Historic Volatility Sets the Table for 2017 Option Writers
Recent volatility in commodities sets an attractive landscape for sellers of options next year
Good afternoon. This is James Cordier of OptionSellers.com with a market update for December 22nd and a look into the upcoming New Year. Over the last ten years, I’ve probably spoken to hundreds of new clients and one of the questions I would always receive is, “How are we able to sell options in commodities fifty and sixty and seventy percent out of the money when I can only sell stock options only five percent out of the money. The answer to that question is, “historic volatility in commodities.”
2016 will probably go into the record books as one of those years that has injected more historic volatility into the commodities markets more than probably any year that I can recall. We start with interest rates, then the Brexit. Then, a very surprising election outcome here in the United States. And last but not least is OPEC and non-OPEC nations in the world cutting production of oil for the first time in practically a decade. I would not call all these events this past year black swans, but the great majority of them were at least grey swans. Trading in an environment like that make it quite challenging.
However, this is an absolute key ingredient in having historic volatility pumped back into both puts and calls in commodities across the board – a challenging environment for sure while it is happening. However, in the coming years the absolute luxury of, once again, having historic volatility put into option premium on both sides of the market in probably seven or eight markets that we follow. The credit spread, something that we are going to be inviting into our accounts in 2017, is going to be our mainstay as far as positioning in the markets.
If you read chapter ten in our latest version of The Complete Guide to Option Selling, it describes the credit ration spread in great detail. The volubility of selling options far out of the money with great premium allows us to have protection at the same time as selling extremely expensive options. This is something that we are going to notice taking advantage of in the coming six to twelve months. And, possibly because of the volatility going into commodity markets this past year, and possibly being able to do this for the next few years. Not only does the credit spread offer great ability to sell options far out of the money, but it also straightens out the equity curve on accounts – something that we’re very interested in doing.
We look forward to doing this in 2017. We are hopefully going to be hopefully involved in seven or eight markets this coming year, and using the ration credit spread is going to allow us to have protection on practically every position we take. And at the same time, straighten out the equity curve – something we are interested in doing. We are still trying to get that formula of going from zero on January 1 and a very good return on December 31. This should do a very good job of it over the next three to four years. We shall wait and see. I personally want to wish everyone Happy Holidays and a Happy New Year. As always, it’s a pleasure speaking with you. Looking forward to doing so again in 2 weeks. Thank you.