“Herd Mentality” Creates Opportunities for Q2 Option Sellers
March 29, 2017 Update
Good afternoon. This is James Cordier of OptionSellers.com with a market update for March 29th. Well, it’s time to take stock of the first quarter of 2017. We liked going across the board. Often, we only talk about commodities and we only talk about commodity option selling, but at the end of each quarter I like to go around and see what other investments and what other analysts and specialists are thinking. Needless to say, Quarter 1 of 2017 was a spectacular rally in U.S. stocks and global stock markets alike. Very end of the quarter we had a bit of a pullback.
As a matter of fact, the DOW Jones, I think, had 8 or 9 days down in a row and was threatening a 30-year low of consecutive losses, which was stemmed this past week as the market was bouncing off the idea that the ideas that the Trump administration is going to be having more of a tough time in Washington than some people think. Needless to say, the healthcare vote, or lack thereof, did not go the way that a lot of investors had thought. If we can’t get Obamacare taken back off the table or all the other ideas that the Trump Administration had in place, are those all slam-dunks? Necessarily, they might not be. Deregulation, lower taxes, all the very friendly financial ideas that have come across from the administration over the last several months, will they still go through? Maybe they will. They might not be exactly what the Trump Administration had in mind, but still should be slightly friendly to both global stocks as well as the U.S. economy, as well.
One thing also that happened with the fall-off in the stock market over the last week or two was a weaker dollar. Some of the FED officials, of course, start running out and say, “Well, we’re not going to raise rates 4 times. We might only raise them 2 or 3.” Of course, they have to make sure we don’t have high rate jitters going through the market. Certainly, that could not only slow the U.S. economy but it could slow the stock market rally, as well. So, of course, they ran out one by one to make sure that the market was not a fear of too many rate hikes in 2017. We think there’s going to be 2, possibly 3. The 3rd wouldn’t come until December. Of course, at that point the U.S. economy would be far on its way or not. So, they’re going to keep that one in their back pocket probably until the last week or two of the year. I don’t blame them- I’d probably do the same thing.
What’s happening right now is a lot of uncertainty. The gold market rallied recently on the idea that the U.S. dollar’s not going to be as strong as earlier thought. Interest rates might be more than earlier thought and the gold market rallied approximately $50 over the last few weeks. The stock market fell over the last week or so. Herd mentality continues to push both commodities and stocks in dramatic fashion. Why does the stock market go up 15 days in a row and then down 9 days in a row? It’s quite interesting. The gold market fell some $50 approximately a month ago, only to recoup the entire loss. Herd mentality is one of our favorite things that we want to take advantage of as option sellers.
Quite often, herd mentality will push not only the underlining price of crude oil or gold or coffee into a certain direction, but then comes the option buying. Herd mentality is something that we just absolutely keep our eyes open for and what it’s doing right now, because the uncertainty in oil with OPEC production cuts, with the ideas that here in the United States, Texas is going to be producing a great deal of oil. We have and hear extremely bullish ideas on the price of oil and the price of gold. You can be watching the analysts and the experts on CNBC, Bloomberg, and Fox equally talk in a bearish fashion.
We think the gold market, the silver market, and the copper market are fairly priced right now. That is ideal for option selling, and you know what I’m referring to, that is putting a large strangle around the market. Right now we’re entering gold calls some $600-$700 above the market. We’re also going long gold from approximately $950 by selling puts at that level. We see uncertainty abound with the dollar, the stock market, and gold prices, and yet we see gold at the end of the year maybe $50-$75 in this range at the end of the year from where we are right now. Ideal for one of our favorite trades in 2016, this same scenario is set up for this year and we think that is going to be very prosperous for our account throughout the year.
The crude oil market, which absolutely fell out of bed because of OPEC production cuts, certainly did not live up to their billing. OPEC right now is talking about extending these cuts into the end of 2017. We feel that’s going to do very little to change the supply and demand of the most valued commodity of all. We could get a little bump as OPEC talks tough again in probably April and May. We also have driving season in the United States, as well, increase prices in gasoline and oil. We think that would be a great selling opportunity. We’re very bearish for crude oil for the months of November, December, and January this year. If we do get a bump up in prices in June and July we’re going to take advantage of that by selling calls with both hands.
The seasonal trades that we put on recently are doing extremely well. One of the trades that are coming up right now is natural gas. We feel that is going to be an ideal situation forward to selling option premiums this year. Natural gas, we feel, has a fair value of around $350. We’re going to go long from extremely low prices and we’re going to go short from extremely high prices. Probably going to be our best fertile ground in 2017. We’ll have to wait and see. I think that’s the way it’s going to play out.
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