The Triumphant Return of the Credit Spread

The Triumphant Return of the Credit Spread
Jun

2

2016

The Triumphant Return of the Credit Spread

Fresh volatility in the commodities markets now makes these high odds strategies viable across different sectors.

In May of 2015, COMEX Silver prices traded at $18.00 per ounce. From that point, they began a jagged steady decline down to below of $14 per ounce by December. But as prices descended, a funny thing began to happen. After an initial drop in June, volatility began to rise. As 2016 began, silver prices based and began to climb from their depths. But volatility? It continued to rise.

April 2016. Silver volatility is over double where it was in May of 2015 and nearly 10 times its levels in June 2015. Yet where were prices? Right back where they started – $18.00 per ounce.

Thus the non-correlation between absolute price direction and volatility. Silver prices are trading near the same levels as a year ago. And yet, this year, you can sell options much deeper out of the money at much higher strikes than you could last.

If you’re not yet an option seller, let me clue you in. This is a very good thing.

We’ve been pounding the table since last December in this newsletter, our videos, blog and television appearances that 2016 will be the year volatility comes back to commodities.

And it has – in a big kind of way. A falling dollar, a stabilizing Chinese economy, lower prices spurring global demand – all can be credited. Prices are adjusting back to more “normal” levels which has awakened volatility in most every sector.

volatilitychartsX3-060216

The volatility charts above indicate volatility has increased substantially in commodities across the board from metals to oil to grains.


But this isn’t another article about volatility. Moreover, its what you can now do with that volatility.

Built for Volatility -The Credit Spread

Mainstream investors tend to cringe when they hear the word volatility. They equate it with wild 2009 like swings in the market (and their equity.)

Seasoned option sellers have the opposite reaction. Volatility means increased fear and/or greed in the market. That, in turn, leads to other investors behaving irrationally. And that my friends, is where your easiest opportunities lie.

Futures and options trading is a zero sum game. If you win, somebody else is losing – and vice versa. Sorry but that’s the way it works. No room for niceties here – this is the jungle – survival of the fittest.


Credit spreads can offer you either reduced or limited risk but also provide increase ROI on your margin. That is why the return of volatility is so exciting.

If it helps, the party on the other end of your option often won’t be Ma and Pa Kettle back in Oklahoma. In fact, its more likely to be Goldman or Bank of America – so don’t feel too bad. These guys use long options as part of hedges, as hedges to their hedges, as insurance, as components of their own credit spreads and everything else under the sun. They factor eroding option premium into their equation. And they buy them by the thousands.

Nonetheless, regardless who is buying, increased volatility means two critical things to you:

1. Deeper out of the money, higher premium strikes

-Which creates

2. Wider cash spreads between strike prices

We like both of these things. #1 means higher priced, further out options if you’re a naked seller. The second means the availability of favorable credit spreads.

In fact, credit spreaders can thrive during times of volatility. In credit spreads, your risk to reward ratio climbs, often substantially, with volatility. Thus, while volatile markets favor option sellers in general, they can be a boon to credit spreaders.

The Only Spreads You Need

Of the 100’s of option spreads available to you, we tend to recommend only two forms of credit spreading. Having traded option spreads for over 30 years, I can tell you this: Simple and pragmatic beats complex and high maintenence over the long haul. While this is not a seminar on option spreads (you can find those on the blog – www.OptionSellers.com/blog) I can recommend to you these two strategies.


  1. The Vertical Credit Spread (Bear Call or Bull Put)
  2. The Ratio Credit Spread

You can learn more about both of these option selling strategies starting with Chapters 9 and 10 of The Complete Guide to Option Selling, 3rd Edition (www.OptionSellers.com/book )

You can also see our free video seminar on both of these strategies at www.OptionSellers.com/Vertical and www.OptionSellers.com/Ratio.

Credit spreads can offer you either reduced or limited risk but also provide increase ROI on your margin. That is why the return of volatility is so exciting.

We’ve commenced credit spreading in several markets this month and I expect to be able to employ this strategy for some time across a swath of different commodities.

If you’re not yet a client, you can certainly apply these strategies on your own with a little preparation.

The election, interest rates, overpriced stocks – not to worry for the informed investor. If you’ve got money allocated to an option selling portfolio – the time you have awaited has come.

Carp Diem – Seize the Day!

And have a great month of premium collection.


Discover How to Sell Options for outsized premiums in the commodities markets. Get our Free Trading Guide for High Net Worth investors: The Option Selling Solution. To get your free guide now, go to www.OptionSellers.com/Booklet

James Cordier is founder and head portfolio manager of OptionSellers.com, an investment firm specializing exclusively in selling commodities options for high net worth investors. James is a regular guest analyst for CNBC, Fox Business, Bloomberg Television, the Wall Street Journal and MarketWatch. His latest book, The Complete Guide to Option Selling – 3rd Edition (McGraw-Hill) is available in bookstores and online retailers or by visiting www.OptionSellers.com/Book.

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