How to Collect on Grain Market Volatility: The Option Seller Radio Show, April 22nd, 2016




How to Collect on Grain Market Volatility: The Option Seller Radio Show, April 22nd, 2016

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(Audio Transcript)

Michael: Hello everybody. Welcome to the April edition of Option Seller Radio. This is Michael Gross here with James Cordier at, here to talk about the markets and what’s going on with commodities and different option selling opportunities this month. James, welcome to the show.

James: Thank you, Michael. Always glad to do it, always interested in talking about what we do for our clients and in the commodities world.

Michael: Boy, what a lot to talk about this month. Let’s start off with the oil meeting in Doha this month. I don’t know if that was a surprise to many or not, but they decided not to put any production limits on anything. What’s your view of that and maybe the oil markets in general right now?

James: Well, what happened with the meeting is quite interesting. A lot of the market participants thought for sure that Saudi Arabia and Russia were going to come to some sort of freeze on production terms, and, at the last minute, Saudi Arabia wanted Iran to join in, and they certainly weren’t going to do that. Iran feels they have a whole lot of making up to do as far as production and getting their finances back together, and they certainly will be able to do that. With oil trading well about forty, in many cases, Iran’s going to get their house back in order by selling oil, and they will have lots of customers to do that. Chances are they’ll probably discount per barrel, maybe a dollar or two. That’s a great way to get new customers, and steal them from everyone else. That’s what Saudi Arabia certainly seems to be up in arms about, and that’s why they kind of ditched the whole idea of a freeze in the last minute. What’s so interesting is the market was trying really to get bulled upon the idea that we would have a production freeze at last. As it turned out, freezing production at all-time highs simply wasn’t that bullish, but it was the idea that there was actually going to be an agreement, had a lot of traders and lot of the market participants slightly bullish for oil, but, in all reality, freezing at all-time high production levels I don’t think is that bullish. I think what’s happening right now, Michael, is we have the continuing seasonal rally that takes place from February usually until May. Certainly, the market did start rallying in February. We discussed that in several of our radio shows previously. We think that the oil market, now trading above forty, is going to probably rally for the next two to four weeks as driving season gets in earnest here in the United States. Then, we see the market leveling off. The production globally is not bullish. Production in the United States, while it’s dropped off a couple hundred thousand barrels a day, is not bullish. Here in the United States, the largest consumer, Michael, as you know, we’re sitting on supplies that are over one hundred year high levels, and when driving season comes to an end, mid to late summer, we certainly see oil prices heading back down into the thirty level again later this year.

Michael: James, those are some good points, and one of the purposes of our radio show here is to give you, our client, the ability to look into some of the discussions that go on behind the scenes in our trade meetings of how we’re deciding which options to sell for your account. James, another good point you brought up, just to touch on oil one more time was, the seasonal tendencies in oil tend to break early. They tend to break in April or May time period. A lot of people think, “Well, that should be later because gasoline demand doesn’t peak until maybe July or August”. Maybe talk about a little bit why crude price tends to break this early.

James: It’s interesting, Michael, the seasonality which, in this case, is moving against the fundamentals will take place only for the length of just that, when it normally is starting it’s rally in February, goes through April or May, when we have bullish fundamentals.We don’t have bullish fundamentals, so I think the seasonality of this rally ending in May will probably take place again this year. Generally speaking, when we have tight supply as the United States, tight supplies worldwide, OPEC is trying to produce as little as possible to pump up prices, then we can have a rally through July and August. Then, we start to fall off in September. The supply figures right now globally is just massive. We’re expecting the seasonal rally to probably end in the month of May. We do follow that very closely. Quite often, over the last ten years, we have had bullish fundamentals if the rally lasts longer, this year we do not have bullish fundamentals.

Michael: James, as a trading strategy, as our clients know, the strategy there as we are taking advantage of some of that inflated call premium that’s occurred as a result of the recent rally, simply because the fundamentals, longer term, appear bearish. If you’re a client, you already know what those strikes are, possibly add to that position as the season goes forward. If you’re not a client, you can look at maybe a suggestion or two we make in our newsletter, or at least the public version of our newsletter you can look at. Let’s talk a little bit about the dollar right now, because it’s having a pretty big impact on commodities prices in general. We’ve seen the dollar have a very weak start to 2016. What role was that playing right now for commodities in general?

James: Well, it’s playing a very large role. At the very beginning of the year, we just came off of our first rate hike, as we all know, in the United States. The dot plot from the Federal Reserve was we were going to have four more increases in interest rates this year. As more data comes out from the Fed, especially this past week, it’s practically miss on every economic report that we’ve seen. Today, while we were taping the radio show, we had housing reports today- just all misses. There is no way that we’re going to see three or four rate hikes this year. If we have one, that’s going to surprise the market quite a bit. We have negative interest rates around the world. Absolutely in no way are we going to have people betting on interest rate hikes in the United States. Those have just come off the table, that’s why the dollar is falling, and that has really pumped up commodity prices over the last thirty to sixty days. Basically, all four rate hikes have come off the table, and that has people selling the dollar and going into precious metals, energies, and grains- something we’ve been waiting for for over six months. We’re finally there and we’re looking at very fertile grounds right now for option selling because of the volatility and because of the turning commodity prices. The next thirty to sixty days could be very exciting.

Michael: Yeah, great point there is that you have funds and speculators come in kind of buying commodities across the board, simply because of the falling dollar. At the same time, a lot of these commodities like crude oil, for instance, that you mentioned, the fundamentals are still bearish, so you have them driving, pushing that price up against the fundamentals. Often times, that’s a recipe for a call selling strategy, or possibly even a strangle strategy. A perfect example right now is over in the grain markets, which we have talked about a lot in our articles this month, but you have markets rallying right now in the face of what appear to be somewhat bearish fundamentals. Wouldn’t you think that’s the case?

James: It certainly is. All the headlines right now are taking place, for example, in Argentina. Here in the United States, of course, we have nice blacktop paved roads and in Argentina they don’t. They have dirt roads and they’re trying to ship soybeans from point A to point B and roads there are flooded. Simply, we have a bottleneck right now of some of the major supplies, like Argentina for soybeans. We have people talking about La Niña and El Niño taking place and the transitioning going on a little bit earlier than thought. All these speculative finds that just jump all over headlines are doing so, especially in corn and soybeans right now. When these weather conditions and these items that are being discussed right now come out of the headlines, for example, it’s dry in the Midwest, Michael, and what’s that going to do? That’s going to cause early planting. Corn and soybeans should be planted extremely well this year. We will have rains that are going to take place in May, June, and July, and we could wind up having one of the largest crops we ever have in both of those commodities this fall. So, right now we do have a lot of headlines pushing commodities up, namely corn and soybeans. We think that timing is difficult, however, we think that making sales, corn call sales and soybean sales well above the market, are going to look pretty good this September and October when we’re reaping probably the largest harvest ever in history in the United States. Right now, there’s a lot of excitement and that’s what we like to sell into.

Michael: Not only that, James, but another point to bring up is all of this is happening in the face of existing stocks that are huge. You have world-ending stocks right now at 79 million metric tons. That’s a new all-time record. You have U.S. ending stocks at 445 million bushels. That’s the highest in a decade. Before we even get a bushel of new crop out of the 2016 crop, we’re sitting on record supplies already, and I’m talking about soybeans, but it also spills over a lot into corn and some of the other grain markets. So, those are the type of markets where you have that big clear-cut fundamental in the background kind of sitting over the market, and all the stuff going on in the short-term is, I don’t know if you call it noise, but it’s certainly distracting from the big picture. Those can often be exploited using option selling strategies as you clearly stated there. If you’re interest in some of these markets we’re talking about right now, the upcoming Option Seller Newsletter we’re going to have a feature on the soybean market, talking about some of those specific items. Obviously, as a client, your version’s going to be a little bit more detailed, so we’re going to talk a little bit about some of the specific strikes and already starting to wade into that market just a little bit. Also, in the May newsletter, which should be out on or around May 1st, we have a special guest expert, Price Headley, on BigTrends. He’s got some great insights into stock values right now, some of his favorite option strategies, and he’s also a big technician. So, he talks a little bit about a couple of his favorite technical indicators. It’s a great interview. I highly recommend it if you trade at all. Whether you sell options or not, it’s got pretty good insights there. James, speaking of the stock market, let’s talk just a little bit about stocks right now. There has been some concern creeping in. We have a big seasonal coming up. What do you see happening there right now?

James: It’s interesting, Michael. The U.S. economy is just absolutely flat lining based on many different measurements. The U.S. economy is certainly slowing down. It appears that this is, once again, one of the most hated rallies ever in the stock market. We busted down to down 10 or 11% for the year. We’ve gotten all that back in just the last thirty to forty-five days based purely on helicopter money from the Fed. The Fed has come out saying that they’re going to raise rates four times this year. That had the market very disturbed. Janet Yellen comes out about a month ago saying basically the most dubbish statements we’ve ever heard. Of course, she had sit down meeting with President Obama recently. I would imagine that the conversation went something like let’s not raise rates here in the next few months. I wasn’t in the meeting, however I bet it went something like that. You don’t have the Federal Reserve chairman come in to talk about her golf game, I don’t think. It’s quite interesting that the stock market has the ability to rally as the U.S. economy is slowing, China is slowing, negative interest rates in Europe, and we have just real difficult economic times all around the world. However, when you’re looking at negative interest rates, you have clearly nowhere for money managers to put funds, except for along the stock market and that’s what they’ve done. Of course, as we approach the end of April, we’re going into May, and we all know what the saying is for the stock market in May. Maybe you want to share a little bit about that, Michael.

Michael: “Sell in May and go away” is the old axiom. You know, while it sounds like folklore, we actually did some research into this and the seasonal tendency backs this up. Again, in our May newsletter, we publish that seasonal chart and I think it’s going to open some eyes because, if you’ve always thought that’s folklore, the seasonal on the DOW here really backs it up. So, it’s something to take a look at. Also, we have a pretty surprising statistic out of Bank of America Merrill Lynch this month. Basically, they released a report, which they’re saying the stock market is expensive versus history and that the headline stat there is they did a comparison between the S&P’s total market cap versus U.S. GDP going back to 1964. The S&P’s market cap has been around 57% of U.S. GDP on average since 1964. As of the beginning of last month, that number has surged to 99%, so that’s correct at saying the stock market’s currently over valued by about 72%. Granted, that’s only one statistic, but it’s a pretty major indicator Bank of America Merrill seems to think it’s a pretty big deal, so something to consider.

To close this month, James, we’re going to do a little lesson here just for our clients to maybe kind of understand a little bit about the type of things we look at. We talk about fundamentals a lot, that’s where we start with any trade, and people might not know exactly what those things are. What do you mean by fundamentals? What exactly type of things are you looking at? So, we’re going to talk a little bit about that and the type of things we look for, where to find it, where we look it up. We start with the crude oil market. You just talk about that. You’re talking about crude oil supply. What are you talking about when you say crude oil supply and where do you find those type of numbers?

James: It’s interesting when the average individual or investor is watching CNBC and Bloomberg and Fox Business, it seems as though everyone’s talking Chinese. They’re talking about this week’s crude oil supply figures, gasoline, and #2 Diesel. The figures are really readily available for anyone, simply Googling gasoline supplies or crude oil supplies. A report comes out by the API, American Petroleum Institute, every Tuesday evening, and then on Wednesday morning the government’s official figure comes out. Basically, there’s a big business in counting barrels of crude oil, gasoline, and heating oil and it does move the market. Sometimes it’s only temporarily, but all these pieces are put together utilizing supply and demand figures. As we go into certain times of the year, the supply means a whole lot. Generally speaking, we have our highest demand season worldwide from May until August. The market usually anticipates that, and when fundamentals are bearish like they are in crude oil right now, the market will rally going into that. Also, what’s going to happen as we get on the other side of driving season, we have what’s called shoulder season, where the fundamentals will no longer trade against the seasonals, then the fundamentals become the fundamentals, meaning demand for crude oil and energy in the United States falls off dramatically starting in September. That’s how we trade fundamentals, that’s how we use them, and that’s how we position our clients going out about six months in the future.

Michael: Great insight, James. I think anybody that has positions in crude oil or has ever considered trading crude oil can get a pretty good picture just from that, you know, the type of stats to look at. I wanted to touch on grains a minute, as well, the type of things to look for there. Obviously grains are big seasonal markets, as well. We talked about that a lot last month, so we’re not going to hit on that again now. If you’re in grains, you’re watching us trade grains in your account, or you’re not yet a client, maybe considering trading grains, there’s two figures that really tell the big picture story for grains. One of those is ending stocks, and ending stocks is the number that’s left after all demand has been met for the year, what supplies are left over. It’s a big figure. It’s what everybody does all their calculations for to see what the ending stocks will be. At the beginning of the crop year, which is on September 1st, because September 1st is typically when harvest begins. They measure how much crop is left over from last year when they start doing calculations for the new year. So, that’s called ending stocks. It’s a very key number. The other key figure in grains, corn, soybeans, wheat, is your stocks to usage ratio. That’s your ending stocks compared to what you’re expected demand for the year is going to be. So, if your stocks to usage is 15%, that means if there was no harvest at all this year you’d be able to meet 15% of demand with what you have leftover from last year. Know those two figures about any grain market and it’s a great fundamental place to start to really give you the backdrop you’re working for. Obviously, you can learn more about both of these things in our book, The Complete Guide to Option Selling, now out in it’s third edition. You can get that at James, any markets you’re looking forward to? I know we already talked on a couple, but just to close out here going into May, what market do you like? What’s one to keep an eye on for May?

James: What’s interesting, Michael, for the first time in probably twelve months, we have opportunities coming up in just about all the sectors of commodities. As we were looking at one of the worst bear markets in memorable history, to follow the Bloomberg Commodity Index back in December, it hit a fourteen year low and there weren’t any commodities to follow. All there was was down, down, and more down. What’s so interesting right now is with the change in stance by the Federal Reserve, which is now weakening the dollar, with a slight up-tick with demand with some of the commodities in China, I think China has done more stabilizing than they’ve actually done improving. That has funds and trend following systems now buying some of the commodities that have the best headlines. We have been waiting for over a year for this commodity route to end. It is officially complete. One of the best opportunities for what we follow is having the eight commodities that we research: two being in an up market, two being in a sideways market, two being in a down market, and one or two fluctuating in-between those levels. That is ideal for option selling. It gives us the ability to diversify inside of diversification away from the stock market. We can now take positions that are neutral from each other in the eight commodities that we follow. The grain market right now is very exciting because we have simply a headline rally going on right now. The crude oil market, I think, is setting up for one of the greatest sales we’ve seen in a long time. We’re going to have record supplies at a time where demand is going to be at its weakest, and that’s going to be this fall. Selling crude oil calls double the price that we expect it to be is ideal. The coffee market and sugar market are finally coming to life, based on some demand and expected demand from Asia, of course, once again, from the weaker U.S. dollar. We’ve been waiting for sideways to up markets for the last six to twelve months. We finally have them. As we like to say, there appears to be a lot of low hanging fruit coming up the next thirty to sixty days. It’s tough to put my eyeballs on one particular commodity, but the eight that we’ve been following and waiting for for a long time, they’re all here right now. So, this could be interesting as spring and summer this year in 2016.

Michael: That’s good news if you’re on option seller. Obviously, if you’re a client, you’ll be taking advantage of some of those positions, maybe all of them over the next month of so. If you’re not a client, I believe Rosemary mentioned we still do have some consultation dates open in May. You can feel free to call her for availability- that’s 800-346-1949. If you would like more information on our program here, you can also go to and get a free information kit. James, thanks for you insights this month, and for everyone listening, we hope you enjoy the radio show and your newsletter on May 1st. Have a great month of trading. We will talk to you next month. Thank you.

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