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…and finally there was joy in Mudville as the stock market may have finally succeeded in catching a much needed foothold in what has been a seemingly endless 9 ½ month slide, giving up 50% of all the gains seen since the move started in 2003. This correction (if over) was long overdue, and taking into consideration the whole sub prime mess in conjunction with record high energy costs we are lucky to still be standing, metaphorically speaking.
As I mentioned in last weeks newsletter, the mighty commodity markets had stumbled and started to fall, we saw more choppy follow through this past week, which is a good thing due to the fact we have been building “net” bearish positions for the past month or so as we tried to scale the top using various option strategies. Our basis for this has been due to a combination of record highs and seasonal tendencies.
To get a word or pdf version of this newsletter “year to date” with charts…email me at pbrittain@alaron.com
Paul Brittain 7-18-08
Latest Ideas
7-17 Soy Meal Put Credit Spreads- This Bear Put Spread with a Naked Leg could be one of the best option trades I have stumbled upon, if it works that is! We are getting strong technical and fundamental sell signals across the board, however that doesn’t mean a thing if the market fails to follow through for some random reason. We are buying the December 3800 put as our primary put and selling both the 3200 put as well as the 4600 call as our short option which would more than pay for the 3800 put with a possibly few hundred to spare. Based on a credit fill this trade would be profitable based upon intrinsic value as long as the market is below 4600, above that level we would be subject to the same risk as being short from 4600 in the futures market. If the market is below 3800 we will add to that profit, at or under 3200 this trade would be worth $6,000 plus the collection! There are also several exciting variations of this trade with different degrees of profitability as well as risk, so call us for help!
7-15 Canadian Dollar Premium Collection Trade- We see that the Canadian Dollar is continuing to trade in sideways trading range between 9700 and 10100 and we believe that there is a good chance that the market will continue to maintain this pattern for the next 30-45 days, if not longer. There are two way we are looking to take advantage of this scenario, an naked short option strangle where you sell the September 10200 call and also sell the 9600 put collecting about $800. This trade would be profitable intrinsically with the market trading between the reverse break evens of 9520 and 10280, with the entire premium being retained between the strike prices. Outside these levels the trade has unlimited risk.
If trading Naked makes you nervous you can cap the trades risk by doing an Iron Condor buy also buying the 10400 call and the 9400 put as insurance, this would lower your profit potential but also lowers margin requirement and limits your risk to $2,000 MINUS the premium collected which should be around $500, which would be the profit with the market between the strike prices at expiration. Your risk would be limited to about 1,500.
7-14 December Bean Oil Credit Spread- Well this is both a credit spread as well as a Bear Put Spread with a Naked Leg. Seasonally this market should be topping out and selling off for the next 60 days. This trade would be profitable, based upon our quotes< as long as the market is below 7300, which is it’s all time high, by over $400. If the market is at or below 5900 come expiration, you can add another $3,000 to that. Above 7300 this trade would have the same risk as a futures contract. Buy the December 6400 put, sell the 5900 put and sell the 7300 naked call.
7-14 October Hogs appear to have finished doing a dead cat bounce and we could and should resume the sell off. This Bear Put Spread with a Naked Leg would be a great strategy to look for the break down due to the fact that the risk (the naked leg) is above the recent trading range and that the Bear Put part of the trade is capable of seeing profits within the lows of the same range. The risk on the trade with the market below 78 is limited to the cost of the spread which is less than $100, above 78 you have unlimited risk, the profit potential is limited to $1,600. There is also a seasonal tendency to trade lower for the next few weeks. Buy the October 70 put and sell the 66 put for the bear put spread, sell the 78 call as the naked leg.
7-11 January Crude Call Fly- Can Crude go to $200? Your guess is as good as mine! With margin and options premiums at all time highs, it makes trading extremely tough as well as expensive. This is where layering a combination of both long and short options can come in handy. This trade has limited risk and no margin requirement with a huge profit playground.
Buy the January 160 call; sell two January 180 calls and buy the January 200 call for about $2,000. The premium plus commission (4) is your maximum risk, the profit potential intrinsically maxes out at $20,000 with the market at 180. The trade would be profitable anywhere between 162 and 198, above or under 200 the trade would lose the premium paid.
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Stock Indexes- Its almost time…if this low holds in the S&P 500, we will be starting to build a bullish position, if the low is broken the next Fibonacci support is under 1100…
Financials- The FED pretty much showed their hand by insinuating that there would be no rate hikes in the near future, this sent the Dollar to all time lows for a short period.
7-10 September British Pound SOS (short option strangle) The Pound is trading in a wide sideways trading range and could continue to do so for the next 30 days or so. Sell the 201 calls and the 191 puts for a combined premium of 140+ or $906. That amount of premium would give the trade reverse break even’s of 202.4 on the upside and 189.6 on the downside, outside these parameters the trade has unlimited risk, between these numbers the trade would be profitable. These numbers do not take into account your commissions.
7-10 September T-Bonds- Market is over bought and over extended seemingly having trouble at the Fibonacci resistance area. Sell the September 120 call for 31/64th’s or about $480. Risk the trade for the same amount.
7-1 Aussie Dollar; technically we are seeing a double top at the 9562-9570 range creating the possibility of several trading opportunities;
Short Calls- Sell the August 97 calls for $340. The profit potential is limited to the premium collected, the risk is unlimited above 9700
Bear Put Spread with Naked Leg- September Options Buy the September 94 puts, sell the September 90 puts and sell a naked September 97 call for about $150 debit. The profit potential is limited to $4,000 with the market at or below 9000 based upon intrinsic value, the intrinsic risk is in two parts, above 9385 the trade will have limited risk (premium paid) up to 9700, above 9700 the trade has the same unlimited risk as a short futures contract from that price.
6-23 Australian Dollar- The market seems to be forming a technical top here at the 9400 level and we are seeing signs of exhaustion. Combine that with the fact the FED is starting to talk pro dollar…and it’s only a matter of time. We like this Bear Put Spread with a Naked Leg as well as straight out of the money puts. Buy the September 9400 put and sell the 9200 Bear Put Spread, for the Naked Leg we are selling the 9700 call which is way above resistance. The profit potential is limited to $2,000 not including costs, the risk is unlimited above 9700. This trade should be filled at a small credit or even money which means that as long as the market is below 97 there would be no risk. For the Out of The Money’s (OTM’s) we like anything above 8600.
5-13 Australian Dollar Puts- We are seeing what could be a definitive topping formation in the Aussie and should it hold-prices could drop quickly. Buy the September 92 put and sell the September 89 put for a three handle bear put spread, which by its self would cost about $1080 (too much!) buy selling a naked September 96 call we can collect enough premium to collect a small credit or at the least do the trade cheaply. The catch is the naked leg adds a margin requirement as well as unlimited risk if the market goes above 96. The profit potential is limited to $3,000 plus any premium collected (minus costs... of course). If filled at a credit, this trade would be profitable with the market anywhere below 96.
Grains- We are now in a historically weak time of the season for the Grain markets, however I don’t think the market realizes this just yet. We maintain a bearish stance overall and are currently trying to be patient while we endure the pain of being prematurely short.
7-10 August Wheat Calls (Sept Futures)- With harvest under way the market is both technically and fundamentally weak. Sell the August 865 call looking to collect around 11 cents or $550; risk the trade to 18 cents or $350 over what you collected.
6-20 Wheat appears to have completed a Fibonacci correction to the upside, if this holds, the next sell off could and should take the market down to the 667 level or even lower. This should be a credit trade- buy the September 860 put and sell the September 780 put for a bear put spread. This portion of the trade could be worth as much as $4,000 with the market at or below 780 on expiration. To bring the cost of the spread down to either a credit or incredibly cheap, we are selling the September 1030 call as a naked leg. This means that we have unlimited risk above 1030 and if the trade is a credit, we would be profitable under that level. We also like buying the 670 puts as the deep out of the money puts.
6-4 December Soy Meal- Like its mother product, meal is consolidating at its Fibonacci resistance area and looking like it’s out of gas. Keep in mind that the real demand is for Bean Oil as a bio-diesel alternative. When you make Bean Oil you also make Meal, whether you need it or not. We believe that the demand for bean oil will create more bean meal, which at these prices isn’t too marketable due to cheaper substitutes, thus we see a glut in the near future. Buy the December 3300/2900 Bear Put Spread and sell the December 3800 Call as your Naked Leg. This trade should be a credit of $400 or thereabouts which mean that as long as the market is below 3840 this trade would be profitable, above that level you have the risk of a futures contract. The profit potential could be as much as $4,000 not including the extra premium. We also like buying cheap OTM options like the December 2100 put.
5-30 Bean Oil- Yesterdays move pretty much has confirmed to us that this market is pretty much done and the recent up moves were nothing more than smoke and mirrors. The Bean Oil market has become saturated with speculation based on the alternative energy bugs who should fold up their tents and run for the hills at the first sign of a top, which could cause the market to drop by 30-50% in the next 90 days. Now this is an extreme prediction but possible based upon the amount of fluff we see. We like all put trades at this time but here are a couple ideas. #1 Bear Put Spread with a Naked Leg- Buy the August 57 put and sell the August 53 put for the Bear Put spread, this trade by itself would run about $650 which would be your risk with a profit gross potential of $2,400 before deducting costs. That’s nice but the risk/reward percentage (3x) doesn’t excite us, by selling a naked leg; the August 70 call, we do open the door to a margin requirement as well as unlimited risk, but we reduce our cost to almost nothing $50 which would be our risk should the market NOT GO DOWN, but stay below 70. If the market does go below 53 we would make the same $2,400, but the return on $50 would be much more exciting! We also like buying way out of the money puts for less than $100 like the August 46’s.
5-19 September Wheat 1X2 Spread, we are overall bearish on Wheat however see the distinct possibility of the market trading higher in a corrective action. Buy the September 800 call and sell two 900 calls for $500 or less. This trade could be easily adjusted should the need arise. The risk on the trade is above 10 dollars, the profit potential is $5,000 with the market at 9 on expiration. The risk is limited to the premium paid.
5-14 November Beans- We are still building our “short position” in the beans, we like this new crop strategy. Buy the November 1300 put, selling the November 1200 put for the bear put spread and also selling the November 1700 call to create a credit spread of +$350. Based upon the premium collected the risk on this trade would be at the 1706 and above level intrinsically. Above that price you have unlimited risk, but anywhere below that the trade would be profitable with the most profits being realized at 1200 or below where you would see a profit of $5,000 plus any additional premium.
------------------------------------------------------------------------------------------------------------NY Softs- Cocoa prices have been supported by a combination of fund buying and civil unrest on the Ivory Coast. With prices currently showing signs of exhaustion, we could see a quick sell-off of as much as $10 at any time
Sugar is still in my opinion the sweetest trade. Remember, during the last inflationary explosion in the 70’s, sugar lagged the rest of the markets by almost a year before setting all time highs at the 64 cent level!
6-17 Cocoa- Although there is no sign of a “technical top”, our feelings are that much of the present price of cocoa may be more fluff and speculation based rather than intrinsic. If this turns out to be true, the top could be quick and sudden, lacking the normal technical characteristics. There are several strategies that you could use to position yourself should this occur. Truthfully, we like all puts at these levels however we tend to favor a bear put spread with a naked leg (no!). Buy the December 2900 put and sell the December 2600 put for the Bear Put Spread portion of the trade. The Naked Leg we like is the December 3400 call. This trade is running about $200 which would be your risk intrinsically as long as the market stays below 3400, above this area you have the same risk as being short a futures contract at 3400. The profit potential is limited to $3000 with the market at or below 2600. We also really like straight puts like the 121 put for $200. There are also September Options available.
6-2 November Orange Juice- The news is being saturated by the latest “experts” talking about an overly active Hurricane Season which officially started sometime last week. Now we aren’t saying that we necessarily agree with their prediction however there is always the possibility that they could be right. Buy the November 120/140 bull call spread and sell the 100 put. The trade is running around $50 which is your risk with the market below 120 and above 100. Below 100 you have unlimited risk, the profit potential is limited to 20 cents or $3,000.
6-2 Coffee Straddle/Ratio Spread- With Coffee caught in a tight trading range over the last few months it is only a matter of time before price break out one way or another. Whether its higher or lower is the question, here’s a way we may be able to take advantage of this situation. OK…First of tall the Seasonal Tendency is for the market to trade lower, on the other hand we are in freeze season in the Southern Hemisphere…so we need a trade that could profit in either direction. For the upside we would use a 140/160 1X2 ratio write, buy the September 140 call and sell 2 September 160 calls, this trade would run about 40 tics or $150 which is your risk with the market under 140 and below 180, where is where you are short a naked call intrinsically. It is important to note that above 180 you have unlimited risk. The profit potential would be anywhere above 140.40 and below 179.60 with the most profit being attainable with the market at 160 on expiration with $3,750. For the downside, which is most probable, we would use the September 117.50/110.00 bear put spread which is running about $350 per spread which would be your risk on the trade. The profit potential is limited to $2,800. Of course if the market continues to trade sideways we would need to adjust the position by folding in the long options and holding the shorts.
Metals- The Metal pits are caught in the confusion of an economy in a transition. We are still slightly bullish based upon the fundamentals being supported by a handful of technicals. The market is still maintaining a bullish posture.
5-19 December Silver is holding its Fibonacci support level and we could and should see prices start heading higher in the next few weeks. Buy the December 1800 call and sell the December 1900 call, also sell the December 1450 put. This trade should be filled at a credit of over $300 which places the intrinsic risk level on the downside at 14.35, anything above that number on expiration would be profitable, although the most profits would be realized with the market at or above 1900. At that level the trade would be worth $5,000 PLUS any premium collected. The risk is if the market trades lower, under the 1435 level you share the same risk as if being in the futures market.
Meats
With Beef prices trading at all time highs due to the price of feed forcing ranchers to cut back on herd size as well marketing strategies, we see this price as a temporary phase as producers go through the adjustment period.
6-24 October Live Cattle- We are looking for a top in the Cattle market who’s push into record high price territory was fueled by a combination of the renewal of exports overseas and fear of cut backs on the feed lots due to feed prices. There are two primary option strategies we are considering, either a 1X2 Ratio put spread, buying the October 110 put and selling two October 105 puts, which is currently bidding at even money, in other words FREE. The risk in that case would be if the market drops below 100 where this spread runs out of money. Of course once we saw a technical confirmation that the up-trend has ended, you would adjust the trade by covering a naked put and selling a naked call creating a bear put spread with a naked leg which happens to be our other trade suggestion. Buy the October 110 put, sell the 105 put and also sell the 118 call creating a credit spread which means as long as the market stays under 118 there is no intrinsic risk, above 118 there is unlimited risk. On both of these trades the profit potential is limited to 5 cents in cattle which is 2,000 before factoring in any costs.
5-29 August Live Cattle- The market is currently and unbelievably trading around its all time high despite the fact that feed prices are also at their all time high, which should mean that the profit margin should be extremely tight. We like selling the August 104 calls and collecting the premium of what could be over 2 cents or $800, which would give us a reverse break even of 10591. We feel that the market being above that price level is highly unlikely.
Energies
There isn’t much I can say expect that prices are currently at the mercy of the huge funds and the FED’s action over the dollar…
6-25 September Crude Oil- All time high’s, offers of increased OPEC output and congressional investigations into the speculators role in the energy markets, blaming speculation on over 30% of crude oils current price could spell the end of 130+ crude, the key word being could. In view of the high option prices and high margin requirements, we like doing an iron butterfly where we buy the September 130 put, sell two 120 puts and buy the 110 put. This trade is a limited risk trade with no margin requirement. The trade should run around 1200-1500 dollars per spread, the premium paid is your risk, the profit potential based upon intrinsic value is limited to $10,000 with the market at 120 on expiration, the profit zone is between 128.40 and 111.60 based on $1,600. If the market is above 130 or below 110 at expiration, the options will expire worthless.
6-17 Crude Oil- Extreme Volatility and Crude Oil have become synonymous and volatility spells risk. Yesterday’s market action could be interpreted as extremely bearish with a blow off high. Buy the August 130 put and sell the August 125 put for the bear put spread, by selling an August 150 call you would create a credit spread of $1000. This means that the intrinsic risk on this trade would be above the 151 price level and if at expiration crude is below 151 but above 130 you would still be profitable by the premium collected ($1,000), if the market is below 125 you would add another $5,000 in profits to that number.
* There is a substantial risk of loss in trading futures and options.
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Past performance is not indicative of future results.
The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. Alaron Trading Corp. its officers and directors may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.
FOR CUSTOMERS TRADING OPTIONS, THESE FUTURES CHARTS ARE
PRESENTED FOR INFORMATIONAL PURPOSES ONLY. THEY ARE
INTENDED TO SHOW HOW INVESTING IN OPTIONS CAN DEPEND ON
THE UNDERLYING FUTURES PRICES; SPECIFICALLY, WHETHER OR NOT
AN OPTION PURCHASER IS BUYING AN IN-THE-MONEY, AT-THE-MONEY,
OR OUT-OF-THE-MONEY OPTION. FURTHERMORE, THE PURCHASER
WILL BE ABLE TO DETERMINE WHETHER OR NOT TO EXERCISE HIS
RIGHT ON AN OPTION DEPENDING ON HOW THE OPTION’S STRIKE
PRICE COMPARES TO THE UNDERLYING FUTURE’S PRICE. THE FUTURES
CHARTS ARE NOT INTENDED TO IMPLY THAT OPTION PRICES
MOVE IN TANDEM WITH FUTURES PRICES. IN FACT, OPTION PRICES MAY
ONLY MOVE A FRACTION OF THE PRICE MOVE IN THE UNDERLYING
FUTURES. IN SOME CASES, THE OPTION MAY NOT MOVE AT ALL OR
EVEN MOVE IN THE OPPOSITE DIRECTION OF THE UNDERLYING FUTURES
CONTRACT.