Fairly Priced Yellow Metal Could Still be Gold Mine for Option Writers


Nov

10

2017

Fairly Priced Yellow Metal Could Still be Gold Mine for Option Writers

Click To Read Video Transcript

(Video Transcript)

Good afternoon. This is James Cordier of OptionSellers.com with a market update for November 10th. Well, so often in the investment world, we’re all looking for the next best buy, or which stock is about to take off, or which piece of real estate has been overlooked and is probably going to be increasing in value. Option selling, especially on commodities, is probably the only investment around where you can identify fair value and actually predict a market to go sideways in price and to prosper from it. Quite often looking for the next big winner in the stock market or in a commodities market is what everyone is scrambling trying to do. In 2017, some of our best investments were identifying fair value markets. We in think in 2018 we probably have a similar list coming up and we’re starting to take positions accordingly. Precious metals have a lot of interest right now. We think that gold and silver are going to be very well supported throughout the remainder of 2017 and probably the beginning of 2018, as well. A lot of investors are trying to diversify away from the stock market and that does include being long some precious metals. Of course, the stock market is precariously high right now. That has some gold fever taking place, as well I’m sure – and of course, you have North Korea, you have Saudi Arabia, you have things going on in Asia – these are all nice supporting factors for the markets of gold, and silver, and platinum. What’s so interesting right now is the third leg required for the gold market, in our opinion, to have a sustained rally, and that would be inflation. And we simply don’t have any now. We don’t see any coming anytime in the near future. This is providing a very stable mark in the precious metals. The gold market we do see having a $100 trading range. We see gold right now trading at approximately $1300 an ounce. We do see it getting up into the high $1300’s – probably in the next six to twelve months. We also see it testing the downside somewhat. It might go down as low as $1200. But we do see this probably being a collar on this market and, you can use the same parameters for silver, as well. One of our very best investments in 2017 was predicting fair value markets. We had a couple. We had coffee. We had natural gas and, we certainly had precious metals. We are positioning with this in mind for 2018 and, we think 2018 is going to be a very good year based on these facts. We’re shorting precious metals, up some sixty to seventy percent from the current price and, we love going long from thirty percent below the going market value because we are slightly bullish on the market, as well.

One fundamental factor that changed in 2017 and that was in the crude oil market. For the first time in decades the United States has been able to export as much crude oil as they want. So, instead of the market taking a tail spin in October, November, and December, this year, large exports left the United States. That, along with cuts from production from the OPEC nations has propelled the market to heights not seen in approximately three years. That did stop us out of some of our crude oil recently. We are going to change the parameters on crude oil. We think it’s still going to be kind of a sideways market over the next year or two but, we do have some of the definitive bearishness that takes place in winter each year, probably alleviating. So, the deep sell-off that takes place in the fourth quarter with now large exports leaving the United States, those might be a thing of the past. We’re going to be adjusting our parameters on the price of crude oil going forward. We now think that petroleum prices are likely also a fair value market – practically a widget if you will – especially with the United States about to produce ten million barrels a day. That will keep large spikes up in price from happening, as well.

Anyone wanting more information from OptionSellers.com can visit our website. If you’re interested in becoming a client of ours, you can certainly contact our headquarters in Tampa, Florida and ask Rosie about becoming one.

As always, it’s great chatting with you and looking forward to doing so again in two weeks. Thank you.

  1. Hi James and Micheal, i really like your articles. My trading has improved and it give me peace of mind when i know i can place my options far out of the money with fundamental on miy side. I have a question regarding a possible flash crash that might happen. This year a flash crash occoured on silver (in June). the price fallen around 8-9% in a few minutes. i believe on gold also occured this year. According to your expeirence if i had sold a naked put on Silver with 6 month expiration and 20% OTM just a few days before the flash crash how the option would have been react to such a flash crash? i mean, in such a situation the option could have been increase his value as fast as the future dropped? Could the premium of the option easly and quikly double in such a situaion? thanks

    • Michael Gross Says:
      December 13, 2017 at 4:23 pm

      Giuseppe,

      Good question. The answer to your question is not likely and yes. It is unlikely a short option will ever move tick for tick with a futures contract, unless it is actually in the money. Although it easily could have doubled in value in the situation you described – although this would have required incredibly poor timing.

      While option selling is not perfect and there still remains potential for losses from time to time, there are many ways of avoiding – or at least mitigating such circumstances. On the surface, the silver market is a good commodity to consider spread trades (either strangles or some kind of vertical spread.) Secondly, I would recommend considering more distant strikes. For a full discussion of this, I’d suggest reading or re-reading chapters 9, 10, and 12 of The Complete Guide to Option Selling, 3rd edition.

      Thanks and good luck!

      Regards,
      Michael Gross

  2. selling gold option need large margin, will push down the return
    how you overcome this problem? vertical spread ?

    • Michael Gross Says:
      November 20, 2017 at 2:11 pm

      John,

      In our experience, gold has no higher margin requirement than any other commodity. If margin is an issue, it may be with the broker or platform you are using. You want to make sure you get with a brokerage that has friendly margin rates towards short options on commodities. The exchange sets a minimum margin requirement. Look for one who offers this. Often, brokerages will charge their own margin on top of minimum exchange margins.

      Regards,
      Michael

      • my fcm is IB, they charge high margin (abt $ 2500-3000) for gold but not for others. Indeed my account is portfolio margin which is very efficient

        I’m very thankful for your blog that give big picture for commodities fundamental
        we can setup flexible position base on fundamental either conservative or aggressive

        Thank you very much !!

  3. Would going out as far as December 2018 be acceptable? Otherwise if trading the closer months the premiums look too low for going short strikes 60% OTM and long strikes 30% OTM. Thanks for another informative video!

    • Michael Gross Says:
      November 15, 2017 at 2:40 pm

      Jess,

      There is no right or wrong strikes in option selling – if it expires worthless, its good. Going out to Dec 2018 is not an unreasonable strategy.

      Regards,
      Michael

  4. Dear, James

    Why do you think seasonal in Crude Oil will change in the future and the low in Crude Oil will not be more in December? I looked at Gasoline seasonals (which US export was not banned for years ) and it has a similar pattern. Why will the increasing US export affect the seasonal pattern?

    • Michael Gross Says:
      November 15, 2017 at 2:44 pm

      Nikolay,

      My outlook is that increased US exports may not erase the seasonal tendency. But it could dull or partially mitigate it. Exports mean increased demand for US crude. As fall is lower demand season in the US, producers will likely be exporting excesses during these months. This new avenue of demand could partially offset lesser US domestic demand in the fall.

      I hope that helps.

      Sincerely,
      James

      • I am still trying to understand the current crude rally. I acknowledge the fact that bigger exports are reducing the US glut, but aren’t those exports replacing OPEC or Russian supply in other markets? Where are those barrels going? Or has the demand increased so much that it is absorbing all that supply?

        Thank you very much for your insights

      • Michael Gross Says:
        November 27, 2017 at 3:28 pm

        Adrian,

        OPEC is still under a production limit agreement which has put a slight dent in global supply. Increased US Export Demand is keeping a bid under crude. We still expect some seasonal weakness into winter. But the seasonal effect could be slightly reduced this year.

        Regards,
        Michael

  5. Your comments are always insightful James. When you say we are selling puts from 30% below the current market value and calls from 60 to 70% from current price, what do you mean? How far out are you going in time to get any kind of premium? Is there enough volume and open interest way out there? Looking at Think or Swim (TOS on TDA), the options only go out 76 days. I might answer my own question when I read your book, which will be a birthday present for me from my wife on the 16th of November. I sell options on equities currently, but commodity options fascinate me from you guys opening my eyes to the advantages of commodity selling using fundamentals and some technicals.

    • Michael Gross Says:
      November 15, 2017 at 2:46 pm

      Alex,

      Thank you and glad you liked the book. We typically look 6-12 months out to get the strikes we’re targeting. Platforms like Think or Swim likely aren’t going to show you these options. If you plan to attempt this on your own, I’d recommend a professional grade platform such as Interactive Brokers or CQG.

      Thanks,
      Michael

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