Most investors first experience with options comes in the form of stock or index options. But if you’re limiting yourself to equities options, you’re missing out on a secret other high net worth investors already know: For those that can afford the capital requirements, selling commodities options can offer considerable advantages over stock options.
Below you’ll find the Top 5 Advantages of Selling Commodities Options over Stock Options.
In short, high net worth investors choose commodities options for their Lower Margin Requirements and considerably Larger Premiums. For you, that can mean potential for substantially Higher Yields. With the SPAN Margin system used in the futures markets, options can be sold for margin requirements as little as 1 to 1 ½ times premium collected. For instance, you might sell a corn option for $600 and post an out of pocket margin requirement of only $700. If you sell 90 day options, it is not unreasonable to assume you can do that trade four times a year. A little math and you can clearly see the power of leverage.
This leverage, of course, can work both ways. Learning how to wield this power correctly requires a little practice. However, investing the time to learn how or working with someone that already knows how can be well worth the effort in the long term. A complete explanation of futures margins and how to use them to build a portfolio is covered in our book The Complete Guide to Option Selling 3rd Edition.
Diversification means more balanced wealth preservation for you – and more security over the long term. Having too much of your wealth tied up in correlated asset classes (ie: Stocks, Bonds, even Real Estate) can prove disastrous in a “Macro Event” (think 2008.) Statistics prove that proper diversification can smooth out an equity curve over the longer term. Commodities option selling offers you both diversification of asset class and diversification of strategy.
Sophisticated investors use commodities option selling as a means of gaining an investment that is 100% uncorrelated to equities, interest rates or the economy – a smart move in preserving their wealth. In fact, this type of portfolio will not even correlate to the commodities indexes. Added benefit: Your option positions can also be uncorrelated to each other. In stocks, most of the time, your individual stock (option) will be largely at the mercy of the index as a whole. If Microsoft is falling, chances are, your Exxon and Coca Cola are falling too. In commodities, the price of Natural Gas has little to do with the price of Wheat or Silver. This can be a major advantage in containing risk.
Unlike equities, where to collect any worthwhile premium, options must be sold 1-3 strike prices out of the money, futures options at high premiums can often be sold at strikes deep out of the money. How deep? Up to 25 -50 even 100% out of the money. Can you imagine selling a call strike at double the price of your stock or a put strike at half the value of your stock? It can be done in some commodities. This allows you to target price levels where short term market fluctuations will not adversely affect your position. In short, let the market do what it will. Your goal is to sit comfortably above or below it – simply keeping your premiums when time is up. Because of this, time value erosion can often work less impeded by short term volatility. This can provide an investor with less maintenance and greater peace of mind when markets get “interesting.” An explanation of how to pick the best commodity options to sell is presented in our Free Report – The Option Selling Solution.
Many equity option traders complain of poor liquidity hampering their efforts to enter or liquidate positions. While some futures contracts have higher open interest than others, most of the major commodities contracts like Sugar, Soybeans, Wheat, Gold, Natural Gas, Crude Oil, et. have substantial volume and open interest offering several thousand open contracts per strike price. This means easy entry and exit of positions for you.
When selling a stock option, the price of that stock is depending on many, many factors – not the least of which is the daily political news, the “mood” of the general public, missed earnings, bad publicity, corrupt executives, Fed decisions, or probably most disconcerting – the direction of the overall index. Soybeans however, can’t “cook their books.” Silver can’t get sued.
In commodities, it is most often old fashioned supply and demand that ultimately dictates price. Knowing these fundamentals (or working with somebody that does) can give you a considerable advantage in deciding what options to sell – and more confidence in the positions you take. Fundamentals play a primary role in all of the accounts we manage.
Of course, writing commodities options does have its own set of risks that should be thoroughly understood before embarking on an option selling campaign of your own. But for well capitalized investors seeking potentially higher rates of growth and diversification from equities, its benefits can be both unique and substantial.
If you are a stock option seller with a net worth over $2 MM, you qualify for a FREE COPY of our 40 page introductory guide to selling commodities options: The Option Selling Solution: How to sell options to target outsized returns, gain real diversification and achieve peace of mind in any kind of market. In it, you’ll learn all about the benefits and risks of selling commodities options as a core portfolio strategy. Get your FREE COPY with BONUS VIDEO DVD at www.OptionSellers.com/Solution