Commodities Hold up Face of Stock Market Crash

Commodities Hold up Face of Stock Market Crash
Feb

9

2018

Commodities Hold up Face of Stock Market Crash

Commodities, Option Writing Prove Valuable Diversifiers Amid Stock Chaos

“…consumers will still buy cigarettes and eat cereal regardless of economic conditions.” – CNBC.com

By: James Cordier, OptionSellers.com

The forest fire in the stock market this week has presented a range of questions for high net worth investors with significant portions of their wealth at stake.

What to do? Where to go? Sell or hold? Is this “just a correction” or the beginning of something more sinister?

Only time holds the answer to those questions.

However, a telling note was a mostly buried article on CNBC.com at the height of the bloodletting:

The stocks that are doing well in the face of the plunge: Tobacco and cereal

On a day the Dow plunged 1033 points, Kellogg closed 2.76 percent higher, while Philip Morris International gained 1.5 percent. The logic according to CNBC?

“…consumers will still buy cigarettes and eat cereal regardless of economic conditions.”

What a novel concept.

Indeed, if you’re wondering how commodities fared in the face of the stock market turmoil, you answer is more or less business as usual. Wheat prices were up about 1% on the week. Cocoa prices remained near 2 month highs. Coffee prices continued to edge along a channel.

You see, wheat, coffee or cocoa prices really don’t care what is happening over in stocks. People still need something to eat, drink and smoke while they are watching their stock portfolios crash.

Granted, not every commodity went up during the week. But the market fluctuations in some commodities had little to do with the carnage in stocks (with the possible exception of spillover selling in crude oil.) Regardless, lower prices can actually be a boon for option sellers short call options in certain markets.

For investors wondering what to do next, the first thing you might consider is your asset mix. News channels like CNBC and Bloomberg are great sources of information. But their overriding premise is that there are two assets classes – stocks and bonds.

Sophisticated high net worth investors know better. A February 7 article by CNBC itself reveals that billionaires actually keep only a small portion of their overall assets in equities . (*Here is Where the Super Rich Keep Their Money, CNBC.com, Feb 7, 2018)

Sophisticated investors know that proper diversification requires not only diversification of asset class, but diversification of strategy . How many investors do you know that made money this week? If you’re not holding at least some assets that helped you during the stock market downturn, you’re likely not properly diversified.

For a brief tutorial only this, I recommend reviewing our video from this week How to Get Real Diversification in Your Portfolio .

As a high net worth investor, you have the means and access to such investments and include them in a diversified, fortified asset and strategy mix. It’s the advantage you have – one that can be used to both protect and grow your wealth in any kind of market environment.

The reasons you should be using this advantage were on full display this week.


James Cordier is founder and head trader of OptionSellers.com, a Tampa, FL based wealth management firm specializing in Option Selling Portfolios for High Net Worth Investors. For more information on Managed Option Selling Accounts with James Cordier and OptionSellers.com visit www.OptionSellers.com/Discovery for a Free Investor Discovery Pack.

  1. MichaeL, If a “Option Seller” has a good understanding of the fundamentals that effect a specific future ie Corn, Wheat, Coffee, OiL, Gas etc how far out of the money in terms of percentage should you consider selling a contract? Would volatility be the answer as to how far out? Thank you William

    • Michael Gross Says:
      February 19, 2018 at 2:32 pm

      William,

      The answer would be – as far as you can! Yes, volatility will help determine how far out you can sell. Ideally, we look for 50-100% out of the money. However, that is not always possible. We will consider options as close as 20-30% out of the money for the right markets.

      I hope that helps.

      Regards,
      Michael

  2. Can you PLEASE let the good people that read your newsletters every month as well as follow you on everything else you publish let us know of a company or broker you would recommend that will manage accounts with much lower balances but still want to sell options on commodities ? I want to get more diversified in my portfolio, and get invested in selling options on commodities, but only have about a $20,000 account for now to invest. I would love to have you manage an account for me. But I know that you don’t touch any accounts that are less than $500,000. Although I do have real estate that it is worth more than a million dollars, I only have saved up about $20000 to invest in commodities

    • Michael Gross Says:
      February 15, 2018 at 3:59 pm

      Darryl,

      I am sorry as I know of no organization that offers this kind of portfolio for that account size.

      Regards,
      Michael

  3. Mr Cordier, I want to praise the soundness of your advice and applaud you for “giving Back”, sharing your excellent experience and knowledge without charge! I first read your book last April, 4 reads later, and 50% of my current portfolio invested in 7 different commodities (5 shorts & 2 long). All is good. I have been waiting for a correction since last March which kept me mostly in short swing stocks trades for the other 50% of my portfolio. The last 2 weeks saw my commodities increase in value with time decay and most importantly shrugged of the stock market correction and held or increased in value. Booyaa!

    James and Micheal Thank you, Thank you!

    Regards, from the cold north Calgary, Alberta.

    Reese

  4. Hmm, yes, but Natural gas is down 4% today, and oil has been down all week. It’s not been smooth sailing selling commodity options this week either 🙁

    • Michael Gross Says:
      February 15, 2018 at 4:03 pm

      Terence,

      Sounds like you’re limiting yourself to one side of the market.

      If you’re short call options, its been an exceptional week. If you’re diversified over 6-10 uncorrelated commodities, the move in stocks is made irrelevant.

      Regards,
      Michael

      Regards,
      Michael

  5. If I opened up a one million dollar account with you and expected a fifteen per cent return, you would have to sell $150,000 worth of commodity options. Since you seem to average approximately $500 for each option sold, I would be short about 300 option contracts. This doesn’t take into account your fees and the fact that not all far out of the money options go worthless.

    Nevertheless I greatly enjoy Mr Gross’ videos. As for the equity market, I hedged my stocks with puts and am substantially ahead this year.

    Regards, Paul

    • Michael Gross Says:
      February 15, 2018 at 4:04 pm

      Paul,

      I appreciate your math. However, our performance (net of fees) speaks for itself.

      Regards,
      Michael Gross

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