Option Seller Radio: Fed Decision, Option Premium Now in Crude Oil, Selling Call Options in Coffee


Dec

2

2015

Option Seller Radio: Fed Decision, Option Premium Now in Crude Oil, Selling Call Options in Coffee

Option Seller Radio – December 2, 2015. OptionSellers.com’s James Cordier and Michael Gross discuss Crude Oil and Coffee futures, Upcoming Fed Decision, Seasonal Tendencies, and Option Selling Strategies in Commodities


Click To Read Video Transcript

(Video Transcript)

Michael Gross & James Cordier Interview
November 24, 2015

Michael Gross:
Hi, this is Michael Gross of OptionSellers.com and welcome to the first installment of Option Seller radio. I’m here with James Cordier, head trader here at OptionSellers.com and we’re going to talk a little bit about the markets today and a little bit about option selling and some things that you may be able to look at and study to learn more about this strategy. James.

James Cordier:
I’m doing great. As always, we’re watching the news and watching certain market conditions fluctuate. And Michael as you know, I think as the year wraps up as we are doing now, we’re just about going into December, lots in the news, lots in commodities, and certainly opportunities that we like positioning for, for the coming year.

Michael Gross:
Good, good. Yeah I think a lot of the people listening out there probably, maybe you’ve read our newsletter, you’ve read our book, you’ve looked at our website; the purpose that we want for this radio show is to really tie a lot of those things together for you and maybe give you some additional avenues if you are looking to learn more about this or just keep posted on what’s going on in the commodities markets and see some examples of how you could be selling options on some of these markets. James, I know one of the big markets we’ve been watching lately is the crude oil market and you were on CNBC last month talking about a potential major low in the market and I know we featured it in our newsletter in November as well; what are your views on crude oil right now?

James Cordier:
The crude oil market is absolutely over supplied as everyone hears about and everyone’s talking about here in the United States we have nearly 100 million barrels over the five year average. We have OPEC trying to fight for market share; it’s going to rebound as far as what OPEC is wanting to do and willing to do, I think, in the next several weeks. Right now, here in the United States, we have real decay in energy financing, practical a third of the companies are basically going out of business as a lot of the infrastructure spending that took place during the boom years in the United States when oil was pushing $90.00 and $95.00 a barrel. A lot of that infrastructure spending is now in place and unfortunately, it was financed. It looked great on paper and now with oil trading in the mid to upper 40’s, it just doesn’t work right now and a lot of the funding that took place right now is leaving that industry; the Bakken especially some of the states North Dakota and such that looked like just a great investment is looking like a terrible investment right now. We think that in the coming weeks or months, certainly Michael, we are going to see US production fall off dramatically and certainly that was OPEC’s idea. They didn’t like seeing the United States go from five million barrels a day to ten million barrels a day, that’s the golden goose that, especially the Saudi Arabia’s of the World have been enjoying for so long. We see that a monumental shift coming. I don’t know if it’s this go around where oil is, you know, near $40.00 recently. Maybe it takes place winter when oil sinks again, but we’re certainly in the process of getting some of the new producers out of the market and at which point you’ll see OPEC then finally cut production and we could see quite a rebound in the next six to twelve months, I think.

Michael Gross:
Yeah that was, you had some great points in the newsletter as well. Even though prices have been so low and production’s been so high, demand has been increasing. It’s kind of a function of low prices carrying low prices where the lower price is spurring demand, maybe not so noticeable because supply has been so high. But if they do start cutting back that production, they will be dealing with increased demand. We have a good seasonal in crude oil right now too, for those of you who follow some of the seasonal charts we talk about; what’s behind this seasonal, James, as far as the often see weakness into December and then often see a strength in crude oil for the spring months?

James Cordier:
Michael, that’s a great question. You and I have been working together and watching the markets for over a decade and you and I joke often about setting your watch to the seasonality’s and the energy market. Each fall, we go into what’s called ‘shoulder season’ when driving season is far over and yet it’s not cold in the Northeast yet. This is typically when energy prices are at their weakest point each year and of course, now we’re in November going into December, oil prices have sunk as low as $40.00 recently, they touched the $39.00 handle. Basically this is the least demand season and this is when crude oil supplies usually stack up. A lot of refiners shut down for maintenance so they don’t need the oil and at the same time, the demand is at the least. This is probably one of our favorite position; the fundamentals this year are lining up extremely well with the seasonality. Buying oil, in other words, how we approach the market selling place, 30%, 40% below the price in December and selling puts that come due or expire June, July or August has always been low hanging fruit for us. It’s setting up extremely well this year, obviously a seasonal doesn’t make it so, but this year we are really excited about it. We started, you know, going long crude oil in the last week or two on some extreme weakness. We expect to see some weakness as supplies continue to build slightly in the next week or two. We consider this extremely low hanging fruit over the next couple of weeks. Michael as you know, come April, May, June shockingly gas prices start to increase and I think they will again in 2016.

Michael Gross:
Yeah I know we talk a lot about seasonals and energy markets have some of well, nothing’s guaranteed. Energy markets have some of the best seasonals of any commodity. It’s funny I was talking to one of our clients yesterday, up in Pennsylvania and he told me the firm he works for, they do some type of hedging on oil, and if he’s listening he can probably call in and correct me later if I’m wrong.

Michael Gross:
What he was telling me is the firm that he works for hedges the oil markets and I’m sure if he’s listening he could call in and correct me, if I got part of this wrong, but the jest of it is that they more or less do their hedges twice a year. They buy crude oil in December and they sell it in July and they it every year and he said that’s just how we do it, it works great just about every year, we cover our fuel costs. I said you wouldn’t think it would be that simple, would you? And he said, no but it’s been working pretty well. So it may not be quite that simple if you are a trader, but seasonals could certainly be a big factor to consider especially when trading in the energy markets.

James Cordier:
Michael, what’s interesting is we always talking about trading like a commercial and that’s exactly what we’re doing, you know, selling puts in December for the June / July timeframe. It’s really interesting that that’s exactly what your client, you know, in Pennsylvanian is doing is exactly what we do each year. You mentioned just a moment ago, you know, trading as most people know it with a seasonal factor involved can get a little tricky, because the seasonal low might be in November, the seasonal low might be in December and that, once again, is the beauty of selling options. With oil trading in the mid to upper 40’s, we’re selling the $30.00 and $32.00 puts for the summer timeframe, gives us a lot of variance to let the market bottom in November, December, January, it doesn’t matter.

Michael Gross:
Yeah and not to go too far into our talk on seasonals here, but just a good point to make for listeners out there that are new to commodities and looking at seasonality, one of the biggest mistakes James you know this as well, that traders make as they look at these charts and they see it makes the bottom in the middle of December and they say well, I got to buy crude oil on December 15th. You have got to remember those are just averages. One there is no guarantee it will bottom at all, but two if it does it could bottom in November, it could bottom in January and one of the reasons combining option selling with that is so powerful is that you don’t have to be perfect on your timing, as we know. So, maybe if you are a little early you can sell puts in November, you can sell puts all the way through January and still, even if you are not hitting the bottom, those can still be successful trades.

James Cordier:
Absolutely, just like taking your favorite investment and dollar cost averaging, you know, we do the exact same thing. We don’t know where the low is or the high is and that what we jokingly often say is why we sell options, basically the average investor who wants to take a stab with their hard-earned money and trade gold or oil or soybeans, it’s so darn difficult because the timing needs to be so precise and as you know we’ve taken that need to be precise completely out of the picture. We plan on, you know, looking at an investment that we are really excited about and we’ll take a 30-minute period to position ourselves into that market. We will never go all in in one day, we’ll look to, you know, buy or sell the market over a 30-day window and sometimes you only get half your position on but certainly hitting a single or a double is certainly right up our alley. We are never swinging for a homerun anyway and over a twelve-month period, often can win the game.

Michael Gross:
Excellent. We’re going to shift gears here a little bit. Everybody listening, however if you do want to real up more on the crude oil market or the seasonality in crude oil, you can certainly go to our blog. We had a feature piece on oil in our November newsletter, which is posted on the blog right now, so you can certainly take a look at that. Also James will be updating crude oil market in his bi-monthly market updates, so you look for those on the ‘video update’ section of our website. James, I know you had the pleasure of joining our first Webinar last week and talk a little bit about that? How do you think that went?

James Cordier:
I thought it went really well. It was the first time you know, that sort of feature broadcast that we’ve ever done. It was interesting how many mainstream investors are not familiar with options, as we always talk to when a new client finally speaks to me before we start investing, they were all introduced to selling options from their stockbroker originally, through the use of covered call options and I was thinking that was still a small niche in the market, but I’m starting to find that a lot of investors are starting to educate themselves. They are thinkers they are readers with the flux of the market recently, it just really seems that a lot of investors are going to take a little bit more control of their investment and learning about options. Whether they become an option seller with us or not, learning about selling options has just really become more mainstream than I even thought of and I think with both you and I doing the Webinar last week, it really opened my eyes to that fact and it’s quite exciting that investors now are not simply handing over a million dollars to their stockbroker and checking their account at the end of the year. It really seems as though most investors are thinkers and readers and they are taking more control of, you know, their nest egg and that was a really pleasant surprise.

Michael Gross:
Yeah, I was surprised too at the big response we got. Not only the attendees, but the questions people were engaged, and I think it’s, especially I’ve noticed talking on the phone with perspective clients recently, the way the stock market’s behaved, you know, since really the last ten years. You know, 2008 is when it started, but even recent volatility, what’s going on in the world, a lot of people are frustrated with government, I think people are starting to question the buy and hold strategy for preserving wealth and they are looking to take matters into their own hands and I think that’s one of the reasons options trading, in general, is becoming more popular. But, the Webinar for those of you that missed the Webinar, the title of it was Option Selling on Steroids, and James covered really for stock option sellers it was an introduction to commodity options and some of the benefits and advantages of upgrading the portfolio into commodities. I know James you talked about the increased leverage, the lower margins, bigger premiums. Fundamentals is a big part of what you talk about.

James Cordier:
Right. I think that the majority of the mainstream investors whether they are small investors or they are working with millions of dollars in capital, the main theme right now is to be diversified and a lot of investors have probably a larger percentage of their assets in the stock market than they probably want, at least that’s what I heard from the Webinar that we did the other day.

The other aspect that’s, I think, causing some angst to a lot of investors is you get good economic news here in the United States and the market falls, with the idea that now the Federal Reserve is going to raise interest rates a quarter a point.

That can get frustrating when the economy is doing good and you see the stock market fall two weeks later, you know, the economy gets a bad report on jobs or retail sales, then the stock market rallies. A lot of investors have a tough time wrapping their arms around that and I get it. And I think that’s way some investors are looking at commodities, which don’t trade that way. They trade purely on supply and demand.

Michael Gross:
Good. For anybody that missed the Webinar and wants to listen to it, it is on our website now. It’s at optionsellers.com/webinar, it’s called Option Selling on Steroids and if you’re interested in learning differences between stock option selling and commodity option selling, it’s a great place to start. James obviously we are heading into December right now, everybody is anxiously awaiting the Fed decision. A lot of nervous investors out there right now, as far as what we have coming up, I know we did a big feature piece in the December newsletter if you are listening right now, if you received that we plunge into this in depth; how the Fed decision could affect equities and how it may or may not affect commodities. James, what’s your take on what’s coming up with the Fed here? How it’s going to affect the markets? And how it might affect commodities?

James Cordier:
Well Michael as you know, over the last 12 months, 18 months guessing what the Fed was going to do has been a fool’s game because just when you think they’re ready for lift off, you get three bad economic reports in a row and then there’s no way they are going to raise and then just when you think, well they are going to be at zero forever, then you got some great economic information coming out. Normalizing interest rates and I realize going from zero to a quarter, you know, I remember back in the day, interest rates at 6, 10 and 8% so it boggles my mind how it’s such a monumental move to go from zero to a quarter.

Personal opinion first, I really hope that they do just get off of zero and just normalize rates so that asset flows can start normalizing themselves as well. Even if interest rates bump up a tiny bit, there will be some investor ability to go into interest-bearing returns, and at that point, when that finally happens investors who want to go into yet certainly a very small interest rate return, at least they are getting something. If they want to be in the stock market, they can go into that, they now have an alternative to go into commodities, they have an alternative. Over the last four or five years, you either held your nose and bought stocks or you got zero and that’s just wrong, that’s just wrong. So, you know, obviously cranking interest rates down to zero nearly a decade ago; do we need to do that? I guess we did, certainly economic conditions and what happened with the housing bubble burst. Probably it was a great idea but those were emergency moves and we don’t have that situation going on right now. Is the GDP running along at 4%? No it’s not. It’s 2 or 2 ½%, is that a robust economy? Not really, but you have low inflation, you have unemployment at 5%, you have GDP doing just fine, that’s no emergency.

So let’s get off zero, let’s normalize rates, and then let the cards, you know, fall where they may. Interestingly enough over the last week or two, obviously we don’t trade the stock market, we don’t invest in stocks, but I do follow it like everyone else does and it seems as though the stock market is ready for it and I think that’s certainly what the Federal Reserve is watching so closely. I don’t want to get too political here, however to think that the Federal Reserve is not worried about what an interest rate rise would do to the stock market is kind of silly. They are interested and I think they kind of got the green light recently because the more they talk about raising rates, albeit just a quarter, the stock market has done just fine with that. So that tells me that if the Federal Reserve does want to do that, they can go in December, I hope they do.

Michael Gross:
Those are some great points James, and one of the things we talked about in the newsletter as well is a lot of investors are standing around waiting, thinking what to do with their equity positions right now, because if the Fed goes one way this could happen, if doesn’t this could happen and those roles actually might be reversed this time and we have a light-hearted look and says is the Fed’s show up as Santa Claus or does he show up as Crampus this Christmas.

James Cordier:
We’ve seen both.

Michael Gross:
Yeah, and a lot of the investors in commodities will wonder, how does this affect commodities prices and a good point you made is well, you know, it may not have a direct effect at all. Commodities are trading on their own fundamentals and yes, a lot of commodities are in a bare market right now, but that has everything to do with fundamentals, more importantly individual fundamentals; oil is low right now for a different reason than grain is low right now. You and I were talking earlier about an article in the Wall Street Journal today about copper fundamentals and there’s individual fundamentals that seem to be playing a much bigger role in low prices of a lot of commodities as opposed to anything going on in Washington. What do you think about that?

James Cordier:
I think that’s really interesting, certainly the abilities that we have to be in one portfolio slightly long in commodities and, somewhat short in other commodities. As you know, the ability for us to long in commodity and short in commodity in the same portfolio gives us the ability to diversify like that. Quite often when you’re simply in the stock market, either the long or short, actually it’s always long and the ability to diversify in different commodities based on fundamentals is truly key. Boy, the Wall Street Journal just recently, the production in copper is just growing in leaps and bounds. I know a lot of investors are thinking well some of these commodities are probably nearing their low cycle year. Copper certainly had the enormous influx of investment during the China boom when they were erecting 30 cities the size of New York and what did the largest copper mining companies do in the world? They said, well if China is going to be an insatiable demand for copper and nickel and zinc forever and ever, seven and eight years ago when all this demand from China was developing, that’s when all this infrastructure spending went into copper mining.

The funny thing about it is, and if anyone does read this article that came out recently, for us today if you listen to this radio show in the coming days you can go back to it, but it takes seven years to build a copper mine. So the fundamentals have changed that dramatically in the last seven years, so we are going to have copper at extremely depressed prices and levels in the coming year or two, simply based on the fact that copper production used to cost $1.75 or $2.00 a pound and there’s a lot of instances where they are going to be producing copper next year for 60 cents a pound. Other commodities are below the cost of production now, so that give us the ability to, you know, create a portfolio that is long, a commodity that has strong fundamentals, and a shorter commodity that has various fundamentals, that is truly part of the diversification that having an option selling account gives you the luxury of doing that.

Michael Gross:
All right. We covered the Fed decision pretty heavily in the December newsletter, or its possible effects. We outlined some potential trades, our Podcast or radio show here really one of the purposes of it is to serve as kind of a companion to the newsletter and a lot of the things we talk about. One thing I did want to point out to readers of the newsletter is a new feature we began incorporating called, Our Guest Expert series, where James and I have opened up our newsletter and a lot of our content is some of our colleagues in the industry, we try and get people that are well known, well respected, can really give you some great insights into different aspects of option trading or even investing.

A lot of you saw Jack Walker from I Volatility, December of course, we had Lawrence McMillion. A treat we have in January is Dr. Alexander Elder who is the author of a couple great books on trading. Anybody that has ever thought about being a serious trader whether you are trading stocks, commodities, or options, I would recommend both of his books, Trading for a Living and Come into my Trading Room. But James, I know, we had talked about this Dr. Elder is a big fan of selling options and when I interviewed him for the newsletter, he made some great points. This will be coming up in the January newsletter so you don’t want to miss this interview.

Dr. Elder, in interviewing him, I think he is one of the smartest people I’ve ever met, present company excluded. But also he had some great points on option selling and I just wanted to read a couple observations he made in one of his books, which is Come into my Trading Room, in it he says, this is in one of the initial chapters, he says, “The insider is almost exclusively right options, professionals use their heads, while amateurs are driven by greed and fear. Options take full advantage of those feelings.” And then he goes on to say, “I’ve never seen anyone build equity buying options. The odds in this game are so back that after a few trades they are sure to kick in and destroy a buyer. At the same time, options have a high entertainment value. They provide a cheap ticket to the game and an inexpressive dream just like a lottery ticket.” I don’t think there’s any better argument there for taking the opposite side of that. But if you are interested in hearing the differences of buying and selling options from somebody who has worked with traders around the world, there’s some great insights in this interview that you want to catch in the upcoming newsletter.

James, I want to finish up our radio show today by talking about some of the upcoming markets we have to look at here; there’s a lot going on. We have tensions building in the Middle East a little bit as we speak today, obviously we have the Fed decision coming up. The great thing about commodities is that they continue marching to their own beat and we’ve got some great seasonals to look at. December is a great month for that. We already talked about crude oil, but natural gas also has a very impressive seasonal. What do you see with that or what are your views on natural gas right now?

James Cordier:
Natural gas certainly does have a great seasonal tenancy. Most investors will go into natural gas as we approach November and December waiting for cold air to inevitably reach Boston, New York, Philadelphia, you know the major hubs in the Northeast. What seems to happen and however is production of natural gas basically is used for winter heating. A lot of investors think it’s for air conditioning and cooling in the summer, that’s approximately 1/10th of its use. The majority of it is for heating in the Northeast, especially heating oil is one of the products used for warming homes and businesses in the winter, but natural gas is certainly a big play for most commodity watchers.

Quite often what happens is that the cold air does reach the Northeast for the first time, whether it be in December or January, the market is so oversupplied with natural gas, the industry is just waiting for any type of blip in demand from that cold air. What we like doing is selling calls about the market when it finally does reach cold levels, investors rush in to buy natural gas, the supplies of natural gas between December and March are absolutely gigantic and anyone following the industry right now knows that natural gas is just at levels as far as supply is concerned that makes reaching levels of $3.00 or $4.00 or $5.00 practically impossible.

Supplies are gigantic right now and that is one of our favorite plays when the market does rally in December, selling calls above the market. If it happens this year great, if it happens next year we’ll be waiting for it then.

Michael Gross:
Yeah and another great point, I know you made to me earlier, is that it’s going to get cold this winter and it’s going to get cold this winter regardless of what the Fed does, regardless of what happens in Turkey or Russia or Syria and people are still going to need natural gas and they are still going to eat their Corn Flakes and they’re still going to want to drink their coffee in the morning and speaking of coffee, that’s the last market I wanted to touch on today. I know that’s one of your favorite markets, a market you have a particular specialty in; what do you see happening in coffee right now as we head into December?

James Cordier:
Well the coffee market, which has been trading around $1.25 / $1.35 abound seemingly for the last several months, the coffee production around the world has certainly grown. Vietnam who used to not produce any coffee at all is now the second largest producer. Columbia was always considered the main supplier of coffee and now it’s approximately 1/5th of what Brazil produces each year. We were hoping for and still expecting some rally as most investors feel that the largest consumption time, especially in the Western Hemisphere is during the colder months, we are expecting a rally in coffee maybe up to $1.35 / $1.40. Brazil this coming year is expected to produce 60 million bags of coffee, which would be an all-time record. At the same time Vietnam is going to produce a record supply figure.

A lot of investors and coffee companies will do some hedging, buy some coffee as we get into the high demand season. As coffee does rally 10 or 15 cents this winter, December, January, coffee calls at the $3.00 level and will probably be in play and with the supplies from producing nations probably hitting all-time records this coming year, we really like the idea that coffee is not going to go from $1.40 to $3.00 and that is certainly of our favorite positions that we like to take advantage of when the opportunity arises.

Michael Gross:
Excellent and I’m sure you’ll be updating coffee, natural gas markets in your video updates, which everybody can watch at their convenience on the website. A lot of people have asked as well, how do I get your newsletter? There is no place on our site you can actually request our newsletter directly, but if you buy the book or buy a book on our website, The Complete Guide to Option Selling, you actually get subscribed to the newsletter, so you are kind of opting into it. But you can also get it by requesting anything on our website; you can request one of our free reports or booklets, you automatically opt in to getting the newsletter. So you can certainly have access to that at any time. I would like to close by wishing everybody happy holidays, Merry Christmas, happy Hanukkah.

One announcement we do want to make for this month, is our consultation dates for new account consultations, prospective clients, if you are interested in talking about an account, we only have limited dates in December. The last date for consultation call scheduling is December 16th. So if you have been thinking about an account or you want to ask questions about an account, thinking about opening in January, the consultation dates for that go up to December 16th. Just call in and speak with Rosemary about what we have left. The number, of course, is 800-346-1949, or if you are listening from outside the United States, you can call us at 813-472-5760. James, anything else you would like to add before we sign off here?

James Cordier:
Michael, I really like the topics we discussed today and some of the opportunities that might be coming up. I am certainly going to enjoy doing this on a timely basis, looking forward to it.

Michael Gross:
Great, likewise and this is our first one, so I hope everybody’s been patient with us, we’ll get better, I promise and we are going to start doing these monthly. Depending on how we go, we might do them more often, we’ll see what our listeners like and what they’d like to hear. But thanks for listening everybody. Happy Holidays and we’ll talk to you next month. This is Michael Gross and James Cordier for OptionSellers.com.

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