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Five Commodities Are Poised For Big Moves… Are You Ready For Them?
by Lee Lowell, Stock and Commodity Option Specialist
Tuesday, October 13, 2009: Issue #1114
Anyone can buy a stock. But not everyone knows how to buy stocks at the prices they want and get paid instant cash for doing so.
But that’s exactly the strategy I showed you how to execute in my last column about the world’s commodities – one of the best ways to go long on stocks. It’s called put-option selling, where you receive money upfront in return for obligating yourself to buy shares of the underlying asset at the price you want.
In my example, I examined a hypothetical trade that involved a bullish play on gold – specifically, on the SPDR Gold Shares (NYSE: GLD) – an ETF that tracks the price of gold. I wanted to buy around $91, so I sold the December 2009 $91 put option (GLD-XM) for a limit sell price of $1.40 per contract.
At the time, GLD was trading around $97 per share. While regular stock buyers would wait for a pullback to the $91 area (which may or may not occur) before buying shares, smarter investors know they can sell the $91 put options and collect instant cash.
And it’s paid off…
The Profitable Put-Selling Advantage
Since then, GLD has risen to $103 on the back of record highs for gold prices. When stock prices go up, put-option prices go down, so the price of the December $91 put option has moved to $0.40 per contract, giving our hypothetical trade a paper profit of $100 per contract (or $1,000 if trading 10 contracts).
Here’s where selling put options comes in handy…
When you sell put-option contracts, you can look to buy them back cheaper as a form of turning a profit. This is something that a straight stock buyer cannot do, since they haven’t been able to enter the market at all. Chalk up one for the option trader!
So since GLD has gone up in price, we could either take profits now, or continue to wait until options expiration to see if the options will expire worthless. If that happens, we’d make the maximum profit on the options.
Now onto the current state of play in the commodities world…
Gold $2,000?
When I last profiled gold and silver on September 7, I noted how they were both poised to break through their yearly highs after a brief pullback.
They certainly haven’t disappointed.
Gold has regained the elusive $1,000 per ounce area and has motored to all-time highs of over $1,060 per ounce. With rumors swirling about the eventual demise of the U.S. dollar (due to the increasing debt load), gold could become the currency of choice. In fact, some analysts say it could shoot to $2,000 per ounce.
Click here to see the original
Silver Set to Follow Gold to All-Time Highs
Meantime, silver has rallied back to the $18 per ounce area – a new high for the year, but still $4 per ounce below its all-time high of $22 from February 2008. However, the way these markets are trading now, it’s probably only a matter of time before silver gets back up to those all-time highs.
For now, both gold and silver look very strong.
Click here to see the original
Let’s take a quick look at few other commodities making large moves lately…
Corn Bottoms Out and is Ready for a Weather-Induced Run
The corn market has finally come off the lows that it’s carved out since the highs of 2008. Prices bottomed out a few weeks ago just above the $3 per bushel level and have since moved up near $3.73 per ounce.
With colder, wetter weather sweeping through the corn belts of the Midwest and hampering the harvest, the focus has shifted to whether the crop size will be as large as predicted. Look for December 2009 corn futures to rally up to $3.90 per bushel as the next move.
Click here to see the original
A Tug-Of-War in the Natural Gas Market
Despite its continued spell in the doldrums, I’ve held a bullish outlook on natural gas for quite some time – and it could finally be coming to fruition.
With the large storage of underground supplies still swamping the market, it seems that all the fundamental news has now been priced in and traders are focusing on the cold winter ahead.
This has provided the impetus for natural gas to finally move off the lows it has logged since the highs of 2008. After bottoming near $3.500 per MMB/tu just a few weeks ago, natural gas has tacked on an impressive 1,500 points ($1.500) to rally back up to levels last seen in early August.
With short-term resistance just ahead (at the $5.000 per MMB/tu mark), we could see either a slight pullback, or a neutral move over the next few weeks.
The bulls and bears are currently waging a tug-of-war, with bears still citing the large supplies for a fall in price, while bulls believe winter could deplete the reserves.
Click here to see the original
Lastly, we move to the sugar market…
Sugar Set to Drop – and Drop Big
I profiled sugar as a potential shorting opportunity back in late August. At the time, it had carved out highs not seen in over 28 years, due to supply concerns in two of the world’s biggest sugar-producing nations – Brazil and India.
As with any market making new highs or lows, there comes a point where all the fundamental data gets factored into the market. It’s then a question of how long can those prices hold. For sugar, I believe the time has certainly come for the market to drop – and drop big.
In fact, the March 2010 sugar futures – the most actively traded contract – have already started to crack. If you want to play the downside, you could buy limited-risk put-option contracts for the March 2010 or May 2010 expiration periods. These contracts trade on the floor of the NYBOT/ICE exchange in New York City.
Click here to see the original
Good trading,
Lee Lowell
Editor’s Note: For more details on how you can profit from the put-selling strategy that Lee detailed above, check out his Instant Money Trader service, which is devoted exclusively to it. You’ll find out just how simple and profitable it is to buy the stocks you want at the price you want to pay for them… and get paid for it, too. Since its inception in November, Lee has notched up an outstanding track record of 13 wins and just one loss. Read more here.
- The Put-Sell Trade: How to Buy Gold and Silver for a 16% Discount
- The World of Commodities: The Future Of The Gold, Silver, Corn & Sugar Markets
- These Three Commodities Are Set to Move… Are You Ready to Profit?
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6 Responses to “Five Commodities Are Poised For Big Moves… Are You Ready For Them?”
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Along with Karim, Lee is one of America's leading options professionals. Over the course of a distinguished career, which includes six years in the options "trenches" as a market maker on the floor of the New York Mercantile Exchange (NYMEX), he has developed a proprietary trading method capable of enormous upside while actually reducing risk. 
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October 13th, 2009 at 11:20 am
well written, but why do you not show symbals? please excuse me if i have shown my lack of familiarity of this market.
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slider Reply:
October 18th, 2009 at 11:03 am
no symbols because they want you to purchase another newsletter.
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October 20th, 2009 at 1:57 pm
If sugar is in short supply and prices are going up, why do you believe those prices will now come down? Nowhere in the article is there factual information on why the supply would suddenly change one way or the other, or why the price would magically be reduced. And since shipping has been down for some time and is still flat, where is this supply coming from?
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Investment U Reply:
October 21st, 2009 at 12:07 pm
Sharon,
As stated in this article (and the previous article with my take on the sugar market), there comes a time in the markets where all the potential “bad” information gets priced into the commodity. Sugar traders have known for awhile about the potential for reduced supply, and that’s why the market has gone up. At some point, equilibrium will take over and prices will find stability.
Technical analysis (chart reading) plays a large role in the direction of prices just as the underlying fundamentals do. Many traders/investors rely on charts to help make decisions, and when all the fundamental factors have already been priced in, then the charts are used for prediction as to where a market could move next.
So based on the fact that I felt the market has priced in an extremely low sugar harvest, and the topping formation seen on the charts, my assessment was that the next large move for sugar would come on the downside.
Hope that helps.
Lee Lowell
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Jim H Reply:
November 25th, 2009 at 2:32 pm
Lee,
What is your track record for the last year? What % were winners and if you started with $10,000, what would it now be rather than what it “could be.”
Appreciate your thorough explanations.
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January 16th, 2010 at 11:40 pm
$22 is NOT the all time high for silver. That was
$50 when the Hunt brotheres tried to corner the market in the early 1980s.
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