Video Lesson: The FUDOM Method of Selling Options
Hi, this is Michael Gross of OptionSellers.com here with your Option Sellers Email Seminar. The subject of this week’s seminar is The FUDOM Method of Selling Options. For those of you that don’t know what this means yet, we’re going to explain it here right now. Somebody told me the other day that it reminded them of FUBAR from World War II. It was a saying they used to have, if you’re not familiar with it, look it up. It has nothing to do with that, this is completely different. FUDOM is our proprietary method we’ve developed for selling commodities options. We’re going to explain it here today what it means, but, in short, FUDOM is an acronym. It stands for FUndamental, Deep, Out of the Money. In short, FUDOM is a method of combining supply/demand fundamentals with deep out-of-the-money options and selling those deep out-of-the-money options to collect the premium. It’s a powerful combination in commodities and we thought it deserved its own name because it’s the entire philosophy we use to take premiums out of the commodities markets, so we’re going to talk about it a little bit here today.
A lot of you stock option sellers out there, and if you sell stock options then you know what I mean, even a lot of the courses or gurus that teach or write about selling options, one of the top things they teach is, one, you want to sell options that have short time, 30 days or less, and, two, you want to sell options with high volatility. To do that, we’ve covered this before, here’s your price chart of your stock, and say you want to sell a put. You’ve almost got to sell it right there, 30 days left, and even in commodities people that try to apply this all sell an option in 30 days to get the fast time decay. Well, what that does is you’re right at the money or very near the money. To get any premium at all, with 30 days options, you’ve got to sell the option almost at the money. If you sell stock options you know this or even if you sell commodity options you know this.
The drawback to that is what? Any little market hiccup, even one of these deals, and guess what? Your option is in the money and now you’re dealing with, “Do I want to exercise the thing? Do I get out of it? What am I going to do?” We don’t want to deal with any of this. As a commodity option seller, one of your biggest advantages is knowing the supply and demand fundamentals that are affecting the long-term price direction of that commodity. For instance, here’s out chart again, and here’s our soybean chart… the solid line is our soybean price chart. Now, when we’re trading soybeans, we’re going to know what the supply is, we’re going to know what this year’s crop looked like, we’re going to know what last year’s crop looks like, we’re going to know how many soybeans are currently in storage, we’re going to know what the projected demand for soybeans is in the United States and globally, we’re going to know what the Brazilian crop looks like this year, we’re going to know what the weather forecast is. Okay? These are all fundamentals that go into knowing, not knowing, but getting an idea of the factors affecting the price.
Fortunately, in commodities, the government does a lot of these calculations for you, so you can go look up USDA and it’s going to give you ending stocks, which factor almost all those things I just mentioned into it. Now, does that tell you what the price of the commodity is going to do tomorrow, next week, next month? Of course it doesn’t. Everybody looks at those things. What the fundamentals will tell you often is where prices shouldn’t go over a period of 3, 4, 5, 6 months. The beauty of knowing commodity fundamentals is they don’t change overnight. So, whatever the soybean crop is expected to be this year, that’s not going to change tomorrow. Now, can it change over 30, 60, 90 days? Yeah, it can change, typically it’s not going to change drastically, but it can change. Nonetheless, when you’re doing fundamental analysis on commodities, it may not tell you price is going to go here tomorrow or here tomorrow or up here next week, but it might give you a pretty good idea that I don’t think prices are going up here or I don’t think prices are going way down here. For option selling, that’s all you need to know.
That’s the beauty of combining the fundamentals with the deep out-of-the-money options. Yes, you’ve got to go 3-4 months out to get premium on these types of options, but when you’re trading fundamentally that works perfectly because fundamentals affect the long-term price direction of the commodity. Can price do this in a short term? Of course it can, a lot of things affect short-term price. We’re talking about long-term price direction. That’s what we care about. It’s a powerful combination combining these two factors. That’s why we use FUDOM, that’s why we call it FUDOM. If you’re using this in your trading, it’s designed to be a slow steady way to take premium out of the commodities markets and I hope you found this helpful. I do want to also mention as a caveat, of course there is risk in this. That does not mean your options can’t go in the money. It does not mean you can’t lose money… yes, you can. What we’re trying to do here is just put every advantage you can in your corner and show you how to do that. In our experience, that’s what FUDOM has done for us.
I hope you’ve enjoyed this week’s Option Seller Email Seminar. If you’re watching or you’re wondering how you can work directly with Michael Gross and James Cordier and the systems we’re using here, I do want to mention that if you’re curious about that we recommend our Investor Discovery Kit. This is the full kit. It’s going to explain to you about our whole trading program, what we look for in investors, what you can expect as an investor of ours, how you work with us. It also includes a full-length DVD of James Cordier’s seminar for high net-worth investors. If you have any interest at all in learning how to work with us I strongly recommend it. I think you’ll find it very helpful. Thanks for coming to this week’s seminar. Have a great week of selling options and we’ll talk to you soon. This is Michael Gross of OptionSellers.com.