Pad Your Portfolio this month with BIG Premiums in Gold and Energy Markets
February 21, 2017 Update
James Cordier & Michael Gross
Michael: Hello everybody. This is Michael Gross of OptionSellers.com. I’m here with head trader James Cordier of OptionSellers.com with your February Option Seller Radio Show. James, welcome to the show this month.
James: Thank you, Michael. As always, enjoy doing these and brining more and more information and educating investors out there to what we do.
Michael: Excellent. We’re going to start off this month, to all of you listening, we’re going to answer some common questions we get through the blog or online. One of the most common questions people ask us is “I really like your stuff. Is there a way I can sign up for your course? Do you offer seminars I can attend? If I pay you, can you coach me how to do this?” … or various forms of that question. We get so many of those and we wanted to answer that question today and maybe shed some light on that for you as a listener. James, do you want to go ahead and maybe take a stab at answering that?
James: You know, what’s interesting, Michael, we definitely enjoy getting feedback from everyone listening to this podcast each month. Please continue asking questions and any feedback is always accepted and we enjoy receiving that. Primarily, we don’t mind and enjoy educating the public. So often, investors are looking for alternative ways to take care of their nest egg or try and build the one that they’re trying to create. Basically, there’s a few investments out there. There’s being long in the stock market, there’s buying real estate, and as long as both of those are going up I think they’re very sound, great investments. But for people looking out 5, 10, and 15 years to expect everything to keep rallying indefinitely certainly is not the way. Educating yourself as to how to help manage your own portfolio, I think, is a great idea. We continue to give information and help teach people how to sell options and take in premium and, hopefully, make really good returns each year whether we’re in a bull or bear market. However, the majority of our clients and the most of the work that we enjoy doing is taking and investing with high-net-worth capitalized investors. That is our niche. That is what we do. The fact that we are a relatively small company and we don’t have thousands of clients, we’re able to be more nimble getting in and out of the market for some of these high-net-worth investors. As far as anyone wanting to follow along with what we do, educate themselves to selling options and taking in premium as we do, we’re going to continue educating people and allow them to do that on their own, if they wish. For the investors who are more apt to hire a manager to do it, certainly, that is our bread and butter and that’s what we’re doing here.
Michael: It’s a good point, James. To shorten what James said a little bit and maybe sum it up a little bit is yeah, we do appreciate those offers and we do appreciate your questions, but we’re not in the education business here. We are money managers. That is the service we provide. We do provide a lot of educational material to anyone, the general public. We like to make it as high quality as we can. I think some of the things you’ll find on our website or that we send out to prospective investors is comparable to what you might pay thousands for in a course somewhere. That is something we provide for free. We enjoy that, we enjoy brining that message to the public and helping people understand this investment, because there really isn’t a lot of information out there on selling options in general but, especially, selling options in commodities. We’re simply out to help people understand that better and get more people involved in this because it can be a great investment if you understand how to do it. James, let’s move on a little into our main discussion here this month. We’re going to address what’s going on in the stock market because all investor’s eyes are on stocks now. They’ve been soaring. Some people are calling it still a post-Trump surge, but we’ve got some grayer clouds on the horizon. We’ve got North Korea and Iran shooting missiles off, we’ve got a lot of discord here in the United States. What’s your take on what’s going on right now in stocks? How do you feel about the market?
James: Michael, I think that a lot of investors have just been waiting for the greatest country in the world to be run like a company and not like a politically correct viewpoint. Lowering corporate taxes, bringing money back to the United States, lowering personal income taxes, de-regulation, making it easier for companies to hire and re-invest, and it’s simply a near perfect platform right now for economic growth here in the United States. If you look at some of the European countries, they are starting to finally lift off. PMI numbers today out of Europe was some of the best in over a handful of years. We are certainly the boat that everyone follows. As the tide comes up, it comes up for everybody. People are extremely optimistic about the U.S. economy right now. Usually, the stock market is 6-12 months ahead and right now the stock market is telling us that the U.S. economy is about to start improving more than a 2% GDP… maybe a 3-4% GDP. So many people have been waiting for an economically friendly environment. Right now we have one and people are voting with their pocketbook.
Michael: So, are you concerned at all about the lofty levels that we’re at? On Barron’s last week, Kopin Tan was talking about 76% of world stock markets are now over-bought. Does that concern you at all?
James: You know, it’s interesting, Michael, overbought doesn’t mean over. I could see this exuberance probably lasting for a period of time. Right now, investors, I think, are so excited about getting into the market. Will profits match the soaring stock prices? That remains to be seen. There definitely needs to be some catch up. The market is either ahead of itself or very close to that; however, I think investors have been waiting for this for a long time. I could see 2017 probably being a decent return on the stock market, but there is no question that second or third quarter of this year a few people start taking profits and then all of the sudden there’s no one left to buy. For us to get a 5-10% correction on the stock market at some point this year is probably quite likely.
Michael: Thus the need for sound diversification and that’s what we’re going to be talking about next here. James, we’re going to talk about one of your favorite markets next which is the gold market. You have a nice commentary this month on your bi-weekly videos where you’re talking about gold and a strategy investors can use right now in that market. Let’s talk a little bit about gold, what you like about it right now, and why you think that’s such a cash cow for investors.
James: It really is. We have been following the gold market for a couple decades. It seems to be such a mystery as to what the value of gold should be. Sometimes it trades like a currency, sometimes it’s flocking to gold because of inflation or because of political concerns. It is absolutely, in our opinion, trading right now at fair value and yet there are so many questions about gold. “What will higher interest rates in the United States do? Will that push gold back down? I heard that there might be some inflation”, an investor might say. “That’s usually bullish for gold.” Talk about a goldilocks environment right now for gold. We have a stronger U.S. economy, which should provide some inflation, and yet we are definitely, in the United States, looking straight at at least 2, if not 3, interest rate hikes. That should keep the dollar firm. So we have people just absolutely wondering how high gold might go and you have an equal number of people saying, “With higher interest rates, gold is going to go down.” That uncertainty is the bread and butter of selling options. Gold right now, trading around $12.50 an ounce, there are people very interested in buying calls 50% above the market right now. Similar interest in people buying puts, believe it or not, 30-40% below the market. If you add up those two percentages, you’re talking about practically 100% strangle around the value of gold and, in my mind, trading gold now for some 25 years, that is about the best trade on the board. We think that’s going to probably carry on into 2018, as well. We’re just really happy about the enthusiasm that people have buying options on both sides and we’re going to take advantage of that.
Michael: So, a lot of this political turmoil in the news right now is really helping that trade is what you’re saying, because that’s really bringing the public in. Gold is a great market to speculate in for the general public. When you get news of things that make people uneasy, when you see Iran shooting off missiles, when you get the daily news, people don’t agree with what Donald Trump’s doing sometimes, those are the type of things that can bring a lot of investor interest into a market like gold, and that’s why you get these wide strikes. That’s what James is explaining. If you’d like to learn more about the strategy of strangling the market, The Complete Guide to Option Selling gives a thorough explanation. That is the Third Edition. You can get that on our website- www.optionsellers.com/book. You’ll get it at a little bit of a discount there than if you get it at the bookstore or at amazon. James, let’s move on here to our next market this month, that’s the natural gas market. As most of you listeners know, we due follow seasonals very closely here. If you’re trading options in commodities, seasonals are a prime thing you want to look at first, especially in cyclical markets like natural gas. James, you want to take us through where we are with natural gas here in late February 2017 and what tends to happen there cyclically in that market over the next 30-60 days?
James: Michael, natural gas is probably the most interesting of all the seasonals, I think, that we follow. Generally speaking, the investor public comes into natural gas to buy it for possible cold winter, they buy natural gas and natural gas calls in November and December. For those who are our clients or listen to some of the recommendations we made, generally speaking, you do the exact opposite. You fade what the public is doing. They’re buying calls, they’re buying natural gas going into winter season. We did that again this year. We saw about a 1 cent spike in natural gas prices. Natural gas generally tops out in December with cold temperatures going through the Northeast and the Midwest, only to come back down in February and March as the winter never seems to be quite as severe as they thought. Then, investors will think, “Well, if the market didn’t rally in this winter then it’s probably going to go down some more in the spring.” That’s just the opposite of what the seasonality is. Generally speaking, supplies of natural gas are their smallest as we come out of the winter heating season, then they start to build supplies and purchases need to be made and natural gas prices normally start heading up in March, April, and May. That is what we’re going to take advantage of the next week or two, is we will be selling put premium below the natural gas levels that we’re hitting right now. We’ve had an extremely mild February, probably March as well. We’re looking at very low prices right now for natural gas and we see the chance for 10, 15, 20% rally in prices starting in March and April. We’re going to be positioning in the coming weeks getting long this market. Seasonally it goes up in spring and we’re going to try and take advantage of just that.
Michael: What’s the volatility like there now? Can you sell spreads there or is it primarily naked positions that you’re looking at?
James: Well, natural gas used to trade at $10, $12, and $15 per million BTU’s. Now it’s trading around $2.50. It’s so interesting that this is probably the fuel of the future and right now it’s practically being given away. We would be selling naked natural gas puts primarily because the market is so low right now. If the volatility continues, and it has just recently, we’ll be looking at doing credit spreads on the put side, as well. So, basically taking a slightly conservative position and a slightly aggressive position because the market is so weak and so low right now. We’re looking at China’s involvement in natural gas imports for the first time since anyone can recall. At the same time, the U.S. is going to be exporting natural gas for the first time in decades. All of these items are going to be slightly bullish or very bullish for natural gas later this year. We think that’s probably the best seasonal to be getting involved with right now.
Michael: Right now, in talking about natural gas, James, about 48% of all U.S. homes use natural gas for heating in the wintertime. Another 37% use electric, which usually comes from power pants fueled by natural gas. So, you do have your peak demand season in the wintertime and what James was just describing is, and we’re going to put a chart up here for you to look at, but gas storage levels tend to hit their lowest levels of the year in March and April. That’s the reason for this. When supplies are lowest, prices tend to get the strongest and they continue to get strong as they rebuild inventory. James, what you were talking about though, selling naked, some people that sell options, some in stock options, they shy away from that; but, in commodities we’re able to sell them so far out-of-the-money that you get a pretty big cushion there and you don’t really have to pick the bottom in the market. You simply sell and even if your timing isn’t right you can still get it. Do you see, if you’re looking at selling naked, what’s your cushion like? Do you still have a pretty good cushion there to give you some leeway if you’re a little early or a little late on the trade?
James: Yeah, I think there’s a really good cushion and natural gas is probably one of the more historically volatile markets. When it was trading at $10 and $15, that volatility is still in the market, now it’s trading at $2.50-$2.75. For the spot contracts, we would be looking out September, October, possibly that far out. Those markets are well above $3.00 right now. Might be teetering on that in the week or so to come; however, some 20-25% below the market there’s excellent premium right now. That’s what we’d be looking at taking advantage of. If the market heads a little bit lower, probably selling premium 25-30% below the market. We think that’s an ideal way to get long the market. Natural gas, if you were to buy it at a certain level and fall slightly, that’s one thing. Selling puts some 25% below the market, I think, is an ideal way– Actually, in my opinion, a conservative way to get into the market. Natural gas over the next several years is going to be in an up-turn based on Chinese demand, Chinese importation, and finally the U.S. getting to export natural gas for the first time in quite some time.
Michael: That and even supply right now looking somewhat bullish in natural gas. Supplies this month are 9% below last year at this time… almost 9% below at 8.9%. So, you have a strong seasonal tendency, you have a bullish supply setup, and what you’re saying, James, is you’re able to go 25-30% underneath the market. For an option seller/a put seller to win here, he can take in a premium of what, $500.. $600.. $700? Is that the range you’re typically looking at? Correct?
James: Yes. With the recent weakness in natural gas because of some very warm temperatures in the Northeast, yes a lot of options are trading right now between $600-$700 and that is certainly the sweet spot for where we like to write puts, especially in natural gas.
Michael: So, what that investor would be saying is that as long as natural gas doesn’t fall another 25-30% at its most bullish time of year with a bullish supply setup, the option is going to expire and he’s going to keep that premium?
James: Exactly. In addition, a lot of investors who are familiar with stock options selling and the high margin requirement, natural gas you’re looking at just 2-3 times the premium that you take in for margins. Your ROI looks really good, as well. Needless to say, we don’t know what natural gas is going to do the next 30 days, but we do know what the fundamentals are and the chance for natural gas to get a small or large rally this summer look quite strong to us.
Michael: Sounds good, James. For you listeners, I know a lot of you listening have heard us for a while and you know what we’re talking about, you know the strategy, but we are making an attempt to over-simplify things a little bit for our new listeners out there that may be unfamiliar with how commodities options work. So, we want to make sure we hit all the bases for everyone listening. We’re going to take just a minute here and give you a little preview of the upcoming March newsletter. If you are on our mailing list, you can expect this next week first couple days of March. You should also be getting an e-version of that in your e-mail box. We have a pretty full issue coming up. We have a lesson coming up on how to use leverage in commodities. We have a lot of stock options sellers that have never sold commodities options. This is a lesson in the newsletter that’s really going to bring you up to speed on how the leverage works and how to use it to your advantage the correct way. We also have a strategy, it’s another little bit more advanced strategy this month- we’re talking about an options spread. It’s entitled The Crack Squeeze. It is in the energy markets. We’ll have to wait for the newsletter to read that and see one of the strategies we’re employing right now in those markets. Look for that in your mailbox or e-mailbox first week in March. James, talking about energies, let’s move over to the crude market. We have a really interesting situation setting up there between the seasonal and existing fundamentals that often times you don’t see, kind of conflicting things going on there right now. Do you want to talk about that a little bit for our listeners?
James: Definitely. Crude oil is certainly one of the most liquid of all commodities as far as volume, open interest, and participation by investors all around. Not everyone is trading pork bellies and potatoes, but a lot of people know what the price of crude oil is. A lot of people bet with their pocketbooks what they think it’s going to do. Generally speaking, crude oil supplies are at their greatest in January and the market starts to rally as we approach driving season. As I think we all know, this year was different. OPEC together, along with non-OPEC nations, put together the first production cuts in over a dozen years and voila, we had a $15 rally. Crude oil is now sitting in the low 50’s to mid 50’s for the later months. I think right now is fully priced. Crude oil supplies in the United States are at all-time record highs. While the OPEC cut took a lot of people by surprise, and there are a lot of bullish factors right now from that, or at least a lot of analysts think so, it really is offering lots of opportunities now and coming up probably in April and May. Generally speaking, there’s a lot of interplay when you talk about energies. Generally speaking, what crude oil supplies and fundamentals might be might be different for heating oil or for gasoline or for natural gas. Probably the next 30-60 days we see crude oil prices very well supported by the idea that a lot of investors are pouring into that market because of OPEC production cuts. Some of the markets like heating oil generally are going to start heading lower after the winter season. So, often you’re going to see March, April, and May crude oil prices inching up while heating oil actually is falling. There is definitely an opportunity involved with that. For our clients, we manage that for them. For the novices, it can be a little bit much, but that’s another reason why you follow seasonality and why you keep well tuned into the market. We think that over the next 60-90 days we’re going to have really long lasting opportunities in energy. I would say in April and May is going to be the biggest one for the year, and that’s in the crude oil market. We’ll wait and see and talk about that when the time comes.
Michael: As far as the energy seasonal goes, that is a major seasonal tendency. What James is explaining is being counter-balanced this year by fundamentals. As you mentioned, James, crude stocks at record highs… over 508 million barrels. That’s an all-time high for crude oil stocks, not for this time of year, but forever. That’s the highest it’s ever been. Also, interesting article in the Wall Street Journal today talking about bullish long positions in crude oil. 10 to 1 – is that what we were talking about earlier, James?
James: Michael, every morning I have my favorite cup of Joe and I read the Wall Street Journal. This morning I read, and it has been well published recently, but today almost hit a crescendo, that fund traders in the world have amassed the largest long position ever in crude oil. It trumps their short position 10 to 1. That, in my opinion, is the most lop-sided position I’ve ever seen, especially in something as liquid as crude oil. While these speculators have time on their side right now, the months of March, April, and May are generally good demand for oil and smaller inter-production coming out of OPEC. That is definitely a wall that could come crumbling down. I would not want to be the last person to buy in that market and be holding on the last day because for crude oil to trade around $55 a barrel when in the United States, for example Texas, we can produce crude oil for around $15. You know that in many CEO offices right now and on napkins having a cocktail late at night in a bar there are business positions being put together where we’re going to produce oil at $15 and we’re going to sell it on the board of $55. There’s going to be an opportunity probably in April or May to take advantage of what the speculators have pushed up to probably over-valued heights right now.
Michael: So, that big long position like that, sooner or later, that’s going to have to be unwound. We’ll see how that plays out. For the time being, you still have that strong seasonal in place that has to be respected, so you may have a little bit of balance there in the near term. That being the case, we have outlined a strategy in the upcoming newsletter called The Crack Squeeze. We’ll show you how you can take advantage of that. The premium available in that market right now, that’s a trade for now and the coming 30-60 days we have one of your favorite trades coming up, James, but we’ll save that for next month. For those of you that are interested in learning more about working directly with us through an account for high-net-worth investors, you can request our investor information discovery pack. You can get that at OptionSellers.com/Discovery. We do have a recommended $1 million account size. If you are interested in something like that, feel free to request our information package. It does come with a DVD. James, let’s move into our final portion of the podcast this month. This is our lesson for investors. We’re going to talk about diversification of asset class this month. In our videos, we talk about two important types of diversification. One is diversification of strategy, which some investors are not familiar with. Then, there’s diversification of asset class, which some investors are familiar with; however, our commodities often are overlooked when it comes to that diversification. We’re going to talk about this month some of the advantages, especially for stock options sellers, who are used to writing options in stocks, you understand how that strategy works, some of the big advantages you have by applying that strategy to commodities. James, maybe you want to cover this first. There’s plenty, there’s a couple right at the top though of most interest. What would you consider the top advantage of a commodities option writer over a stock option writer?
James: Well, you know, stock option writers are a lot of our current clients. They eventually were introduced to short options through their stock account writing covered calls and such. A lot of investors started thinking, “Well, why don’t I sell options on stocks? That seems to be my best portfolio gains.” Generally speaking, selling options on stocks you’re selling approximately 5%, sometimes 10%, out-of-the-money, where in commodities when you educate the different ideas of applying short options to different asset classes, investors are absolutely amazed by the fact that you can sell premium 50%, 60%, 70% out-of-the-money. In some of the markets that we sell premiums it’s as high as 100% out-of-the-money with relatively low margin requirements to do so. A lot of investors that study for themselves what to do with their investment and what to do with their nest egg who discover short options, when they stumble across selling options on commodities certainly that is when our phone starts ringing. I think for the fact that we put ourselves out as the premier stock options sellers, rather commodity option sellers, it’s certainly an eye-opener to a lot of people who want to be diversified. Diversification is always the number one goal for a sound investment portfolio. The fact that the stock market right now is in a bull market, it’s at all time highs. At any moment, it can start a 5 year bear market and selling options on commodities allows you to be profitable in bull or bear markets. That’s what’s the real beauty of what we do.
Michael: These don’t just come from us. A lot of these come from our readers/prospective clients that repeat this and these are the reasons we hear the most. That’s why we’re repeating them here. As James was saying, the biggest advantages here is, one, you can sell deep, deep out-of-the-money strikes. Two, you get a potentially high RI because the margins are so much lower than they are for stock options. I know the margins, most of the time, we pay are sometimes 100-150% of the premium. So, you sell an option for $700 and maybe you only put up $700 or $1,000 in margin to hold that. Is that what you’re seeing right now, James, in this condition?
James: That’s exactly what we have right now. We have some of the lowest margins to hold short options on commodities that I’ve seen since I’ve been doing this. Not all of them are that way, but some of the most lucrative ones like the gold option strangle that we’re doing and the crude oil trade position that’s coming up. I’m looking at that already trying to get our ducks in a row for that. You’re looking at about 150% of the premium that you take in is what’s required for margin. That is really not tying up a lot of money to hopefully have very good results at the end of the year.
Michael: We’re talking about selling deep out-of-the-money. That natural gas trade you described earlier, we’re talking about selling 25-30% out-of-the-money. That’s probably about the closest we’ll be to the money when selling options. Would you say that’s a fair assessment?
James: Generally so. Any time someone is selling options on commodities on their own or with us, you’ll notice that the calls are always or most often can be further out-of-the-money for a simple reason. A market can only go to zero, it can’t go below that. When natural gas, which used to trade at $10, $15 per million BTU’s, is trading with a two-handle it can only go so low. The fact that we’re 25% below this market currently, I think, that’s way out-of-the-money. If the market inches a little bit lower, we’ll just continue to sell puts on that market. Often, we’re looking at puts some 40-50% below the money. The fact that natural gas is so cheap right now and the fundamentals look anywhere from friendly to bullish later this year, we think that’s selling them quite a bit out-of-the-money. We think that’s going to be a great position for later this year.
Michael: Of course, one more thing I want to point out… you mentioned a diversification aspect. Commodities in general tend to be uncorrelated to stocks as a whole, but when you introduce the option selling aspect to it it’s a portfolio that’s completely uncorrelated to anything. It’s not going to correlate to equity, it’s not going to correlate to interest rates, the positions aren’t even going to correlate to each other because a market like silver’s going to have nothing to do with the price of corn and the price of corn will have nothing to do with the price of coffee. So, it’s a completely diversified portfolio that isn’t even going to correlate to the commodities indexes. That’s simply because you have the ability to sell options on either side of it. Those would be the three big benefits for you stock option sellers listening. You’re thinking about giving it a try, giving it a look. Those are the three biggest draws to this type of investment. Of course, they’re described in depth in our book or any of our materials on our website. James, I think we’ve had a pretty full session this month and I do thank you for your insights and your sharing of some of your thoughts on the markets this month.
James: My pleasure. Talking about commodities and, not only that, but the approach of selling options on commodities is definitely an eye-opener to many investors and we look forward to doing more so in the future.
Michael: Just an announcement here at the end of our podcast, for those of you considering applying for new accounts, we are closed for March. We are fully booked for March. If you are interested in one of our remaining April openings, please contact Rosemary. You can call her at the 800 number… 800-346-1949. You can also, if you’re an international caller, 813-472-5760. You can also e-mail her at firstname.lastname@example.org. That is to schedule a phone consultation. We do have a few of those left for March and they would be for April openings. Feel free to give her a call if you are interested in discussing one of those remaining openings in April. Everybody have a great month of option selling. We’ll be back here in March and we’ll talk to you then. Thank you.