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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 Quote of the Month
giving you credit for your story.)
“I don’t look to jump over
Bob mentioned that he’d had the privilege of having lunch with a well known author 7-foot bars: I look around
and provider of trading courses (For the sake of this article, we will call him “Joe” for 1-foot bars that I can
to protect the guilty). Prior to the luncheon, Bob had used a computer program to step over.”
backtest several of this gentleman’s trading systems. Without exception, every single
one of the systems he tested had lost money through the period tested. -Warren Buffet
During the luncheon, Bob decided to breach the subject with Joe.
“Joe, I’ve backtested nearly every system I could find 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 ways
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 updates
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 one
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. Selling
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.
Each Option you Sell should only To paraphrase an important lesson I learned from an old CME floor trader many
be a small piece in the larger,
interconnected puzzle of your overall
years ago, “Options are meant to be used in conjunction with other options.”
option selling portfolio.
I couldn’t agree more.
Past performance is not necessarily indicative of future results. Futures and options trading involves risk of loss. Only risk capital should be used.
www.OptionSellers.com Copyright © Liberty Trading Group 2010 800-346-1949
The Big Picture continued from the front page March 2011 Crude Oil
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.”
Feature Market #1 These balancing effects have kept crude oil prices in a $13
range between $85 and $72 a barrel since May. Considering
Crude Oil – Cash Cow for Strangle Writers that you can write strangles right now with a roughly $80
range of movement, we feel crude oil and the products
The great thing about trading energy markets is that they
will continue to be cash cows for option writers this month.
are rarely effected by weather (hurricane season not
The existing fundamentals do not appear likely to change
withstanding). They don’t stop pumping crude oil because
in the near term. Last month’s Fed comments regarding
it’s too hot. The gasoline crop is not subject to a shortage of
quantitative easing should keep the dollar under pressure and
rain.
support energy prices. And yet, crude oil is now entering a
slack demand period (between driving and heating season)
Crude oil is a storable commodity and refineries tend to keep
which should slow any upside momentum. We expect these
running rain or shine.
offsetting factors will continue to keep prices in a potentially
wider but still somewhat defined range.
In a year when weather has taken headlines in everything
from Wheat to Coffee, this feature has made prices of crude
We like the 130 calls and the 50 puts in crude. However,
oil and its products (Gasoline and Heating Oil) a beacon of
investors seeking more premium can “tighten up” the
stability this summer.
strangle by selling closer calls and/or puts. Look to sell out
several months to get the larger premiums.
Crude oil prices have been caught almost perfectly balanced
between the opposing forces bulls and bears. The bulls have
Feature Market # 2
surprisingly resilient 2010 demand from China and India
as well as more recently, a falling US dollar. The bears have Cotton: Classic Demand Story Could Pay Put
an outright burdensome US supply, along with concerns Sellers
about a fragile US recovery.
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’s
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.
Past performance is not necessarily indicative of future results. Futures and options trading involves risk of loss. Only risk capital should be used.
www.OptionSellers.com Copyright © Liberty Trading Group 2010 800-346-1949
economy is expected to grow by another 9% this year. China
is the world’s largest consumer and importer of cotton. The Option Selling 101 – Back to the Basics
Pakistani floods as well as shortfalls in it’s own production
have forced it to rely on US producers to fill much of the
cotton supply void. The USDA’s weekly Export Sales report
from September 23rd showed US year to date cotton sales at Should I use “Stop Loss” orders on my short
more than three times the rate needed each week to reach the Options?
current export projection. As of mid-September, cumulative
cotton sales stand at 54% of the USDA forecast for 2010/11. Many new option sellers ask me if we use “stop loss” orders
The five year average for this time of year is 34.8%. when they sell an option. The short answer is “no.” While
stop orders may make the novice feel better about his trade,
March 2011 Cotton there are much better ways to manage risk on short options
and I know of no serious futures options trader that uses
them. In fact, some option pits no longer accept stop loss
orders.
Past performance is not necessarily indicative of future results. Futures and options trading involves risk of loss. Only risk capital should be used.
www.OptionSellers.com Copyright © Liberty Trading Group 2010 800-346-1949
Apologies to New Option Sellers
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 the
list 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.
Past performance is not necessarily indicative of future results. Futures and options trading involves risk of loss. Only risk capital should be used.
www.OptionSellers.com Copyright © Liberty Trading Group 2010 800-346-1949