The Power of Simplicity
“Simplicity is the ultimate sophistication.”
It’s times like these I’m glad I didn’t choose to be a stock broker. The last 5 years, of course, would have been a great ride. But if you’re a stock broker, what do you tell your clients to do now? We’re currently in what is arguably the greatest bull market of all time. But the bull market was due, in no small part, to near zero interest rates serving as jet fuel for the bull rocket.
But what happens when rates start to rise again?
The press has enjoyed a field day in recent weeks with the inclusion or removal of the word “patient” in the lastest Fed meeting statement. Now that the cat is out of the bag and everyone “knows” rates are going up, what happens? Or perhaps the better question: What happens, when?
Despite the temporary relief to the market, the focus will now be on what happens if and when the Fed raises rates. Will it be ¼ point? What happens when they raise it another quarter? What happens when they raise it another half?
S&P 500 Quarterly Since 1982
If you’re looking for the answers to those questions here, you’ve got the wrong newsletter.
As I said, I’m glad I’m not a stock broker. I’ll spend my time counting bushels of wheat, pounds of sugar and bags of coffee beans. If there are 5 million bags of coffee sitting in a warehouse in Brazil, you can make a pretty safe bet they’ll still be there after Yellen’s next speech. I cannot say the same for share values.
You should be under no illusion that commodity price analysis is easy. But it can be simple.
As an old Chicago Floor Trader once told me about corn trading: “You count the bushels and subtract what they eat. Whatever is left is what you bet on.”
An over-generalization of course. But within it lies a hidden truth: Simplicity.
In our over sophisticated world of smart phones, smart cars, smart houses, and smart software, simplicity may sound like an outdated concept left to the world of Barney Fife and Aunt Bee. But for the individual investor these days, sophistication may have created so many trees, one indeed cannot see the forest.
Despite what the option guru’s would have you believe, you’ll do well in option selling by keeping things simple. -Leonardo da Vinci
For all of the new electronics, ideas, measurements, and interpretations of Janet Yellen’s eyebrow movements, it’s still good old Econ 101 that’s pushing commodities prices around. After all the cool devices and quant software gets turned off for the day, it’s still Supply and Demand that wins the day in commodities.
To the outside world, selling options on commodities may sound like the ultimate in sophistication. But to you and I, it’s actually taking the act of investing in the opposite direction – a more simplistic one.
As an investor told me this week, “I like selling options because nothing has to happen for me to make money. I get paid up front and if the market wants it, it has to come take it from me. In any other kind of investing, I have to try and take it from the market.”
I wish I would have had him around when we were writing the book. I’d have paid him for that copy.
Again, however, the concept reflected in his words is simplicity.
Trying to guess what the market is going to do? Sophisticated.
Trying to pick what it’s not going to do? Simplicity.
Simplicity and Marbles
Think of it this way. Two kid brothers playing marbles out in the driveway. First kid says, “I’ll bet you a dollar I can shoot this blue marble, bounce it off the green one, knock the red one into the black one, and the black one falls in the grass.”
Second kid says, “Sure. And if ANYTHING else happens, I get the dollar?”
“Deal!” shouts the first kid excitedly. In his enthusiasm, he fails to properly calculate his realistic chances of making money. If the exact thing he wants to happen happens, he wins. But if an infinite number of other possibilities take place, he loses the buck.
The first kid is trying to take money from the second kid. What he doesn’t realize is, by the structure of the bet, the second kid already has the money. The first kid has put himself at a disadvantage from the start. Now he has to perform a difficult feat to get the money back from the second kid.
And the second kid? He doesn’t have to do anything.
Sounds like a bet I would have made with my brother.
My guess is the first kid turns out to be an option buyer or a position trader – trying to time the market.
That second kid has got to grow up to be an option seller.
See, he doesn’t care about the sophisticated shoot the first kid is describing. He’s just betting on anything else but that one thing happening.
Big Picture for Option SellersDespite what the option guru’s would have you believe, you’ll do well in option selling by keeping things simple. Simple markets, simple strategies, simple risk management. It’s a lesson I’ve learned the hard way over the decades. And it’s the theme of our books, articles, videos and ultimately, our core investment values.
I don’t know if the stock bull market ends tomorrow or 5 years from now. I can only look at that quarterly chart of the S&P and conclude…….I’m glad I’m not a stock broker.
That’s about as simple as I can make it.
Option Seller Discovery Kit
For more information on selling options through a managed portfolio with James Cordier and Michael Gross, request your Free OptionSellers.com Investor Discovery Kit at www.OptionSellers.com/Discovery ($250,000 minimum investment).Learn More about the Kit
James Cordier is the founder of OptionSellers.com, an investment firm specializing in writing commodities options for high net-worth investors seeking outsized returns. James’ market comments are published by several international financial publications and news services including The Wall Street Journal, Reuters World News, Forbes, Bloomberg Television News and CNBC. Michael Gross is an analyst with OptionSellers.com. Mr. Cordier’s and Mr. Gross’ book, The Complete Guide to Option Selling 3rd Edition (McGraw-Hill 2014) is available at bookstores and online retailers now. For more information on managed option selling accounts visit www.OptionSellers.com/Accounts ($250,000 minimum investment)
***The information in this article has been carefully compiled from sources believed to be reliable, but it’s accuracy is not guaranteed. Use it at your own risk. There is risk of loss in all trading. Past performance is not necessarily indicative of future results. Traders should read The Option Disclosure Statement before trading options and should understand the risks in option trading, including the fact that any time an option is sold, there is an unlimited risk of loss, and when an option is purchased, the entire premium is at risk. In addition, any time an option is purchased or sold, transaction costs including brokerage and exchange fees are at risk. No representation is made that any account is likely to achieve profits or losses similar to those shown, or in any amount. An account may experience different results depending on factors such as timing of trades and account size. Before trading, one should be aware that with the potential for profits, there is also potential for losses, which may be very large. All opinions expressed are current opinions and are subject to change without notice.