Bump Your Odds of Success with the Intercommodity Strangle
Michael Gross explains how to use the Option Strategy that can offer Potentially Higher Returns while Upping Your Odds over a Traditional Option Strangle.
Hi, this is Michael Gross of OptionSellers.com. I’m here with your bi-monthly option seller video seminar. The title of this week’s seminar is the Intercommodity Strangle. This is a little bit more advanced trading strategy that you can use. This can be advantageous to you if you’re selling options in commodities. We’re going to talk about some of the reasons why that is. Before I get started, if you are interested in learning about strategies like strangles, different things you can apply in the commodities markets, we do recommend the Third Edition of our book, The Complete Guide to Option Selling. You can get a copy of our book at a substantial discount directly off our website… it’s www.OptionSellers.com/Book.
Let’s talk about the intercommodity strangle. If you’ve read any of our materials, if you did read the book, maybe you’ve seen some of our other stuff online, you know selling strangles on different commodities markets is one of our favorite strategies. It’s also one of the highest odds, potentially highest profit, potential strategy you can use as a commodities option seller. As option sellers, we’re always looking for ways to increase our odds. The intercommodity strangle is one way you can potentially do that. Let’s assume, for example purposes, that you want to trade the corn market and you think corn prices are going to stay at a relatively defined range so you decide to sell a strangle, which means you sell a put down here and you sell a call up here. That means the corn prices can go anywhere between these two strikes, as long as it stays between them through expiration both options expire worthless, you’re going to keep both sides, and that’ll be your profit. So, let’s say you sold a call for $600 premium and a put for $600 premium. That’s $1,200 you’ll take in that strangle. That’s a pretty good take. The problem here is if corn breaks to one side or the other, you have the potential to lose on either side. That’s a drawback of a strangle. What we’re going to talk about is the intercommodity strangle.
We’re going to stay in the corn market. Now, when we talk about selling options in the commodities markets, a big factor that comes into play is seasonals. It’s one thing you want to look at. Grain markets are especially noticeable for their seasonal tendencies. Now, when you talk about grain markets, you have sister markets in there. A lot of commodities are like this. You have it in the energies, you have it in metals, but you have corn and then you also have markets like wheat, soybeans, soybean meal, soybean oil, oats, there’s different types of markets that tend to move in the same general direction. Now, they don’t move lock-step and sometimes the differences can be substantial. By using some of these sister markets, as we call them, you can sometimes improve your odds and efficiency by writing a strangle. How do I mean? For instance, during the springtime, and this is just an example, grain prices in general tend to gravitate higher on a seasonal basis, not always, but it’s a seasonal tendency. They tend to gravitate higher because during the springtime farmers are planting, there’s often weather concerns, there’s a lot of uncertainty, nobody knows what the crop’s really going to look like and how much of it’s really going to get into the ground.
There’s a lot of anxiety there that tends to add some general support to grain prices; however, I’m going to get rid of corn because I’m going to use a different example, a market like soybeans where the majority or all of soybeans in the United States are grown in the summer months. So, springtime planting is a big deal in the United States. Where you go to its sister market, wheat, wheat is grown in the United States primarily in the wintertime, so 75% of wheat grown in the United States is winter wheat. Only 25% is grown in the summer time. What does that mean? What it means is soybeans tend to have a stronger seasonal in the spring, where wheat tends to look more like this. In some cases, wheat trends even lower into the spring because the harvest has already come in. Now, the price together will tend to move in the same general direction, but what that says to you is during the springtime soybean prices should be stronger than wheat prices regardless of what direction outright prices are moving.
The advantage to you is this: if you want to write a strangle and you’re looking for maybe a slow, steady creep in soybean prices, instead of writing a strangle on soybeans you go ahead and write your put on soybeans. I’m going to draw another chart here. Instead of writing a call to make it a complete strangle, you write the call on the wheat market. Now, you still have a strangle on the grain market as a whole, but your put is written on what should theoretically be the stronger springtime market, which is soybeans, and your call is written on what should theoretically be your weaker market, which is wheat. Is the sector itself tending to be steadied higher in spring? Yes, but if you break it down to the individual commodities, historically speaking, this market should out-perform this market. What it does is if prices are moving up, soybeans should be stronger than wheat. If prices are moving down, wheat should be weaker than soybeans. That means your put on the beans is likely a better plan and a call on the wheat is likely a better play than writing a strangle on one of these market outright. I hope that makes sense. It’s a little more complicated technique. You will see us write about this occasionally. We did write about the Minnesota squeeze in the springtime and that’s exactly what this is called, so it’s one reason I used it. You can also do this in energies markets. We talked about a trade called the crack squeeze you can do between unleaded gas and heating oil. There’s a number of different ways to apply this. Again, this is a more advanced technique. If you’re just starting out, I wouldn’t recommend it. If you’re getting into commodity option selling having some success, this is one way you can tend to boost your odds on some of these trades, hopefully boost your premium.
If you’d like to learn more about managed accounts with OptionSellers.com where we do use these types of strategies for investor accounts, we do recommend accounts of $1 million and up. If you would like to learn more about that, you can request a copy of our Investor Discovery Pack. This is a full package that will explain everything you need to know about our accounts, how you qualify, what you can expect, that type of thing. You can get it on our website at www.OptionSellers.com/Discovery . I hope you’ve enjoyed this week’s lesson and we’ll talk to you again in two weeks. Thank you.