The First 60 Days – Target High Yields with these Top Seasonal Option Sales for the First 2 Months of the Year:
Michael: Hello, everybody. Welcome to the January 2017 edition of the Option Seller Radio Show. This is Michael Gross of OptionSellers.com here with head trader, James Cordier, of OptionSellers.com. We’re starting off a new year here in the week of the Presidential Inauguration. James, it appears markets may be treading water here, kind of waiting to see how things play out after the Inauguration. What are your thoughts on the markets here as we start the new year?
James: Well, Michael, welcome to 2017, as well. Really excited about the next 12 months, and we’ll see what the markets offer us as far as opportunities and looking at landscape as we go forward. The stock market certainly got a shot in the arm after the election, thinking that a Trump presidency is going to be very business friendly. The stock market certainly enjoyed that; however, over the last 3-4 weeks it is simply treading water going sideways, waiting for another idea. As far as “Will this actually help the economy? Will some of the Trump policies that are being tossed around actually be and do what we are hoping for the economy?”, the stock market is kind of going sideways waiting for a little bit more information. I think you’re right – right after the Inauguration I think people are going to get either the warm and fuzzies of the new president or possibly a little bit of a caution and then the stock market has some profit taking. The one thing that’s interesting right now is the put-call ration is the most bullish it has been in the stock market in years. Usually, that’s a bit of a caution flag for the market to have a correction. I guess we’ll find out in the next few weeks.
Michael: Yeah, I saw Soros is one of the guys that took a beating on betting against the stock market with the Trump election. The big shooters aren’t always right. Of course, us here, we don’t trade the stock market but we do watch it closely, primarily because: one, a lot of our investors are in it and, two, because it can have an overall impact on a lot of other things going on in other markets. So, not a direct impact, but it’s something that we do keep an eye on. What we’re going to talk about here this month is obviously diversifying into commodities and we’re going to talk about a big advantage you have as a commodities investor. That big advantage is seasonal tendencies and commodities. January offers a plethora of seasonal tendencies that we can watch and take advantage of, and that’s what we’re going to talk about this month. James, why don’t we start out with some of our listeners that may not be familiar with seasonals. We do talk about them a lot, but maybe just start off by explaining exactly what a seasonal tendency is in a commodities market.
James: Michael, that’s a really good point that you make about seasonals that do come up this time of year. For currency traders, they don’t know what a seasonality is. Trading silver, you probably don’t know what a seasonal is; however, trading corn and coffee and heating oil and crude oil is simply a propensity for a market to make a particular move during a particular time of the year based on supply and demand. New production that comes online certain times of the year, some of the biggest demand, certainly, for certain markets, comes at a particular time of the year. For example, heating oil and crude oil often starts getting large demand in the winter for heating oil and driving season for crude oil. The coffee market certainly gets a bump usually in December and January as demand for coffee, especially in the western hemisphere, does increase as temperatures cool. The propensity for the market to fall off starting March, April, and May, when temperatures in the United States and western Europe start to warm, people simply drink less coffee. That’s basically the ABC’s of seasonal trading. It seems incredibly simplistic but if you followed, and certainly we follow, the price of unleaded gasoline going into driving season, and the price of soybeans going into planting season, you become a true believer. Certainly, that is something how we like positioning portfolios using a portion of seasonality to diversify accounts, and January-February seem to be 2 months that offer the most trades like we’re describing.
Michael: Now, we are going to talk about some of the more pronounced seasonal tendencies that do tend to happen in January and February, but, before we do that, we want to cover briefly here one of the mistakes people make, and maybe one of the misinterpretations people have about seasonal tendencies. A lot of people, when they first find seasonals, they look at them and it looks like they’ve found the Holy Grail of investing, the secret hand behind the markets. There are certain factions of truth to that, but the mistake most people make is they use them improperly. In other words, they may look at a seasonal chart and say, “Boy, this average looks like it falls every year on January 10th, and so I’ll sell it on January 10th and buy it back on January 31st because that’s when it looks like it goes up again.” What people don’t realize is that’s an average and trying to time that to the day is extremely difficult. A lot of people that try and do that end up losing and then they say, “Oh, well seasonals don’t work. They’re no good.” That is absolutely not the case; in fact, when you combine the strategy of selling options with a seasonal tendency, it can become a very powerful asset to your investment arsenal. James, can you maybe touch on or explain why that’s the case?
James: Well, option selling, as the majority of our listeners know, is certainly putting odds in your favor. A lot of our clients and a lot of people that we speak to make it seem like you’re betting against the house. We are the ones selling the options, the people that come into the casino, if you will, are buying options. When you take the percentages of options expiring worthless and you combine that with seasonalities of when the market usually rallies or usually falls, you’re really putting the odds in your favor, but you have to keep your eyes open. Every single year you’re not going to have a seasonal tendency work the way it does on its 15 or 30 year average. You need to be aware of what the current conditions are in that particular market and see if it’s trading seasonally prior going into a sell or a buy for a particular market.
Michael: One thing to mention there, too, is if you’re a futures trader or even some guys try to trade ETF’s with seasonals, which I do not recommend, but for futures traders, their timing has to be perfect. Option sellers, you don’t need perfect timing because you’re selling way above or way below the markets. So, if you miss the seasonal move that happens a couple weeks early or a couple weeks late, it doesn’t really make a big difference to you as an options seller, where if you’re a futures trader it can make a huge difference. So that’s one additional reason why combining option selling with seasonals can be such a powerful strategy. As far as the markets, I want to talk about one, James, you and I spoke about earlier that’s a little bit different this year. That’s the crude oil/unleaded gas market. We talked a lot in November about some possible big moves coming up in seasonal’s tendency in crude oil, the potential for prices to start moving higher, and we’ve had a little shift this year. Do you want to talk about that and what you’ve seen happening this year in the crude oil market seasonally?
James: Michael, it’s interesting, crude oil and unleaded gas normally is extremely weak in the December-January time frame. Then, as you start approaching driving season, you normally see a large increase in price, albeit slow and steady, but it does go from its low in January to often its high in June and July. 2017 is certainly a different trade this year. With the first announced production cut by the largest world oil producers in the last dozen years, certainly it’s going to change the seasonality for this year. We were seeing crude oil pushing down into the low 40’s and then, lo and behold, Saudi Arabia and Russia and some of the other largest producers in the world decided we need to do something about balancing this market. They did come together and they did announce what seems to be production cuts that are sticking, to a certain extent, and the oil market, which normally rallies from January to June, made that entire rally the days and weeks after the announcement. So, like I was saying earlier as far as keeping your eyes open in reference to what’s happening on any particular year, 2017 is a perfect example of that.
Michael: So, you think as far as a seasonal move goes, where the normal seasonal for crude or unleaded tends to start pulling prices up in January in anticipation of driving season, you think we’ve already seen the bulk of that move already?
James: I really do. We will have stronger demand for products such as gasoline starting in March and April; however, we have oil pushing in the low-mid 50’s right now. A lot of the production cuts that apparently will take place at approximately 1 million barrels, it’s thought that those missing barrels can come back onto the market relatively soon. We’re expecting the seasonality this year of higher prices going into driving season muted quite a bit.
Michael: So, in the near term, you’re not necessarily bearish prices, you’re just not as bullish as you normally would be, simply because the price has already moved up. What’s the strategy to trade it then?
James: Well, the strategy is actually one of our favorites. The fact that we do have fewer barrels coming online from OPEC and non-OPEC nations should underpin the market. We should not see oil trade into the low 40’s, certainly not the high 30’s, going into driving season. That certainly is not going to happen, especially with the OPEC and non-OPEC production cuts. We would be really interested in selling puts in the low-mid 30’s for crude oil for later this year delivery. At the same time, the fact that the market has already done its seasonal rally and we expect the U.S. production to come online, we would not see oil go into the mid-upper 70’s. Practically ideal for the clients who follow along and the listeners that we hear today that know about what’s called a strangle, you would sell crude oil puts in the low 30’s and crude oil calls in the high 70’s. I think that is a really good opportunity as far as collecting premium on both sides of the market. There’s a lot of volatility and that’s when you get the luxury of being able to sell a strangle. I think, right now, the crude oil market is practically ideal for doing that right now.
Michael: … and that’s what, close to a $40 strangle there? That’s a $40 window prices could move and both options still expire worthless?
James: Well, that’s how we started out the conversation today with selling options far out-of-the-money. We’re strangling oil $40-$45 from the put to the call and we feel very confident that crude oil, which used to have large swings in the past, is not going to have a move like that, not in 2017. Oil is a great value in the mid 40’s. It’s quite a sale if it gets in the 60’s. Certainly, our strangle would be $10 above and below that. That’s the way we like to play it.
Michael: All right. For those of you listening that want to learn more about seasonal tendencies, how they work, we did devote 2 full chapters to seasonals in The Complete Guide to Option Selling. If you do want to see some of our favorite there and some of the ones we recommend for individual investors you can find those in chapters 15 and 16. That’s in the new Third Edition. Of course, if you want to purchase a copy of that you can at www.optionsellers.com/book. You get it at a discount at Amazon or Barnes and Noble there. Let’s move on to talk about another seasonal tendency that does appear to be tracking closely this year, and that’s over in the grain markets. We have 2 markets there we’re watching very closely. Both the soybean and the wheat market have strong seasonal tendencies that tend to start in January. I’m going to talk about wheat here for just a second. As far as the tendency goes in wheat, wheat has a strong seasonal tendency to start declining in price in January. Unlike most of the grains, wheat is the only market that can grow in the winter. In fact, you may not know this, but, 75% of the wheat grown in the United States is winter wheat. Therefore, that gives it a different seasonal tendency than the other grains, from oats to corn to soybeans. Winter wheat sprouts in January, typically. Unlike the other commodities, it doesn’t have extreme heat to deal with. There are some weather factors, but typically once that wheat crop sprouts a lot of the anxiety comes out of the market and once that sprouts and it starts growing, a lot of traders will start selling wheat because the fear of the upcoming winter wheat crop tends to start to come out of the market. That’s why you often see wheat prices start to decline in winter and continue that weakness through spring. Obviously if your investor wants to take advantage of that, you may look at a call selling approach. We’ve taken that a step further and that involves a different market. That’s the soybean market, which has a different seasonal. James, you’re going to talk about soybeans here a little bit.
James: Michael, that’s interesting. A lot of investors, whether they’re close to commodities or they simply keep one eye on them from time to time, would think that corn, wheat, and soybeans are always moving in the same direction. Soybeans have very different fundamentals and very different seasonality than the wheat market does. In the winter, January and February especially, demand for soybeans and soybean meal is at its greatest, as many U.S. producers and producers around the world are feeding livestock. Of course, that is when demand is the greatest for protein seed. At the same time, in South America, quite often you’ll have weather problems because it is grown in so many areas. Especially in Brazil and the surrounding southern countries of Brazil, they seem to be having, once again, some weather developments down there that are supporting prices. At the same time, the weather in the United States, for especially the Midwest, is always either too wet, too dry, too hot, or too cold. Sure enough, a weather premium starts getting built in the months of March, April, and May. For soybeans, January is usually quite a strong buy time as far as expecting prices to start moving up, just the opposite of the wheat. For those reasons, we like selling puts below the soybean market in the months of January and February. It’s almost a squeeze, if you will, by being short wheat and going long soybeans over the next 90-120 days. Certainly, that is something that we have followed closely in the past and, sure enough, looks like it’s setting up again for 2017.
Michael: Yeah, we talk a lot about combining strategies to boost your odds, how the option strategies you can’t just view them in a vacuum when you’re trading them in a portfolio. You look at how one position offsets the other and a perfect example of that is one of the things we’ve talked about here. It’s called the Minnesota Squeeze. We’re not going to go into it here, but we are going to explain that in detail in your upcoming Option Seller Newsletter, which is slated to come out next week. We have a very special combined January/February seasonal issue and we are going to show you how you can combine these two seasonals to really boost your odds when it comes to getting those worthless expirations, selling the wheat into the growing season fade, and in buying the soybeans on the potential weather rallies in addition to winter being a high-demand season for soybeans. That will be in your upcoming special issue January/February newsletter. Look for that the week of January 23rd. In addition to that, in your upcoming newsletter, it is a special issue on seasonals so we’re going to talk in a little bit more detail in some things you can do to put these seasonal tendencies in your favor. It really is an advantage you have as a commodity options seller, as opposed to being in the stock market or bonds. It doesn’t really exist in any other asset class, so it’s something you can take advantage of in commodities. We’re also going to cover another subject that’s near and dear to our reader’s hearts and that’s staying properly diversified and how sometimes investor fear, even savvy high-net-worth investors, can let fear get in the way of getting properly diversified. There’s some good stuff in this month’s newsletter. I hope you enjoy it. James, before we go this month, let’s talk about one of your favorite markets, as we continue our coverage of big seasonal tendencies this month, that is the coffee market. We just published a special coffee article this week that is available on the blog at www.optionsellers.com/coffeejan. Let’s talk a little bit about coffee. We’ve got a strong seasonal tendency for weaker prices coming up here. Can you talk a little bit about that, James, and why that tends to occur?
James: Michael, the coffee market looks like in 2017 it will be trading seasonally. Often, the winter time frame is when many of the producers in South America and Central America have to watch the weather quite closely. As long as those areas get ample rains, cherries then form on trees and, of course, those become green beans and later on roasted into the lovely mocha color that we all enjoy… most of us do each morning. Once the fear of the weather patterns in South America and Central America dissipate, and they usually do, that is normally short-lived and it looks like set-up is taking place again this year. At the same time, during the winter period is the strongest demand. So, we do have in western hemisphere areas the strongest and most consumption of coffee is in the winter and colder months. As we get into March, April, and May a lot of tendency does go to either soft drinks or flavored waters and I know that sounds kind of interesting to be talking about that, but when you multiply it by 300 million people in America, changing their drinks by just a slight amount really does make a large difference. Quite often in the winter, we have the most fear for any type of drought conditions in the coffee growing regions. That is now behind us. Coffee consumption in the United States will start to taper in February and March, and that is why we usually look to sell calls in coffee at the very beginning of each year when the seasonality and propensity seems to be setting up. 2017 looks like, yet, another year to be selling calls in this market. Coffee has been trading around $1.50 a pound on and off for the last quarter or two. The market did bump up here recently on what was expected to be a slightly smaller production in exports out of Vietnam. Then, earlier this week it was just announced that Vietnamese exports were up 25-30% from the previous year. Once again, knowing your fundamentals is really important. When you can combine that with the seasonalities and the odds of selling options, you can find out just by watching this for maybe 12 months why we do follow seasonalities and why it can combine with selling options to be really good for someone’s portfolio. Not every single time, like any other investment, but, on the averages, I like where we stand.
Michael: Needless to say, as an option seller here in January/February, certainly no shortage of opportunities coming our way. If you’re a managed client, you have obviously seen the majority of these trades in your account thus far, and we certainly look forward to some more of those coming our way as we work through the first quarter. If you’re not yet an account, these are markets you can look at and maybe learn a little bit more how these trades work. We do have some availability for new account consultations in February. If you are interested in a managed account that is your first step. You can call Rosemary at our main office at 800-346-1949 to inquire about availability for those. If you’re one of our international listeners you can call at 813-472-5760 or you can also e-mail… that is email@example.com. James, thank you so much for your insights this month.
James: My pleasure, Michael. Always great chatting about what it is we do for our clients and our listeners. Beginning of this year looks like there might be some very good landscape and some very good opportunities. We’ll just have to wait and see.
Michael: Well, perfect. Everybody, have a great month of option selling. It’s 2017- if you’re not diversified into alternative assets this is a great year to think about it. We wish you all a great month of option selling and we’ll talk to you next month.