum risk is done by setting the corporate stock options price at $27.50 on expiration.The corporate stock options, purchased at $28.50 has lost $1.00. The options, not neutral, resulted in a $.65 loss. The total loss is $1.65. In both the “stagnant” and “down” scenarios, the loss increased over that in our original example. As you can see, the higher potential gain is accompanied by an increased potential risk...

A Strategy For Commodity Option Trading That Can Save You Money

Tax Deferral Strategies & Commodity Option TradingA Strategy For Commodity Option Trading That Can Save You MoneyFor years up until the burst of the bubble, investors needed only to be right about what kind of commodity option trading they got involved in. Should they buy XYZ, ABC or PDQ? The philosophy at the time led investors to believe that the purchase of the right stock in commodity option trading was the key to success. The question was not “which stock will go up?” but “which stock will go up more?” It was a time of buy and hold and the concept of sell was often overlooked and infrequently used in commodity option trading.This remarkable bull market phase was characterized by large moves, and also by some degree of investor complacency – in that they just bought, held, and waited to profit from their commodity option trading.When the bubble burst, commodity option trading became much more volatile, making it too dangerous to just buy, hold and wait. As quickly as an investor had a profit, the market could turn and they would suddenly be faced with a loss. The time of buy and hold had ended and the time of buy and sell had begun.The importance of taking a quick profit from commodity option trading now meant the difference between profit and loss. The shrewd investor took profits from commodity option trading quickly, instead of waiting and having those profits disappear. However, one of the problems investors then faced was higher taxes, in the form of short term capital gains.Investors who sold their stock accumulated from commodity option trading before holding for a one year period were hit with these higher short term capital gains taxes. Short term capital gains are treated as ordinary income thus taxed at that rate which for most investors is 25%. That tax is much higher than the long term capital gains tax of 15%, up to 67% higher.Prior to the burst of the bubble, an investor was pretty safe holding onto an investment gained from commodity option trading for a few extra months in order to get beyond the one year mark. Then they would sell their position and only incur the long term capital gain tax, which today is 15%.These days, it can be dangerous even waiting a couple of extra days, let alone weeks or months. That delay can mean the difference between having to pay taxes from commodity option trading or finding a previous gain to put against your new loss.Fear not investor … commodity option trading to the rescue! As we have established in “The Stock Replacement Covered Call Strategy,” a deep in-the-money call can be substituted for stock under appropriate conditions. In the Stock Replacement Covered Call, you used the purchase of a call with a delta in the mid to high 90’s to replace your long stock. As you saw, the call behaved very similarly to a long stock position.In this case, you will again use a deep-in-the-money call to replace your stock. This time, however, you will engage in a sale of the call to mimic the sale of the actual stock. With proper timing and call selection, you can hold on to the stock until the one year time line passes without risking the potential decrease in your commodity option trading profit. Let’s take a look at how this works.We begin our analysis by walking through a commodity option trading example. Let’s pretend that you were commodity option trading with stock XYZ at a price of $45.00 in January 2003. Over the course of the next nine months, XYZ traded up to $82.00. At this point (October - the ninth month of ownership), you feel that it is time to take your profit and sell your stock.However, since it has only been nine months since the purchase, you would be susceptible to the higher tax on your short term capital gains. But, by waiting another few months, you run the risk of the stock trading down and losing profits.If you sell the stock, you lose additional money because of the difference between short term (15%) and long term (25%) capital gains taxes. If you wait out the year, you risk the decrease in the stock price. What should you do?The best solution would be to sell a call option against your stock...

Effects Of Volatility On The Time Spread For Commodity Options Trading

When purchasing a time spread, the investor should pay attention not only to the movement of the commodity options trading price but especially to the movement of volatility.Volatility plays a very large roll in the price of a time spread and, as we have stated, the time spread is an excellent way to take advantage of anticipated volatility movements in a hedged fashion.Since the time spread is composed of two options, the investor should understand the role of volatility in commodity options trading as well as in time spreads. Let’s start with commodity options trading volatility.A commodity options trading volatility component is measured by a term called vega. Vega, one of the components of the pricing model, measures how much a commodity options trading price will change with a one point (or tick) change in implied volatility. Based on present data, the pricing model assigns the vega for each option at different strikes, different months and different commodity options trading prices.Vega is always given in dollars per one tick volatility change. If an option from your commodity options trading is worth $1.00 at a 35 implied volatility and it has a .05 vega, then the option will be worth $1.05 if implied volatility were to increase to 36 (up one tick) and $.95 if the implied volatility were to decrease to 34 (down one tick). Remember, vega is given in dollars per one tick volatility change.As we continue to discuss vega, keep these facts in mind:
Vega measures how much a commodity options trading price will change as volatility changes.
Vega increases as you look at future months and decreases as you approach expiration.
Vega is highest in the at the money commodity options trading.
Vega is a strike-based number – it applies whether the strike is a call or a put.
Vega increases as volatility increases and decreases as volatility decreases.It is important to note that a commodity options trading volatility sensitivity increases with more time to expiration. That is, further out-month commodity options trading have higher vegas than the vegas of the near term options. The further out you go over time, the higher the vegas become.Although increasing, they do not progress in a linear manner. When you check the same strike price out over future months you will notice that vega values increase as you move out over future months.The at-the-money strike in any month will have the highest vega. As you move away from the at-the-money strike, in either direction, the vega values decrease and continue to decrease the further away you get from the at-the-money strike.Remember, vega (an option’s volatility component value) is highest in at-the-money, out-month commodity options trading. Vega decreases the closer you get to expiration and the further away you move from the at-the-money strike. The chart below shows vega values for QCOM commodity options trading.As you look at the chart observe the important elements: the commodity options trading price is constant at 68.5; volatility is constant at 40; time progresses from June to January; and finally, the strike price changes from 50 through 80. Notice the increasing pattern as you go out over time. Also notice how the value decreases as you move away from the at-the-money strike.
Chart 3-Vega Stock Price 68.5 Vol.40
Strike
June
July
October
Jamuary
50
0
.008
.064
.114
55
.004
.030
.102
.153
60
.023
.063
.135
.184
65
.053
.090
.157
.205
70
.056
.094
.165
.215
75
.032
.077
.154
.213
80
.011
.052
.142
.203Another important fact about vega is that it is a strike-based number. That means that the vega number does not differentiate between put and call. Vega tells the volatility sensitivity of the strike regardless of whether you are looking at puts or calls. So, the vega number of a call and its corresponding put are identical...

How Time Decay Affects Commodity Options

Time decay, also known as theta, is defined as the rate by which a commodity options value erodes into expiration. The value of the commodity options over parity to the stock is called extrinsic value.Since commodity options are a depreciating asset, meaning they have a limited life, the extrinsic value in the commodity options will wither away daily until expiration. This “decay” is not a linear function meaning it is not equally distributed between all of the days to expiration.As the commodity options gets closer to expiration, the daily rate of decay increases and continues to increase daily until expiration of the commodity options. At expiration, all commodity options in the expiration month, calls and puts, in-the-money and out-of-the-money must be completely devoid of extrinsic value as noted in the time value decay charts below.As more time goes by, the commodity options extrinsic value decreases. Again, it is important to note that the rate of this decrease is not linear, meaning not smooth and even throughout the life of the option contract. An option contract starts feeling the decay curve increasing when the option has about 45 days to expiration. It increases rapidly again at about 30 days out and really starts losing its value in the last two weeks before expiration.This is like a boulder rolling down a hill. The further it goes down the hill, the more steam it picks up until the hill ends.By selling the commodity options and owning the stock, the covered call seller captures the extrinsic value in the option by holding the short call until expiration.By selling the commodity options and owning the stock, the covered call seller captures the extrinsic value in the option by holding the short call until expiration.At The Money Call vs. In The Money Call At The Money Call vs. In The Money Call
Key Point – The covered call strategy provides the investor with another opportunity to gain income from a long stock position. The strategy not only produces gains when the stock trades up, but also provides above average gains in a stagnant period, while offsetting losses when the stock declines in price.We have now seen how a covered call strategy is constructed and how it is supposed to work. Keep in mind that the trade can be entered into in two ways. You can either sell calls against stock you already own (Covered Call) or you can buy stock and sell calls against them at the same time (Buy Write).Example 1You own 1000 shares of Oracle at $9.50.The stock has been stuck around this level for a long time now and you have grown impatient. You finally give in and sell the front month (November for example) at-the-money calls. The at-the-money calls would have a strike price of $10 if the stock was trading at $9.50.You sell the calls at a $.50 premium per contract which creates a $10.50 breakeven point. Remember, in a buy-write, the breakeven point is the strike price plus the option premium.
Discover these secret option trading strategies that will have your friends calling YOU 'the options expert' Click here!...

How You Should Employ The Different Spreads To Your Commodity Futures Options Trading

There are two main types of vertical spreads for commodity futures options trading. There is the vertical call spread and the vertical put spread. Each spread allows you to do two things. First, you can buy it, making you long the vertical spread. Second, you can sell it making you short the vertical spread. Both can be employed to take advantage of directional commodity futures options trading plays. When we use the term “directional stock play,” we refer to using vertical spreads to capitalize on anticipated stock movements either up or down.A bull spread is used when the investor feels that commodity futures options trading is most likely to go up. As we recall, “bullish” means to have a positive outlook on a commodity futures options trading movement. There are two ways to set up a commodity futures options trading bull spread. The first is with the use of calls. In this case, a bullish investor would buy a vertical call spread (bull call spread). Buying a call with a lower strike price and selling a call with a higher strike price accomplish this.The second way to construct a commodity futures options trading bull spread is with the use of puts. A bullish investor could sell a vertical put spread (bull put spread) hoping to profit from an increase in the commodity futures options trading value. The investor would sell a put with a higher strike price and buy a put with a lower strike price. Let’s take a look at how the P&L chart of a Bull Spread looks below.
To recap, if you feel commodity futures options trading will be increasing in value, you may put on a bull spread by either buying a vertical call spread (bull call spread) or selling a vertical put spread (bull put spread)A commodity futures options trading bear spread, however, is used when, you the investor, feels a commodity futures options trading is likely to trade down. Remember, “bearish” means that one’s outlook on the future movement of the stock is negative. To take advantage of this expected downward movement, the investor would put on a commodity futures options trading bear spread. This can be done in either of two ways.First, the investor can do it using puts. The purchase of a vertical commodity futures options trading put spread (bear put spread) can be accomplished by purchasing a put with a higher priced strike and selling a put with a lower priced strike.The second way an investor can construct a bear spread is by using calls, specifically, by selling a vertical call spread (bear call spread). You do this by selling a call with a lower strike price and purchasing a call with a higher strike price.So if you think that commodity futures options trading is likely to decrease in value, you sell a vertical call spread (bear call spread) or purchase a vertical put spread (bear put spread). Let’s take a look at the P&L diagram for a Bear Spread below.
Finally, there are two fundamentals that are universal to all commodity futures options trading vertical spreads. These fundamentals are critical to understanding the foundation of the vertical spread strategy: (1) you can determine a vertical spread’s maximum value by taking note of the difference between the two strikes and (2) vertical spreads have intrinsic value...

Another Profitable Strategy For Commodities Options Trading

The fact that you are creating the covered call strategy (buy-write) for commodities options trading, by doing the vertical spread is very important to note. For margin purposes, the vertical spread will be margined at a much more favorable rate than the traditional buy-write because you do not own the actual stock for the commodities options trading and therefore do not have as much to lose. This is especially important to investors/traders who trade on margin.This scenario includes another significant value added benefit that you receive. When you purchase a spread, the most you can lose is the amount you paid for the spread, which in this case is $10.15.As you already know, the biggest risk in a covered call/buy-write strategy is a large downward move in the stock from commodities options trading. If you had done this trade with the actual stock from commodities options trading and the stock from traded all the way down to $20.00 from $60.00 (although unlikely) we would stand to lose almost $40,000.However, if you did the trade with the 47.5 calls in place of the stock via the vertical call spread above, the maximum loss is what you spent on the commodities options trading. Remember, you purchased the vertical call spread for $10.15. If you traded the spread an equivalent amount of times to equal 1000 shares, you would have bought a total of 10 spreads.The total dollar amount of your investment would be $10,150.00, as opposed to $58,900 had you bought 1000 shares of Amgen outright. Your loss will be maximized at $10,150 if the commodities options trading ventures traded down to $20.00 as opposed to a $38,900.00 loss in the case of outright stock ownership. Even if the stock were to trade down to $0, your maximum possible loss would still be $10,150.This is because once the commodities options trading goes below $47.50, the December 47.5 calls become worthless thus the calls can not lose any more money no matter how much more commodities options trading ventures trades down.In order to continue or “roll” this position, you will have to roll two options into the next month instead of one. In a traditionally structured covered call strategy (long stock, short call), you are dealing with only one option series.However, in the commodities options trading replacement strategy, you have a second option series (the call you purchased to replace the losses during your commodities options trading) to roll into the next month. This may incur an additional commission but the commodities options trading is obviously well worth it when you look at the previously stated risk/reward scenario and the size of the capital outlay needed to initiate the position.Conclusion: As we detailed here, the stock replacement version of the covered call/buy-write strategy is an example of the proper use of option leverage. It offers the investor a bigger percentage return, less risk and less capital requirement than the traditional covered call/buy-write strategy.Anytime you are interested in a high dollar stock, first look to see if there are any deep in-the-money calls that fit this replacement scenario and evaluate if this might be a better option...

How This Strategy Can Drastically Effect Your Commodities Options

Looking at the collar in the “stagnant” scenario, the commodities options price would be unchanged thus neutral in terms of return. Therefore, the potential profit or loss would come strictly from the debit or credit of the two options.If the commodities options do not move, as in our example, both the put and call would finish out-of-the-money and be worthless.Our profit or loss would simply be calculated from whether you paid for the collar or collected from the collar and how much that amount was.Using the same prices as the previous example (the commodities options purchase price of $28.00, the Dec. 27.5 put $1.00 and the Dec 30 call $1.00) we will now take a look at the “down” scenario. Let’s set the commodities options price at $28.00 on expiration. At this price both the Dec. 27.5 put and the Dec. 30 call are out-of-the money and worthless. Since there is no credit or debit incurred in the option position ($1.00 inflow from the calls, $1.00 outflow from puts) the total return of the position is simply the gain or loss from the commodities options.With the commodities options purchase price of $28.50 and a commodities options price of $28.00 on expiration, there will be a $ .50 loss in the position. Setting the commodities options price at $27.50, we see that the Dec. 27.50 puts and the Dec. 30 calls are again worthless and with no debit or credit incurred, the positions profit or loss will come down to the gain or loss on the commodities options.With the purchase price of the commodities options being $28.50 and the commodities options price at expiration $27.50, there will be a $1.00 loss. In this case, we have reached the maximum loss. No matter how low the commodities options go, you can only incur a maximum loss of $1.00.Now, let’s set the commodities options price at $26.00 and see if this holds true. With the commodities options at $26.00 on expiration, the Dec. 30 calls are out-of-the-money and worthless. The Dec. 27.5 puts, however, are in-the-money and now worth $1.50.The commodities options you purchased for $28.50 is now worth $26.00 on expiration which is a $2.50 loss. Combining the $2.50 stock loss with the $1.50 gain in the puts and you have a $1.00 loss in the overall position.This demonstrates that $1.00 is the maximum loss of the position. Keep in mind that if the commodities options position creates a debit or a credit, it must be added to, or subtracted from the stock loss.Most of the time, there will be a small debit or credit incurred in the option position. It is relatively infrequent that the put and call used in the collar are trading at the exact same price...

How This Strategy Can Drastically Effect Your Commodities Options

Let’s take a look at how the strategy works for commodities options with this position. For the sake of our illustration and to make our calculations easy let's establish the collar using the December 27.5 put and the December 30 call, with both sets of commodities options trading at $1.00.Remember the commodities options price was $28.50. The cost of the collar will be $0 because you paid $1.00 for the put but you collected $1.00 from the sale of the call. How does the collar work in our usual three scenarios: the “up” scenario, the “down” scenario and the “stagnant” scenario?In the “up” scenario, we find that when the commodities options rise, the investor gains penny for penny until the commodities options reach the call strike. Once the commodities options reach that level, the position no longer gains because the commodities options are at the point where they will be called away.Capital gains of the position are maximized when the commodities options reach the call’s strike price. Let’s take a closer look at what happens as the commodities options price goes up. With the commodities options at $29.00, both the Dec. 30 calls and the Dec. 27.5 puts are out of the money and thus worthless. Since there was no debit or credit incurred in the options, the option profit (loss) is $0. Only the stock position remains. The commodities options purchased at $28.50 are now trading at $29.00 for a $.50 profit.Let's raise the commodities options price to $30.00. The puts and calls are again worthless so your profit (loss) is solely determined by the commodities options. The commodities options, which were purchased for $28.50 is now worth $30.00 and represents a gain of $1.50. This $1.50 gain is the maximum gain the position allows.Once the commodities options go over $30.00, the Dec. 30 call, which we are short, would become in-the-money and therefore the commodities options position would be called away at that price. When the commodities options price rises to $31.00, the puts would be out-of-the-money thus worthless but the calls would be worth $1.00.You received no money for the establishment of the collar so you would have a $1.00 loss in the options. Meanwhile, the commodities options that you purchased at$ 28.50 are now worth $31.00 at expiration, which is a $2.50 gain.Combine the $2.50 gain in the commodities options with the $1.00 options loss; you have a $1.50 profit again. You may do this calculation with higher and higher commodities options prices but the outcome will always be the same. This example shows how your upside potential is limited.Obviously, if the commodities options portion of the collar incurred a debit or credit, that inflow or outflow of money must be added to or subtracted from the stock gain to get the overall return of the position.Normally, there will be a debit or credit incurred in the collar. It is usually difficult to find a put and a call that you want to use in the collar trading at an equal value. Let’s use our last example with some minor price changes.If the put had been trading at $1.25 instead of $1.00, then there would be a $.25 capital outflow that would have to be subtracted from the $1.50 gain to reduce it to only a $1.25 gain.On the other hand, if the call was trading at $1.25 then you would have collected an extra $ .25 which added to the $1.50 gain would produce a $1.75 gain. The cost of the collar always impacts the bottom line profit or loss of the position...

How To Save Money On Your Commodities Option

Be sure to talk to your broker and your accountant about this commodities option strategy before employing it. Tax laws change regularly, as you can see, and you should check with an expert to make sure this commodities option strategy is still viable. It is important to consult with a professional accountant or tax attorney before employing any of these commodities option strategies to see which is currently acceptable with the IRS.At the time of this writing, we have heard that the IRS may be changing their policy on this commodities option strategy and may consider this a ‘wash sale.’ This essentially means that the sale of a call in this manner would constitute a sale of the commodities option, and that you would still be liable for the short term capital gains on the trade. This means. In reality, the IRS is stating that the commodities option was effectively sold on the date the call was sold and not on the expiration date of the call.If the IRS will not let us use in-the-money options or at-the-money options for tax deferral, then we must find a way to use out-of-the money options to lock in the commodities option price for the period of time necessary to meet the long term gain requirement, as in the case of the collar strategy.As you recall, the collar combines the purchase of an out-of-the-money put, with the sale of an out-of-the money call. The proceeds of the call sale will be used to off set the cost of the put and thus, the total outlay of capital will be minimal.Looking back at the earlier example, we will now apply a collar to protect our position price, and buy us time until the one year mark passes.As you remember, we were talking about commodities option, XYZ, which we purchased in January of 2003 at a price of $45.00. By October of 2004, the commodities option had increased in price to $82.00. If you wanted to sell your commodities option and take your profit at this time, you would have to pay the higher short term capital gains tax.This means your profit will be taxed as ordinary income. Now if you could get the commodities option to hold steady for a few more months, you could sell and only incur the long term capital gains tax, which could be a big savings to you.Let’s take a look at how to properly implement the collar here. With the commodities option at $82.00, you would purchase the January 2004 80 strike put and sell the 85 strike call. Hopefully, you can execute this trade for no cost, but, in all likelihood, you’ll have to pay a small premium for the position (which would be well worth it).Now that you have the January 80-85 collar on, let’s take a look at how the position would work based on where the commodities option goes...

How To Save Money On Your Commodities Option

To capitalize on this commodities option strategy, your call must meet certain criteria. First, the time to expiration should be just beyond the commodities option one year ownership time period. You need to get beyond the commodities option one year period but not too much beyond so you are not tied into the position longer than you have to be.Remember, you are engaging in this commodities option strategy because you want to sell the commodities option and close the position, so you want to stay away from doing anything that would keep you in the position longer than absolutely necessary.Second, you would want to make sure the commodities option is deep enough in the money, in two respects. First, the commodities option must have a high delta, at least in the 90’s, and second - the strike price must be lower than what you perceive is the lowest price the stock could reasonably go between now and the commodities option expiration.So, you decide to sell the January 2004, 60 strike calls for $23.00. By doing this, you have ensured yourself of being able to sell the commodities option at $60.00 and you have received $23.00 to do so.In effect, you have sold your commodities option at $83.00 without selling your stock, as long as the stock stays above $60.00 by the expiration. This is because the buyer of the option will naturally exercise your short call with the commodities option above $60.00 forcing you to sell the stock to them. You then sell your stock at $60.00 plus the $23.00 you received from the sale of the commodities option.Because this happens at January expiration, which is after the one year time line, you now only have to pay long term capital gains tax - instead of the much higher short term capital gains tax.You see what happens when the commodities option stays above $60.00, but what happens when the commodities option trades below $60.00? Below $60.00, the buyer of your call will not exercise their call. Under those circumstances, you must sell the commodities option yourself. You will realize whatever the market price of the stock is at that time plus the $23.00 you received from the sale of the call.Another strategy that would provide you the protection you need, while buying you the time you need would be a collar. A collar, however, can cost you money because the collar involves the trading of two commodities options, and therefore costs you more in commissions.When applying the collar strategy to this situation, make sure you choose an expiration month that is beyond the one year time period from the purchase date of your commodities option. Before you make a final decision on selling a deep in-the-money call to avoid short term capital gains tax, make sure you check out the collar and compare its suitability against the call sale strategy to see which is better for you.As you can see from our example above, the sale of a deep in-the-money call can buy enough time and protection for you to artificially extend your commodities option position with minimal risk. If employed properly, the Tax Deferral Strategy can save you many thousands of dollars in saved taxes. The next time you have profits in a long stock position that you’ve had for nine months or more, consider using this strategy to lock in your profits – and save money on your taxes...