The 5 Advantages of Commodities Options over Stock Options


Dec

11

2017

The 5 Advantages of Commodities Options over Stock Options

Michael Gross explains how to discover the hidden benefits of applying stock option selling strategies to the uncorrelated commodities markets in this week’s Option Selling Video Lesson.
  1. You’re apparently comparing writing an option on 100 shares of Exxon, worth about $8,300, with an option on 5,000 bushels of corn, worth about $17,500.

    Thanks for video.

    • Michael Gross Says:
      December 14, 2017 at 3:55 pm

      Paul,

      That is correct. Not sure if there is an implied question here. However, the advantages apply regardless.

      M. Gross

  2. Hi Michael, I’m sure you get asked this all the time. How would a newbie get their head around some of the commodity demand/supply dynamics. Is there a resource you could recommend? Thanks.

    • Michael Gross Says:
      December 13, 2017 at 4:08 pm

      Hi Steve,

      Great question. I’d recommend subscribing to a private research newsletter such as The Hightower Report to start. I would also subscribe to the CRB yearbook. Finally, you should consider subscribing to several of the commodities newswires such as Bloomberg, Reuters or Dow Jones News. And finally, regular visits to the websites of the USDA, the DOE and the commodities exchanges themselves is strongly recommended to stay on top of market fundamentals.

      Its not an easy climb but well worth the digging. There can be gold in going where few others are willing to go.

      Thanks and good luck.

      Regards,
      Michael Gross

  3. Thank you always for your great video, Michael!

    I am learning so much from your videos and your book as well. You book is so great that I’ve just left an Amazon.com review with 5 stars! (FYI, I rarely leave any Amazon.com review). I am looking forward to working with you at some point.

    To try what I have learned from you, I sold a few commodities options on InteractiveBrokers. But the margin requirements on InteractiveBrokers seemed higher than those numbers suggested in some of your blog articles.

    The margin requirement for options on natural is in line with what you have just described in your video. BUT, for example, the premium for April 18 $70 call option on crude oil (CL) is about $95 but the margin requirement is $2,391 as of today (12/12/2017). The premium for April 18 $65 call option on crude oil (CL) is about $300 and the margin requirement is $3,097. The margin requirement for options on gold is extremely high, too. The margin requirements for options on crude oil or gold do not seem to be a lot different than the margin requirements for the stock options.

    So I asked a representative of InteractiveBrokers and have just confirmed that their margin requirement is usually higher than the minimum SPAN margin!

    Am I doing something wrong here? I want to know the true benefit of the SPAN margin. Can you recommend me a brokerage firm or any other way that allows me to use the minimum SPAN margin?

    Thanks

    Jeff

    • Michael Gross Says:
      December 13, 2017 at 4:14 pm

      Hello Jeff,

      Most of the big players in online options trading aren’t going to offer you absolute minimum SPAN margin. Thats OK. Even at slightly higher than minimum, there is still good potential ROI on commodity short options.

      That being said, to get minimum SPAN margin, you either have to work with some kind of managed option specialist, or – perhaps go directly to some of the “old school” commodities brokerages such as as RJ O’Brien, Iowa Grain or FC Stone. Even if these houses don’t offer minimum SPAN up front, they can sometimes be willing to negotiate it with qualified option traders.

      Thanks and I hope that helps.

      Regards,
      Michael

    • Jeff, I’ve been with IB for about 15 years and yes, their futures options margins are A) quite a bit higher than SPAN, and B) impossible to make sense of.

      That being said, while it is an impediment, it is still workable. Basically, you just won’t be able to put on as many positions as you could somewhere else. Since you’re new at this, that’s not a bad thing. You should still be able to work with IB for a year or two and see whether or not you can succeed at your strategy. If you can and you find that you would really like to put on more positions than IBs margin allows, then there are other places to go where the margin requirements are lower (but commissions will be higher).

      In the meantime, at IB, you can still make a reasonable return from selling options while keeping your margin usage at 50% (even at IB’s increased levels). I’ve done it for years. Another thing that IB’s higher margins does is it encourages you to close out “winners” early rather than waiting for expiration because you will see, for example, that you can have a short option that is only worth $20 but it is tying up $5000 in margin!

      In a case like that, you’re much better off covering your short and re-investing that margin into a new position, which is also something that Mr. Cordier / Mr. Gross encourage.

  4. Kenneth Says:
    June 29, 2017 at 1:20 pm

    Thanks for the great video once again, Michael!

    After reading your book, I’m quite sold to the advantages of selling commodities options and I have started to explore doing so. There’s just one thing that I can’t seem to wrap my head around – with so many advantages of selling commodities options, why are there still so few people doing it?

    • Michael Gross Says:
      June 29, 2017 at 2:37 pm

      Kenneth,

      Good question! Probably a number of reasons, first and foremost being lack of awareness – both on the public and even professional level. Its a very specialized field and thus, not many firms offer it. Therefore, there is little incentive to promote or discuss of it in the mainstream investment world. The media has little interest in addressing it (they want to hit the widest audience possible.) Also, there is the widespread belief (oft promoted by equities firms and media) that commodities are “too risky” or “too complicated” for individual investors. The solution to both of these concerns, of course, is education – something we try hard here to provide.

      Thanks for your positive feedback and best of luck in your trading!

      Regards,
      Michael

  5. Lyle Stein Says:
    June 28, 2017 at 1:33 am

    Love these comments on stock vs commodities option selling I have been selling stock options for a while. Looking forward getting started selling comm options. Your bi- monthly videos are most helpful. Looking forward getting your new book and putting it to work.

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