3 Big Predictions for 2018


Nov

22

2017

3 Big Predictions for 2018

Click To Read Audio Transcript

(Audio Transcript)

Michael : Hello everybody. This is Michael Gross of OptionSellers.com here with your November Podcast. We have a lot to talk about this month, so we’re going to go ahead and jump right into it. The title of this month’s podcast is Three Big Predictions for 2018. We’re going to get into what James sees as the three biggest predictions in the commodities markets or overall markets for the upcoming year. Before we do that, we’re going to talk just a little bit about what’s going on right now. Obviously, everybody’s looking for tax reform and what’s going to happen. James, what are your thoughts right now?

James : Well, tax reform, Michael, is certainly on the front page right now. A lot of the other implementations of ideas are still kind of in the works, but tax reform is certainly on the front burner and it does look like some form of an agreement is going to take place… maybe not in December for holiday cheer, but maybe the beginning of next year.

Michael : James, a lot of the T.V. channels and newspapers are focused on reform and what it might mean for stocks, obviously, if they pass corporate tax reform. Most people believe that would be somewhat bullish for stocks. Do you see any effect here on the commodities markets or any commodities in particular you think could be effected if they do pass tax reform in the next month or so?

James : Michael, that probably will be a slight positive for the stock market. I would imagine that a majority of tax reform is probably already priced into the market, but there will be some of the base commodities that might do quite well. Energy prices might get a bump from tax reform, there might be ideas that there might be more inflation because of more spending. That might give the precious metals a slight bump initially, and then, of course, the fundamentals after that will take over. I think positive for many things maybe the first quarter of 2018 and then we’ll have to see where it goes from there.

Michael : Okay. Let’s touch on a couple markets here. I know a lot of people that listen to us like to hear what we’re thinking. Maybe before we get to your predictions we’re going to just cover a couple markets here we do think are favorable for selling option premium right now in the commodities markets. First is one we’ve been talking about here over the last 30-60 days: natural gas. That has just been an ideal market for selling premium and I know you still think so, partially because of the volatility there. Can you speak to that a little bit or what you see going on there right now?

James : Michael, of all the markets that we follow and all the markets we participate, natural gas probably has the most historic volatility of them all. Basically, several years ago when we had hurricane destruction in the natural gas areas of the Gulf of Mexico and Louisiana, I’m referring to Rita and Katrina for those of you scoring at home, that volatility is still in the market. Natural gas supplies are plentiful, they’re basically widgets when you produce natural gas right now, and yet option values 100, 200, and 300% out-of-the-money are carrying premiums that we certainly enjoy selling. That continues to go on. We just put on another position in natural gas here just about a week ago. We feel that natural gas is probably a sideways market for the next 4-6 weeks, even though we’re going into winter heating season. Long-term forecasts are for a very mild winter, and that tells us natural gas is going to likely be very quiet, and the decay that we’re going to see probably in the next 4-6 weeks, as well, on the options that we recently sold looks like it’s going to be quite fast.

Michael : Those of you that have read the book where we talk about selling options 50%, 100% or more out-of-the-money, it doesn’t mean you can sell them like that in every commodity, but those opportunities certainly do arise and natural gas is one markets where you can actually do that right now. James, you talked a little bit about historic volatility because of the hurricanes. Do you think it is small speculators that are buying options this far out-of-the-money or is there some institutional interest there, as well?

James : Michael, there’s institutional interest. What’s so interesting now with the advent of computerized trading, when I am selling options for our clients and we are looking at some of these far out strikes, $5, $6, $7 in natural gas, we can get 100 contracts to trade and all of a sudden you’re watching the bid-ask on these markets and the computers will now put a 2,000 lot bid up a tick and a 2,000 lot offer down a tick from where the market is. The liquidity has just become incredible. Small speculators certainly, but institutional investors and now the computerized generated bids and asks have made natural gas one of the most liquid markets of all that we trade. I’ve seen this come on in the last year or so, so liquidity and going forward for this commodity only seems to be getting better as we go on. I guess we’ll have to wait and see in the next year or two, but right now it’s just ideal.

Michael : For those of you listening that want to read a little bit more about the fundamentals in natural gas, why we like that market fundamentally right now, don’t really have time to cover it here today, but we did publish our research piece on natural gas on the blog. That is from about 3-4 weeks ago, I believe. You can certainly go on the blog and look at that and get an idea of why we’re recommending these and some potential strikes you may want to look at. Let’s talk about our second market here for this month. That is the silver market. Some balance fundamentals going on there right now, but it’s a great market for selling premium. It has been all year. Do you want to talk a little bit about that and what you see going on in silver and why you feel that’s a good market for selling premium this month?

James : Michael, we often talk about identifying markets that have fair value. Silver has fair value between $16 and $18 an ounce. The fundamentals that we see really won’t be pushing the market above or below those levels. Silver demand right now is relatively weak. Supplies of silver are relatively high. That is holding silver prices at check from going too much higher. On the down side, investors are nibbling at gold and they’re nibbling at silver with the idea that they need to be diversified because the stock market some day is going to be coming down and the demand from speculators is really good right now for silver and gold. The demand itself for the physical isn’t so good. We see silver trading probably in a $1-2 trading range throughout the first half of 2018, and yet we’re able to sell puts and calls at a greater value than what silver’s total cost is. We have silver strangles $15-20 wide 6-12 months out. That has been just an absolute cash cow for us. A strangle wide enough to fly a sleigh through right now. It’s really attractive, it has been all year, and I think that’s going to be one of our big positions for 2018.

Michael : If you’re listening, as far as a strategy for an option strangle, that gives a pretty wide window and wide profit zone. Prices can do a whole lot of things and that trade can still make money. It can go up quite a bit and it can go down quite a bit. A strangle is so versatile that it can really handle a number of different moves and it’s one reason why James is doing it right now because the strangles are so wide. As you mentioned, James, physical demand for silver is down. That’s kind of balancing some of the institutional demand. I think I saw last year the physical demand was down 11% in 2016 and expected to drop again this year. So, William Devane, even some of the coin sales demands for that is down. With all the commercials on, you’d think demand for coins would be going up, but that has dropped a little bit, too. I guess that demand is more on the institutional side.

James : Michael, it certainly seems to be and, of course, the stock market making new highs and interest rates are supposed to start ticking up again at the end of this year throughout next year. All head winds for precious metals, but, still, I think there’s an underlining demand at certain price levels for gold and silver. So, while we don’t think those markets are going to take off toward the up side, we also think that there is a big under those markets. When you’re talking about silver at $11 and $12 an ounce where we have puts sold, that is the same price it was trading at 20 and 30 years ago. So, factor inflation, we don’t see too much downside in silver, thus probably a great sideways stagnant market, great for strangling and that was one of our best trades in 2017. 2018 looks like the landscape is quite similar.

Michael : Excellent. If you’d like to read more about the silver market, our strategy there right now, that is the feature market in our December newsletter. If you are a subscriber to the OptionSeller Newsletter, that should be in your mailbox on our about December 1st. Make sure you look for our feature piece on silver. Let’s go ahead and move into the topic of the podcast, James, and that is your Three Big Predictions for 2018. We used to do this in January, but I thought doing it here going into December might give people a little more time to look into it, because some of these start taking place as early as January-February. So, why don’t we go ahead and move into that and get to your first prediction here for 2018.

James : Michael, I’ve given 2018 a lot of thought. Investors are certainly looking for ways to diversify their portfolios. The stock market is at all-time highs, interest rates are about to start ticking up, what’s going on in Washington D.C. and what’s going on in Asia. So many people are trying to look forward to 2018 and to where can investors get an edge. Well, after a lot of study and lots of consideration, my answer to the first and question and the market that’s going to be very pertinent here in 2018 and it surrounds the electric car. China has absolutely not only announced but about to put into law basically that they’re going to start the end of combustible engines, as far as transportation goes. All you have to do is look at the news and now there are semis that have a 500-mile charge on them. You have California getting involved with electric cars. I don’t personally drive one but I know a lot of people that do, and they are really fascinating automobiles. That is definitely the wave of the future. How we can kind of determine this in addition to just what everyone reads. Energy prices certainly have been in the spotlight recently. For the last dozen years, oil prices 2 years out, 3 years out, 4 years out, have always had a premium for interest and carrying charges. For the first time in many years, you go out 2, 3, 4 years, now there’s a discount for crude oil. Crude oil is $3, $4, $5 cheaper than the spot price and a lot of people are wondering why that is. Well, we’re looking at less demand for energy going forward, at least fossil fuel energy. I know it’s hard to believe that everyone was talking about peak oil a couple years ago, well now investors and analysts alike are looking at peak demand. That tells us that electric cars are not only the future, and everyone kind of knows that, but the realization of that and the implementation of that in 2018 is going to be forefront. We like the copper market in 2018. Copper goes 4 times into an electric car than it does a regular car, cars that we know of them to be currently. The copper market has been steadily going higher recently over the last 6 months. We think that the red metal is going to be a star performer in 2018 and beyond, not only because of strong demand for industrial usage in Asia, but for automobile production copper looks like a big winner in 2018.

Michael : Yeah, it’s funny you mention that. I just looked at a Tesla a couple of weeks ago. Electric car and went in and sat in the thing. One thing that the guy said that stuck with me is, “There’s no liquid in it. You’ll never have a leak because there isn’t any liquid in it at all. You’ll take it in, you plug it in.” The second thing that stuck with me was, “You think it would be obvious when you’re looking at it, but you don’t really realize it until you’re sitting in it, is you never have to get gas.” The thought of “I never have to stop at a filling station to put gas in this thing EVER”, that has some repercussions that reverberate possibly longer-term for oil and certainly for the factor you mentioned, perhaps right now in the copper market. Not only China, but some of the European nations I saw were also looking to do away with combustion engines altogether, just phase them out, so that could have some serious consequences for oil prices going forward, especially with the production now ramping up in the United States we kind of have a short term and a long term prediction there.

James : Michael, it’s interesting. So often, people talk about the Tesla, of course; however, it has always been out of range for the average driver until now. The latest series is now going to be for sale in the mid-$30,000 range. Very reachable for practically every household in America, of course, maybe not so much in China, but prices will probably likely come down some more. The fact that it’s now available in that price range, this trend is only going to continue. My second prediction for 2018 is just that. It’s not only, yes, long copper because of the electronic automobile, but selling crude oil. The crude oil market, we’re now looking at possibly a peak demand because of the electric car. Let’s face it, between semi usage, automobile, transportation, you’re looking at some 25% of energy demand worldwide and is that all going to fall over the next year or so? Not necessarily, but the trend is everything. The trend is that we are going to be going electric automobiles. For that reason, my second prediction for 2018 is probably crude oil prices easing from the levels that they’re at right now.

Michael : … and you don’t see any issues? A lot of people are worried about Saudi Arabia right now and maybe some instability over there. Is it causing any issues or are you seeing the focus more on lower demand and higher U.S. production?

James : Michael, I am glad you brought up Saudi Arabia. There is some instability there now. Part of the instability is the fact that they are moving into the 21st century and they are doing something that probably no one thought of could be coming anytime soon. Saudi Arabia is selling their oil business. Saudi Arabia, of course, is the largest producer of oil as far as an exporting nation. They’re soon going to be 2nd to Russia and then 3rd to the United States. They’re basically selling bonds and you buy their oil and you get into the oil industry for them. Why in the world would they be doing that? They’re doing it because the market is going to change and the usage for energy is about to fall. I think a big part of it is the electric car. Saudi Arabia is probably the best trader of oil in the world and if they are selling oil, and they are selling their oil rights, I would probably piggyback them on that trade.

Michael : Wow, that’s a great point. Okay, so we have two big predictions so far. We’re predicting maybe a bull market in copper in 2018 and possibly a bear market in crude oil in 2018. What’s number 3?

James : Number 3 is something I probably didn’t think I’d be discussing 2 years ago, 3 years ago, 4 years ago, but current fundamentals always need to be checked, they need to be analyzed, they need to be understood. My 3 rd prediction is in reference to bitcoin. The same investors that would buy gold are buying bitcoin and they’re getting great results with their investment in bitcoin. Basically, the gold market, as they always talk about “every ounce of gold that has ever been mined is still above ground”. Anyone reading the Wall Street Journal last week read about demand for gold. World gold demand 3rd quarter of 2017 was the lowest in 8 years. Is it possible that some of the gold bugs are now become bitcoin bugs? I would bet yes. The whole idea of pulling some of the gold bugs and investors in gold away from that market, simply 5% of the buyers of gold leave and go to something like bitcoin. That’s a huge dent in demand for gold. We see gold while it could have rallies from time to time, and it always will, gold, we feel, at the end of 2018 will close lower than it starts on January 1st.

Michael : All right. That’s a pretty good prediction. So, we’ve got 3 markets there, long-term projections there. You’ve got the bitcoin. I’m guessing probably a lot of that is younger generation of people investing in bitcoin. Is that your guess or do you see institutional interest going in there, as well?

James : Michael, I think that’s across the board. So many people talking about bitcoin 12 months ago, then 9 months ago, then 6 months ago, some of the biggest names in the world dissing bitcoin and you can’t dismiss it anymore. The CME is starting a futures contract on bitcoin beginning of 2018. That absolutely legitimizes that as an investment and an instrument that’s going to be with us for a long time.

Michael : It would trade just like a currency then, just like the pound or the euro or even gold could trade somewhat like a currency.

James : That’s the way we see it.

Michael : Well, there you have it, listeners. That’s James’ Three Big Predictions for 2018. We will see you here again this time next year and we’ll see how many he gets right. Of course, as option sellers, we know we really don’t have to get the direction of the market right to make money in the market, but it can be a good exercise and certainly help to give us big-picture perspective on some of these markets. For those of you that’d like to learn more about option selling in general and how you can apply it to the commodities markets, of course, we do recommend our book, The Complete Guide to Option Selling: Third Edition. It’s out through McGraw-Hill. You can get that at a discount if you order it off our website instead of Amazon or at the bookstore. That web address is optionsellers.com/book. As far as new account consultations, we have a few left in early December and then we are pretty much booked for the year. So, if you’re considering allocating money to an option selling portfolio in the early part of 2018, the consultations for those take place this month. If you’re interested in that you’ll want to call Rosie over the next 7-10 days at 800-346-1949. She can set you up with one of our remaining consultations for 2017. James, thank you for your insightful predictions this month and your outlook on the markets.

James : Michael, thank you very much. As always, I enjoy doing this show and providing day-to-day information for our listeners. Hopefully it was quite profitable for them as it was for us in 2017.

Michael : Excellent. Our podcast for December will likely be out sometime after the holidays, so this will be our last podcast prior to the holidays. From all of us here at OptionSellers.com, we’d like to wish you all a Merry Christmas, Happy Hanukah, Happy New Year, and we will talk to you again in 2018. In the meantime, you do want to look for our newsletter. It will be coming out in the next week or so. We will talk to you in January. Thank you.

  1. Hello,
    I noticed that options on copper not that liquid in distant months. Your thoughts and reasons.

    • Michael Gross Says:
      November 27, 2017 at 3:23 pm

      Nuha,

      That is correct. James did not recommend selling options on copper. He only pointed out that copper could have a strong year in 2018.

      Regards,
      Michael

  2. Copper is a terrible candidate to sell options. Right now you can only sell Mar18 options and very close to the money

    • Michael Gross Says:
      November 27, 2017 at 3:30 pm

      Andrew,

      We agree. There is very little volume in copper options. So little, in fact, that copper is on our list of commodities in which we do not sell options. James did not recommend selling copper options in his commentary. However, the price of copper can be seen as a general indicator of the overall economy. In addition, the price of copper can have a residual effect on some other commodities. Thus, its price is relevant for option sellers.

      Regards,
      Michael

  3. Sold April ’18 Crude $62 calls per last rec. Forced to close at modest loss as oil rose in price. Win some, lose some ?

    • Michael Gross Says:
      November 24, 2017 at 2:19 pm

      Charles,

      Good call on closing. However, we think the crude market is a good candidate for rolling up to recapture the premium.

      Thanks,
      Michael

  4. Nice commentary, I really enjoy these podcasts and the newsletter. I am about a third of the way through your book and it is a good read so far, have a happy holiday season James, Michael and staff of Option Sellers.com

  5. Keith Jones Says:
    November 22, 2017 at 7:00 pm

    Great prediction for Oil, as you know the Norwegian Sovereign Wealth Fund has also in the last few days proposed it’s intention to reduce or divest itself of it’s o&g stocks, and this from a country that has invested so heavily in oil in the past.

  6. Luis Moran Says:
    November 22, 2017 at 6:27 pm

    You both are so good at what you do and we the small investors are grateful for your sharing, teaching and advise.
    Have a Happy Holidays full of Health and Happiness
    Luis

Share This

Share This

Share this post with your friends!