The 3 “Must Know” Seasonal Tendencies for September Option Sellers


Aug

26

2016

The 3 “Must Know” Seasonal Tendencies for September Option Sellers

Discover three powerful seasonal tendencies that can have a massive impact on commodities prices in the fall. Learn how to take advantage of these tendencies through high probability option strategies in this monthly radio broadcast by OptionSellers.com.
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(Video Transcript)

Michael: Hello, everybody. This is Michael Gross from OptionSellers.com, here with your August Option Seller Radio Show. I’m here with founder and head trader James Cordier and we’re going to talk a little bit about the markets here and things going on as we start September, back to school month, or, for a lot of investors and financial professionals, it’s back to work month. A lot of people go on vacation in August and when we get back in September it’s back to business. A lot of people start focusing on some of the stories they may have overlooked over the last month or two. James, welcome to the show – a lot to talk about this month.

James: Thank you, Michael, there certainly is. Both markets moving, instruments happening, as well as the stock market, of course, the Federal Reserve is always interesting, and new highs in the stock market. We were talking recently about a couple articles that have some of the largest, most well known investors in the world saying that not only is the stock market going to pause but go into a bear market, then it continues to rally. Its just really interesting times right now with both the Federal Reserve and what a lot of people are considering with the stock market what it might do over the next year or so.

Michael: You know, we’re going to talk about oil here in a little bit, but some of the stories coming out of OPEC talking maybe about a production freeze, and some people think maybe that’s helping the stock market, too, a little bump in oil here.

James: It really is. This is so interesting how the oil market, especially, is a great example of a market that has extremely soft fundamentals. In the United States, we have all-time record supplies. We have Iran and Iraq and Saudi Arabia who are going to just duke it out for market share starting in October and November. What is OPEC come up with going into the soft demand season? Well, we are going to talk. We’re going to come up with some ideas and we’re going to try and freeze production. The part that is so interesting about freezing production, as we all know, is that productions are at record highs right now, so the market really is trying to grasp onto anything it can to try and get insight on what the market might make the next move. What’s so interesting is, as all OPEC discussions over the last few years, each country needs a specific amount of money to run their economy and if oil goes down to 40 or 38, they’re going to need to pump that much oil and everyone really knows it. This buying the market because of OPEC discussions coming up, that’s going to be a feudal end. I’ve seen it before the last several years and when the market rallies up because Iran is now going to join into the talks, they know that all they’re doing is jawboning. When push comes to shove and demand is low in winter, they’re going to be pumping oil like never before.

Michael: Yeah, that’s a great point and we are going to talk about that in a second, too, because we have a big seasonal coming up in crude. I know you’re eager to point it out as well. September, as we discussed earlier, is a big month for seasonal tendencies. If you’re listening and you’re unfamiliar with seasonal tendencies, these are the type of things that happen at different times of the year – fundamentals in these underlying markets that can have an outside impact on price. So, being aware of what the seasonals are can really have an impact on your trading, really give you some direction when you’re starting to identify trading opportunities. It’s certainly where James and I start when we’re looking at markets and being aware of that underlying seasonal. September is a huge month for seasonals and one of those markets, in particular, is one of your specialties, James. That is the coffee market. As we end the Brazilian growing season here, we are at the end of harvest, some certain things happen when that harvest is done. Do you want to talk about that a little bit, James?

James: Well, what’s interesting is a lot of investors were pointing to whether that wasn’t exactly perfect in many growing areas of the world for cocoa or sugar or coffee. But, in Brazil, we have a record harvest that just took place for Arabica beans. Those are the sought after variety that we drink here in the United States and through most of the western world. We have a record supply coming in. Harvest right now is about 95% complete and you’re going to see co-ops in Brazil wanting to turn those beans into cash. They’re going to try and hold back and they are going to make all kinds of discussion about how we’re going to have a retention plan and we’re going to wait for higher prices, but the bottom line is that they only have so much room for that coffee and it has got to go. As they say, bills have to be paid. If you’re in a third-world nation like Brazil and your cash crop is coffee, you need to turn that into the market. We expect those supplies to start hitting market channels in September and October as the harvest wraps up. Lo and behold, the United States, the largest consumer of coffee, we are currently sitting on the highest coffee supplies of green coffee stocks in the United States for the last 13 years. We don’t really need to bid up coffee prices to get the beans to get here. Coffee roasters can be very picky because we’re sitting on so much coffee here in the United States. With Brazil trying to find a home for their coffee, the United States has all the coffee they need. This seasonal for a downward move in java prices looks quite certain for September, October, and November, so we will be looking at selling coffee calls with both hands here in the next 30 days.

Michael: James, that’s a great point. You’re talking about records Arabica production. Total crop out of Brazil, the latest estimate I saw, correct me if I’m wrong, but I believe they’re looking around 56 million bags, which isn’t a record but it is near a record. What you brought up, and maybe just a way of restating it to help some of our investors listening grasp it, is as these supplies hit the market, that excess supply is Economics 101. As supplies go up, price tends to come down. What tends to happen in the fall, if you look at a seasonal chart for December coffee, you hit the first of September and prices typically start declining. That doesn’t mean it is going to happen every year, but over the years that tends to be the cycle. It is something that we are expecting this year. An investor listening to this, you know, it sounds probably Chinese to somebody who just traded stocks and doesn’t know a lot about commodities… you’re talking about how we’re going to be selling options with both fists. How does an investor sitting at home grasp that? How does he take advantage of this? He sees coffee prices where it is right now and he’s looking at a chart. Maybe just kind of walk them through what he would do.

James: Certainly. For anyone listening to our commentary today who have read our books on The Complete Guide to Option Selling and have read chapters that concern, for example, historic volatility, namely in the coffee market, years and years ago we had a large rally in the coffee prices because of a freeze that took place in southern Brazil, which caused coffee prices to jump dramatically. In southern Brazil, coffee plantations have migrated north. The chances of freezes that have caused prices to go up in the past are negligible. They no longer exist. However, the historic volatility that is still in coffee options will still be there and it does exist. We actually have the ability to go short coffee at double the price of its current level. In other words, we have a seasonal factor that should cause prices to go down in October, November, and December. The strikes and the coffee calls that we will be selling for clients, or someone listening to us today can do it themself, you are looking at selling coffee calls double the current price. As you mentioned a moment ago, will coffee prices slide 10 or 20 cents a pound this fall? It is really not that important. What we are positioning ourselves and our clients to do, is that we are wagering the fact that coffee won’t double during this price. Historic volatility gives us the ability to sell coffee calls at a very high price and at strikes that are almost double the current price.

Michael: Yeah, coffee currently trading just above $1.50 per pound in that range. Good explanation there, James, of why you’re able to sell so deep out-of-the-money. I think that’s a big question a lot of investors have, is why can you sell so far our in commodities and not in stocks. A lot of it has to do with the leverage and the way commodities are priced, but it also has to do with fundamentals that may have changed over the years but that volatility is still in the market. Great, great example there. Selling calls into a harvest in a lot of markets can be a good strategy to pursue. That’s going to take us into another market that we are watching here in September. The grain markets are all big markets that have seasonals in the fall. In the United States, we harvest soybeans, corn, and wheat in the fall. As those supplies come in from harvest, historically speaking, that has tended to pressure prices because as that supply builds, it’s going back to that Economics 101. Higher supply tends to pressure price. That tends to happen in the fall as the new harvest comes in. Not always, nothing is guaranteed, but historical tendencies, however, have tended to drift that way. James, soybeans are another market we’ve been watching lately, we’ve already had kind of a drop-off there, but heading into a harvest now, talk a little bit about the crop there and what you see happening.

James: Well, in corn and soybeans in the United States, it seems as though farming just continues to get more and more improved. Not only is Brazil able to produce more coffee beans, but here in the United States and places like Argentina and Brazil, growing more soybeans on the same number of acres here in the United States. We are looking at a huge crop in soybeans and corn that the Unites States is going to be harvesting starting in September and October. Once again, as you mentioned, too much supply and not enough demand certainly sets up ideas for shorter prices and going into this fall. Any rallies that we would have in corn and soybeans over the next 30 days, we would certainly be very interesting in selling call options on those, as well. I know that there is a lot to be made about something that’s called stocks to usage, which actually compiles how much demand there is worldwide versus how much supply there is. I know next year, Michael, you might want to refer to this a little bit, but from what I’ve been hearing, next year’s supply versus demand is going to be gigantic. Selling calls in that environment, I think, is a great addition to someone’s portfolio, as well.

Michael: Yeah, you know, we talked about that this spring. We were looking at pretty big acreage this year. We did get a pretty big rally in June because we had some weather concerns, but once that crop was made, prices, especially corn, the corn prices just fell off the cliff since June. One of the reasons we are talking about soybeans right now is that they’ve fallen, but not quite as far as corn. The seasonal tends to kick in at the beginning of September, so we have some pretty good timing. In talking about the soybean crop, we are looking at the largest U.S. harvest ever. We are looking at a projected yield or crop size of 4.1 billion bushels. That’s an all-time high. If this comes to pass, our 2016-2017 U.S. soybean ending stocks are going to be at 330 million bushels, stocks to usage at 8.2%. Both of those will be the highest in a decade. When we talk about bearish fundamentals, that’s bearish fundamentals. That is a pretty big weight on the market. It doesn’t mean that market can’t rally, as you always talk about, but it certainly hinders rallies and certainly casts a bearish shadow, often a great setup for call sellers. It’s one of the reasons we’re watching beans right now – looking for those types of opportunities.

James: Well, it’s interesting Michael, something that you and I referred to quite often – we may not know where the price of soybeans is going to go next week or two weeks later, but what we’re calculating and what we’re betting on is where it’s not going to go. That’s all we have to do is get that part right.

Michael: Exactly. That is a good segway to talk about the crude market here. You started off talking about crude. You got a lot of media coverage lately… a couple of appearances on CNBC, you’ve had a lot of calls from the media on your call on crude oil because back at the beginning of summer everyone was bullish, you were bearish – you’re still bearish, and you’re still looking at that as a great option selling opportunity. So, maybe share with some of our listeners what you see setting up there and why you like it so much.

James: Anyone listening to this right now who is thinking the idea that crude oil is going to continue rallying because of OPEC discussion or slightly smaller production here in the United States, I think you would be really well served to do a little research and find out how much supply is actually out there. In the United States we have record supplies. We have cars that now get 40 miles to the gallon instead of 20 miles to the gallon. We have Iraq, Iran, and Saudi Arabia that are producing record amounts of oil all at a time when we’re going into the weakest demand season of the year. September, October, and November, demand in the United States, the largest consumer, it falls off the table. We really like the idea of crude oil prices heading to softer levels, possibly in the 30’s and then bottoming out around November and December. This is one of the greatest seasonal plays there is, is being short oil going into late summer and early fall. Lo and behold, when the holidays come around, we get into December, we’re going to have some very low oil prices, at least that’s the way it looks from my desk. Then, the other seasonal kicks in and that is to go long when everyone is so fearful that the market is going to go down. So, we have two of our greatest plays as far as building a core position in crude oil, that come up now and then come up again in the 4th quarter of the year. It’s certainly something that has been a great addition to our portfolios over the last several years and we think it’s going to be again this coming year.

Michael: James, you bring up a great point there on supply. When you’re talking about crude supplies here in the United States, the last report we are at 521 million barrels. That’s an all-time record for this time of year, as you said. 37% higher than the 5-year average for this same time of year. A key point here, it’s 14% higher than last year at this time. As you know, last year, we saw crude prices dip below 30 down into the high 20’s. We are headed into a seasonal time of year now with supplies 14% above where they were last year and if anybody listening to James talk about the seasonal tendency, you’ll be able to see a chart of that seasonal tendency in the September newsletter. It should be in your mailbox next week by the 1st of the month. You’ll see a crude oil seasonal chart there. I want you to take a look closer at what tends to happen to crude prices at the beginning of September. James hit on it pretty good there – this is why we look to build positions in markets like this that have strong fundamentals that don’t tend to change quickly. They tend to take a while to change why you build things called a core position, James, and I think a lot of our listeners might be interested to hear what that is. You talk about something like a core position and building a portfolio. That’s not something that people read about in books. That’s something that often comes from experience. Do you want to share that with some of our listeners?

James: Michael, it is interesting because, for those of us that watch CNBC, Bloomberg, and Fox, you would think that there’s a bull market and a bear market in these different commodities and different stocks every 30 days, but there really isn’t. When the market moves 2 or 3% it gets so much fanfare if it’s going up and it gets so much depressed looks on TV if it’s going down. The options that we sell when we are building core positions, as we like to refer to them, they are 50 and 75% out-of-the-money when we sell calls and puts on these positions. So, when gold or silver or crude oil, in this instance, moves 2 or 3%, it gets so much fanfare. With the OPEC talks recently, they are going to bring one oil analyst or oil company CEO onto the set daily talking about oil getting to 55-60 this year and 65-70 next year based on nothing. You mentioned a really important point, and this is something we discuss often when we’re building core positions, crude oil supplies in the United States is 14% greater than last year. Last year’s low in oil was $27 a barrel. Fundamentals is the key to price projections in commodities. We like to project out 6-12 months and that is what we talk about when building a core position. The fundamentals in a market that is over-supplied won’t change in 30 days or 60 days or 90 days, so what we will do is when we get out of the high-demand season, which ends in May and June, we will sell calls for several months out. As we get into December and January, which is normally the low price-point for crude oil, we will then sell puts 6-12 months out based on the idea that the market will then bottom. Core positioning is basically the meat and potatoes of someone’s portfolio. I know we are not into the holidays yet, but commodities like gold and oil and coffee, these are core-building positions because the fundamentals don’t change and they have huge volatilities from the past. What we then like to blend in with them, it’s almost like Thanksgiving meal. You have the meat and potatoes, which will be things like gold and oil, and the cranberries, the gravy, and the dressing will be soybeans and cocoa and sugar. It’s interesting. Being diversified like that gives a portfolio a lot of staying power and the ability to withstand small movements in the market. So many people, Michael, as you know, look at commodities as a highly speculative, incredible form of gambling, and that may be true for investors who are trying to time the market. As we discussed earlier, we are building core positions at levels that the market cannot reach or very likely will not reach. Like options do, they expire worthless some 80% of the time, building core positions that last the entire year. Basically, that’s hitting singles for 12 months.

Michael: Yeah, you talk about that quite a bit in the upcoming newsletter – that concept is a recipe for building a portfolio, structuring a portfolio, and if you’re listening and interested in that type of concept, you’ll get a pretty good dose of it in the September newsletter. While we’re on that subject, I wanted to mention that some of these markets we talked about today, such as the seasonal tendencies and soybeans, seasonal tendencies and coffee. If you missed those articles they are on our blog. You can go back and see those seasonal charts and see how some of these prices tend to perform different times of the year. If you’ve never traded commodities before, it’s a real eye opener to try and get a feel for maybe what some consider an invisible hand behind prices and getting kind of a peek at some of the things really affecting price in different commodities. While we’re on the subject of the upcoming newsletter, James, I want to talk about this for our listeners and readers. We have coming up, as I said – you’ll probably get this at the end of next week, we have an article called 3 Reasons to Love Commodities Now and we kind of go into why commodities are such an attractive investment at this point in time. We talk about some of the warning signs we’re seeing for stock prices right now. As you mentioned at the top of the show, a lot of big names getting pretty bearish on stocks, a lot of big investors thinking the prices are getting a little scary now with what’s going on in the world, so they’re looking for alternatives. We really dig into that a little more this month. Something we also have is a crude oil piece that you talked about here briefly, but we outline a little more detail in the newsletter. We also have a guest column this month by former commodity hedge consultant Don Singletary. James, I know we talked about Don and looking for ways to maybe work with him a little more. Don spent 25 years advising a lot of these big commercial hedgers on hedging hundreds, millions, and even billions of dollars worth of product, whether they are harvesting corn or hedging their oil or gasoline. He kind of came to the same conclusion we did as far as option selling – he came at it from a different angle, though. He came at it as he played, pretty much, to these individual investors. It is tough to compete with these pros, but here’s how they did it. He kind of came to the same conclusion we did and he talks a lot about the same philosophies that we do about selling options. Great piece in our newsletter this month – You don’t want to miss it if you have an interest in that. Let’s talk a little bit about our lesson this month, James. I know we talk a lot about fundamentals in this month’s lesson. We want to talk a little bit about technicals because that’s not something we discuss a lot when selling options, but we still use them and I think some of our listeners might be interested to hear how you use them when you are looking for a trade.

James: You know, Michael, when we have very discernable bearish fundamentals, we are watching for a market to rally and reach over-bought conditions. Watching technical indicators, like Stochastic Bollinger Bands and RSI, basically that’s going to help us with timing. It is certainly not necessary, but when we see the oil market rally on short covering, for example, if you were to look at open interest in crude oil you can see that this entire rally was based on investors that were short and were forced to cover. That is an extremely important tool to have in your toolbox is watching open interest in a market that’s trending against its fundamentals. You can almost see by watching open interest when the market is rallying against its fundamentals or its falling against its bullish fundamentals, you can almost see when the last bear got out of his position. It’s not splitting atoms, it’s nothing that the average investors can’t do for himself, but it’s something to be cognoscente about. When open interest balloons to all-time highs in crude oil on the short side, you know what’s coming. Everyone who wanted to be short is already sold the market and the least amount of bullish factors that hits the market will cause the beginning of a rally. By watching open interest, you can see when the last guy got out of his short position. That just happened in crude oil here over the last few weeks. Watching fundamentals gives you the idea of which position you want to take and sometimes, being very cognoscente of the technicals, it can tell you when to get in. We’re not trying to be market timers, but when technicals and the fundamentals line up that is when we put our tuxedo on and jump in.

Michael: You know, that’s a great point you bring up because a lot of people watch technicals and maybe they can time a little blip in the market or time a little turn around in the market for a short term, but the big point you make, and it’s one we make often in a lot of our writing, is that knowing the fundamentals is what tells you if that blip in the market is the start of a change in trend or is it a buying or selling opportunity on a correction. That’s what the importance of the fundamentals is knowing that big fundamental picture. I know that’s something you stress a lot.

James: Well, Michael, these 8-10 markets that we often discuss have been my friends for the last couple decades. They have personalities and they have seasonal tendencies. You can tell when they get a lot of hype on TV and you can tell the difference between hype and fact. The more you trade these the more you get used to them. They are kind of like friends you keep in your back pocket, and when they are over-bought or over-sold against the fundamentals that is when you add to your core position and making building portfolios so much fun.

Michael: As a trader, James, portfolio manager, I know a lot of people have their technical indicators. Maybe talk a little bit about the top 1 or 2 we like to watch in our office. You and I know what they are, but maybe our listeners would be anxious to hear just out of curiosity what we like to watch.

James: As far as technical indicators, Bollinger Bands is one of my favorites. Putting a Bollinger Band calculation on a weekly chart, and it really helps you understand what the exact outer limits on what a market can reach simply on short covering or news item or headlines that often push the market because that generates computer buying and computer selling. I would suggest to anyone listening to us today who wants to get more averse with technicals, I would look at weekly charts instead of daily charts. I would look at things like Bollinger Bands instead of simply Relative Strength Index. We look at weekly charts because during the time that we are in a trade or in a position, it’s going to get several buys and sells and the fundamentals never budged. The name of the game is patience. The name of the game is fundamentals. We get paid to wait, and following weekly charts allows you to do just that and the noise in the market doesn’t affect you because you’re looking at the big picture.

Michael: Well, what a great synopsis there. This has been quite an information-packed radio show, don’t you think, James? We’ve covered a lot of ground here!

James: Michael, you started out by saying September is one our favorite months, and you and I talk about that because we’ve experienced so many Septembers selling options on commodities and we expect this September to be quite a lot the same.

Michael: I agree. Well, everyone, I believe that is going to wrap up our show this month. For those listening, our September account slots are closed for this month, they are all filled, there’s no availability this month. We still do have a few slots remaining for October. If you’re interested in pre-qualifying interview for one of those slots, you can contact Rosemary at the office at 800-346-1949. For the rest of you, have a great month. We’ll be updating you on portfolio progress in the bi-weekly videos if you’re a client. Have a great month of premium collection. James, thanks for all of your great information this month.

James: My pleasure, Michael. I enjoy doing these and look forward to doing them again many, many times.

Michael: Great! Everyone have a great month, and we will talk to you at the end of September. Thank you.

  1. Great show guys. Love it.

  2. Fernando Hanelmann Says:
    August 26, 2016 at 11:01 pm

    I always listen and read Your newsletter. Compliment for the great job, especially how You explain, simple and clear.

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