option seller newsletter_oct 2010

8/8/2019 Option Seller Newsletter_OCT 2010

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THE BIG PICTURE – The “Guarantee” Traing Sstem

I’d like to retell a story I heard from Bob in Colorado, who called me this week and

was kind enough to share this with me. (Bob, if you’re reading, please note that I’m

giving you credit for your story.)

Bob mentioned that he’d had the privilege of having lunch with a well known author

and provider of trading courses (For the sake of this article, we will call him “Joe”

to protect the guilty). Prior to the luncheon, Bob had used a computer program tobacktest several of this gentleman’s trading systems. Without exception, every single

one of the systems he tested had lost money through the period tested.

During the luncheon, Bob decided to breach the subject with Joe.

“Joe, I’ve backtested nearly every system I could nd of yours,” he explained. “And without exception, every single one of

them lost money though the test period. How do you explain that?”

“Bob,” Joe replied in a low voice, “Every one of my systems makes money. It just depends on how many copies they sell!”

Great story that illustrates a good point. The guys with the great trading systems probably aren’t going to be selling that

information. They’re either keeping it for themselves or using it in some kind of capital management capacity.

I had to explain to Bob that we were not selling a “system,” but rather educating

investors on a method they can use. They can use this method in a number of way

or even incorporate it into their own system. (We do use our own system to sell

options for our clients. Parts of that, of course, are proprietary and not for sale. )

The investment ideas you read in this newsletter, and our bi-weekly online updat

are just that – ideas (many of them good ideas – but ideas nonetheless). They do

not constitute a trading plan in and of themselves. A trading plan is something on

gets by designing his own or seeking out a managed portfolio. Selling crude oil

calls may not be a good idea if you are already heavy short heating oil calls. Selli

soybean calls may be a better trade if you are already short corn puts. A larger position in short gold calls may be warranted if one is short Euro puts. And so on

and so on.

To paraphrase an important lesson I learned from an old CME oor trader many

years ago, “Options are meant to be used in conjunction with other options.”

I couldn’t agree more.

Liberty Trading Group’s

The Option Seer Newsetter

James CordPreside

Liberty Trading Gro

Education, Insights and Updates for the High Net Worth Investor

MONTHly EdITION OCTOBER 2010

Quote of the Month

“I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can

step over.”

-Warren Buffe

Each Option you Sell should onlybe a small piece in the larger,interconnected puzzle of your overalloption selling portfolio.

Past performance is not necessarily indicative of future results. Futures and options trading involves risk of loss. Only risk capital should be us

www.OptionSellers.com Copyright © Liberty Trading Group 2010 800-346-1

Continued on the next p



Therefore, the next time you sell a sugar put and it expires

worthless for you, it does not mean that selling puts is the

ultimate strategy. And the next time you sell a soybean call

and get stopped out, it doesn’t mean that “option selling

doesn’t work.”

Individual trades are just one tiny piece in a great big

coordinated puzzle. Keep that in mind when you read this

month’s suggestions.-JC

October Feature Markets

Feature Market #1

Crue Oi – Cash Cow for Strangle Writers

The great thing about trading energy markets is that they

are rarely effected by weather (hurricane season not

withstanding). They don’t stop pumping crude oil because

it’s too hot. The gasoline crop is not subject to a shortage of

rain.

Crude oil is a storable commodity and reneries tend to keep

running rain or shine.

In a year when weather has taken headlines in everything

from Wheat to Coffee, this feature has made prices of crude

oil and its products (Gasoline and Heating Oil) a beacon of

stability this summer.

Crude oil prices have been caught almost perfectly balanced

between the opposing forces bulls and bears. The bulls have

surprisingly resilient 2010 demand from China and India

as well as more recently, a falling US dollar. The bears have

an outright burdensome US supply, along with concerns

about a fragile US recovery.

Chart courtesy of Hightower Research

These balancing effects have kept crude oil prices in a $13

range between $85 and $72 a barrel since May. Consideri

that you can write strangles right now with a roughly $80

range of movement, we feel crude oil and the products

will continue to be cash cows for option writers this month

The existing fundamentals do not appear likely to changein the near term. Last month’s Fed comments regarding

quantitative easing should keep the dollar under pressure an

support energy prices. And yet, crude oil is now entering a

slack demand period (between driving and heating season)

which should slow any upside momentum. We expect these

offsetting factors will continue to keep prices in a potential

wider but still somewhat dened range.

We like the 130 calls and the 50 puts in crude. However,

investors seeking more premium can “tighten up” the

strangle by selling closer calls and/or puts. Look to sell ou

several months to get the larger premiums.

Feature Market # 2

Cotton: Classic Demand Story Could Pay Put

Sellers

It was weather that initially ignited the raging bull market

in cotton this year. Sporadic weather problems in China as

well as the US supported cotton early. Flooding in Pakistan

accelerated the rally as Pakistan produces 10% of the

world’s cotton and sustained severe damage to much of it’

2010 cotton crop.

But while supply side issues get the press, it is demand that

is largely responsible for fueling the bull engines in cotton.

Voracious demand.

At the risk of sounding like a broken record, we must again

point to the Chinese as a main contributor to the rally.

While we continue to suck wind here in the US, the Chines

The Big Picture continued from the front page March 2011 Crude Oil





economy is expected to grow by another 9% this year. China

is the world’s largest consumer and importer of cotton. The

Pakistani oods as well as shortfalls in it’s own production

have forced it to rely on US producers to ll much of the

cotton supply void. The USDA’s weekly Export Sales report

from September 23rd showed US year to date cotton sales at

more than three times the rate needed each week to reach the

current export projection. As of mid-September, cumulative

cotton sales stand at 54% of the USDA forecast for 2010/11.

The ve year average for this time of year is 34.8%.

As of late September, the cotton market, like many

agricultural commodities right now, is overbought and

vulnerable to corrective price action. However, demand

led bull markets can be quite resilient and nothing in the

immediate future suggests slowing cotton demand through

year’s end.

We feel the trend will remain your friend in cotton and that

technical pullbacks will be opportunities for fundamentally

based put sellers in October. We continue to favor strikes

below the 75.00 level basis the March contract.

Opon Selling 101 – Back to the Basics

Should I use “Stop Loss” orders on my short

Options?

Many new opon sellers ask me if we use “stop loss” orde

when they sell an opon. The short answer is “no.” Whilestop orders may make the novice feel beer about his trad

there are much beer ways to manage risk on short opo

and I know of no serious futures opons trader that uses

them. In fact, some opon pits no longer accept stop loss

orders.

Stop loss orders can be very eecve at managing risk on

highly liquid shares of stock or futures contracts. However

opons, especially opons with wide bid/ask spreads, the

are not only an impraccal risk management tool, they can

be detrimental.

This is why. When you plac

a “stop loss” order on an

opon, only one opon ha

to trade at or above your s

to trigger it. Once your sto

loss is triggered, it become

a Market order. And mark

orders placed in less liquid

contracts can become

detrimental to your accoun

health – especially if you’re

placing it on an electronic

plaorm. They can ll it

wherever they want.

For exing a short opon

posion (or for entering

one for that maer) I highl

recommend limit orders placed through a foor broker.

A good oor broker can “work” your exit order to get a

reasonable ll in most cases. They have not failed me yet.

This can be a much beer opon than leaving your exit pr

to the mercy of somebody on the other side of the market

Have a great October and I wish our readers healthy prot

this month.

March 2011 Cotton

Using a “stop loss” ordermay not be your best betwhen managing risk on ashort option.





Liberty Trading Group401 East Jackson Street, Suite 2340, Tampa, FL 33602

800-346-1949813-472-5760 (International)

www.OptionSellers.com

Email: [email protected]**Fundamental Charts Courtesy of Hightower Research ***Price charts courtesy of CQG, Inc.

T h i s M o n t h ’ s F e a t u r e s I n s i d e c t o b e r F e a t u r e M a r k e t s

• C r u d e O i l - C a s h C o w f o S t a n g l e

W i t e s - P G . 2

• C o t t o n : C l a s s i c D e m a n d S t o r y C o u l d P a y P u t S e l l e r s - P G . 3

p t i o n S e l l i n g 1 0 1 - B a c k t o t h e B a s i c s

• S h o u l d I u s e S t o p L o s s o d e s o n m y

s h o t O p t i o n s ? - P G . 3

h e O p t i o n S e l l e r N e w s l e t t e r O N T H L Y E d i t i o n , O C T O b E r 2 0 1 0

Apoogies to New Option Seers

If you are one of the potential investors that was placed on our waiting list last month, we apologize for the inability to serve

you immediately. Investors, like you, hire us to personally manage their option selling portfolios. To accommodate that

demand and continue to give each investor portfolio the full attention it deserves, we are forced to limit the amount of new

investors we accept each month. September brought an unprecedented amount of new investors to our doors and we were

forced to, for lack of a better word, “ration” new accounts. We do appreciate your interest in this type of account and wish to

serve all investors that want to get started this year. To that end, a waiting list has been started for October and November

accounts. If you are already on the list, we hope to be contacting you within the next 30-60 days. If you are not yet on thelist and would like to be placed, please call our main number below. We look forward to continuing to offer the highest

quality option selling portfolios in the United States and the world.

Managed Account Waiting List - 800-346-1949



http://www.optionsellers.com/

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option seller newsletter_oct 2010

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