High Net Worth Investor Series

Option Selling
on Steroids
Commodities Options for
the Stock Option Seller
By: James Cordier, Michael Gross, Portfolio Managers,
Liberty Trading Group/OptionSellers.com
Copyright 2010 Liberty Trading Group
Table of Contents

How I got Started Selling Commodities Options...............................................1

Selling Commodities Options-That big of a step?.............................................2

The 5 Key Differences between Stock and Futures Options............................2

Selling a Commodity Option – Example.............................................................3

Tips for New Commodity Option Sellers............................................................4

The Short Cut to Getting Started........................................................................5

 How I got Started Selling Commodities Options

I discovered commodities when I was 14 years old. I had a coin collection and kept it meticulously
organized by date, type, et. One day I bought a set of silver coins and kept them together as a set. While my
brother was playing baseball, I was following the price of silver in the Wall Street Journal. A few months
later, I noticed that silver prices had risen to over $6.00 an ounce. It was about $4.00 an ounce when I bought
the coins. I took them down to my local metals dealer and asked what he would offer for my coin set. To my
By: James Cordier,
surprise, he offered me $60 for the set, a 120% profit from the $25 I had paid for it. As much as I liked my
Portfolio Manager coin set, I took the money. I could buy more coins. He bought them for the silver value alone.
When I got home I thought “That was pretty neat.” I was hooked.

10 years later, I became a commodities broker. One of my first duties was helping my clients to buy options. It took me 5 years
to figure out that buying options is a tough way to make money. I could study every tiny detail about soybeans, coffee, oil or
gold, get the market direction right and we would still lose money because we bought an option.

And then I read a statistic that 80% of options expire worthless. So I started my study of option selling. I talked a few of my
clients into giving the strategy a try. It worked – extremely well. There was only one problem. These guys were gamblers. They
were futures traders. They were in it for the thrill. Making 20-30-even 40% a year was not enough for them. They wanted the
action. Selling options was a little slow for their tastes. What I found they would do is take their option selling profits and use
them to make big bets on fast moving futures contracts. Some actually caught a few big moves and cleaned up. Most of them
didn’t. I still remember one client saying to me “Well, we lost another one. I guess we’ll have to sell some more of those options
to raise enough cash to try it again.”

Gamblers vs Investors

That’s when I realized the difference between investors

and gamblers. And so, in 1999, I started my own firm,
specializing exclusively in selling options. My firm was for
investors.
At that time, many investors were not ready to accept this
“new” investment strategy they had never heard of (despite
the fact that funds had been quietly using it for years.) We
started slow, wrote a few articles. And clients started coming.
And people started to get it. And we started to get some buzz.
Pretty soon McGraw Hill came knocking. They thought we
had a pretty good concept and wanted us to write a book. So
we did. Then CNBC, The Wall Street Journal and Barrons
started calling. And we have never looked back.
I did not write this to brag but to tell you the story of how I started my career nearly 25 years ago as a retail futures
I discovered selling commodities options. I don’t think broker working with individual investors. Way too often,
selling options is the perfect strategy or the guaranteed path we would get the direction of the market right and still
to wealth. Every investment has it’s drawbacks and risks. lose money because we were buying options.
However, in my 25+ years of helping clients invest their
money, I have never found anything more consistent.

Anything and everything you read in this report or any of our newsletters, website, or portfolio literature is based on real life, in
the trenches, hard won experience. You are not going to find pages of long winded, ivory tower “theories” or pages of useless
greek hieroglyphics. It is my opinion that 90% of everything written on trading options is either useless to the individual
investor or outright garbage. Selling options successfully only requires a little elbow grease and a lot of common sense.

This booklet was written for stock option sellers to introduce them to the concept of selling commodities options. However,
even if you’ve never written any kind of option before, you should find it to be a helpful primer on collecting big premiums
without having to pick market direction ever again.

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
 Selling Commodities Options –
Is it really that big of step?
If you are currently writing options on equities, I don’t need
to sell you on the concept. You understand that by selling
options, you no longer have to predict which way the market
is going to move. Your primary concern is only where prices
are not going to go. You know these odds. You know it works.
Expanding your option selling enterprise into commodities is
not a large leap from where you are. After all, you’ve already
gone down the rabbit hole. You’ve already embraced an
alternative strategy. You’ve seen the light that there is more
to investing than “buying low and selling high” regardless
of what the TV, the newspaper or your financial advisor tells
you. You get it, which means you’re already ahead of 95% of
all individual investors.
You can look at selling commodities options as simply an
extension of what you are already doing. Sure, there are some
key differences which you will learn in this report. However,
the core concept remains the same. The draw is, the potential
for much larger rewards implementing a strategy you
already know.
If you’re already selling equity options, expanding into
commodities can be a natural transition.
Option selling on futures is not for everybody. It requires
the willingness to embrace an “outside the box” type of
mentality. It requires a moderate acceptance of risk. It takes
a little work – a little study. If you are looking for “action” or
“something to do with your spare time,” this is not for you. If
you are a serious investor considering a serious investment,
you’re in the right place.
One key distinction will be your purpose for selling options.
Of course, the ultimate purpose is to make money. However,
in equities, the designed purpose is often to collect extra
income on a stock you already own, or as a means of
collecting income until a stock hits a level at which you wish
to purchase it. In commodities, you will have no intention,
or need to own the underlying (futures contract). Using the
concepts we suggest, there is no need to get involved with
taking delivery, getting assigned, getting exercised, et. You
will be selling options so far out of the money that this will
not be a concern. There is no need to make it messy. This is
pure, simple premium collection. The question is, why would
you want to? That question is answered in the next segment.
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
5 Key Differences between Stock
and Futures Options
(Why expanding into commodities
options could be well worth your while)
There are substantial differences between writing
stock options and writing futures options.
However, what it generally boils down to is
leverage. Futures options offer more leverage and
therefore can offer greater risk, but also greater
opportunity for profit. In selling equity options, one
does not have to guess short term market direction
to profit. The same remains true in futures, with a
few key differences.
1 Lower Margins (Higher ROI): A key factor that
attracts many stock option traders to futures.
Margins posted to hold short stock options can
be 10 to 20 times the premium collected for the
option. With the SPAN margin system used in
futures, options can be sold with out of pocket
margin requirements* for as little as 1 to 1 ½ times
premium collected. For instance, you might sell an
option for $600 and post an out of pocket margin
of only $700.
2 Attractive premiums can be collected for deep
out of the money strikes. Unlike equities, where
to collect any worthwhile premium, options must
be sold 1-3 strike prices out of the money, futures
options can often be sold at strike prices far out
of the money where adverse short term market
moves will not adversely affect the position, yet
time value erosion may be allowed to work less
impeded by short term volatility.
3 Liquidity. 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 contracts like Financials, Sugar, Grains,
Gold, Natural Gas, Crude Oil, etc. have substantial
volume and open interest offering several
thousand open contracts per strike price.
 4 Diversification – In the current state of financial
markets, many high net worth investors are
seeking precious diversification away from
equities. By expanding into commodities options,
you not only gain an investment that is 100%
uncorrolated to equities, 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 benefit in
curtailing risk.
5 Fundamental Bias – When selling a stock option,
the price of that stock is depending on many,
many factors - not the least of which is corporate
earnings, comments by CEO/Board, legal actions,
Fed Decisions, or direction of the overall index.
Soybeans however, can’t “cook their books.”
Silver can’t be declared “too big to fail.”
Knowing the fundamentals of a commodity, such
as crop sizes and demand cycles, can be of great
value when selling commodities options.
In commodities, it is most often old fashioned
supply and demand fundamentals that ultimately
dictates price. Knowing these fundamentals can give
you an advantage in deciding what options to sell.
Commodities Option Selling –
An Example
The following example illustrates the concept of selling
a futures option. This is for example purposes only and
assumes the seller is neutral to bearish crude oil prices.
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
Selling a Call Option in September Crude Oil
Date: April 20, 2010
Scenario: An investor is neutral to bearish on crude oil
prices and wishes to collect premium above
the market.
Trade: Sells September Crude Oil 130 call
Premium Collected: $700
Margin Requirement: $1400
Expiration Date: August 17, 2010
Risk: The risk to the call seller is that crude prices move
substantially higher. If the option goes in the money, it
could be worth more than he sold it for at expiration at
which point, he would have to buy it back at a loss. He
could also choose to buy it back at any time prior to
expiration, even if it was not in the money. This can be
an excellent risk management strategy.
Summary: If September Crude Oil Futures are
ANYWHERE below $130 per barrel at option
expiration, the option expires worthless and the investor
keeps the full premium collected as profit. Notice that
the call can be sold at a level nearly 50% out of the
money (Crude oil prices would have to increase by
50% prior to option expiration to go in the money.) The
option could also be bought back at any time prior to
expiration at a varying level of profit or loss. Bullish
oil traders could use the same strategy by selling put
options far beneath the market. Note the margin
requirement vs. premium collected is nearly a 50%
return on capital if the option expires worthless.
 Tips for New
Commodity Option Sellers
Many investors have achieved attractive returns with a
properly managed option selling approach in equities.
However, equity traders who have been successful in
selling options can consider adding futures options
to their portfolio mix both for diversification and
return aspects. Gaining higher leverage can carry
increased risk in some situations, but can also produce
substantially higher returns in an option portfolio. At
the same time, as mentioned above commodities tend
to move independently – not only from equities, but
from each other. This can be an attractive alternative to
those seeking investments non-correlated to the equities
markets.
However, to futures neophytes considering such
an approach, I make the following “quick tip”
recommendations:
Quick Tips
1. Be sufficiently capitalized – Futures margins
can vary depending on market movement.
Be sure to keep a sufficient cushion of cash
in your account to absorb potential margin
increases. Like many alternative investments,
option selling is a strategy that requires
sufficient equity to take advantage of the high
probabilities. We recommend at least $100,000
to start for our clients.
This report is meant to be an introduction to this
investment strategy of which many are not yet familiar.
To learn all about option selling on commodities and
discover a simple, effective strategy for doing so, we
recommend our book, The Complete Guide to Option
Selling (McGraw Hill 2009) now in it’s updated second
edition.
In addition to positioning properly, how you manage
aspects such as risk and margin will ultimately have
the greatest impact on your overall success. The biggest
mistake I see neophytes making is the tendency to try
to manage their commodities option portfolio like a
stock option portfolio. Learn the differences and your
commodities option writing account can not only be an
excellent, non-correlated diversifier for your equities,
but a stand alone investment in it’s own right.
How do you start selling options in
Commodities?
Commodities options are traded across the globe. For
our purposes, we will focus on those traded at the
major US exchanges in Chicago and New York. To sell
commodities options, you must use a licensed futures
broker. Experience and competence of futures brokers
varies widely and it is best you if seek out one with
broad experience in selling options. Very experienced
option selling professionals can even manage your
account for you if you so choose.

2. Stay diversified – this universal investment

principal still applies in option selling. Keeping
your positions spread out over a variety of
uncorrelated markets can substantially dilute
your risk

3. Sell Deep out of the Money Strikes – As

we covered in a past issue, this can not only
improve your win ratio, it insures a good
nights sleep

4. Know your Fundamentals – Commodities are

not stocks. P/E ratios, management decisions,
insider buying are all out the window. Prices
can be affected by weather in Iowa, a strike in
Peru or a pipeline disruption in Nigeria. Get to
know what moves the price of each commodity
or work with somebody that knows.

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 Short Cut to Getting Started
Work with the Option Selling Specialists
Learning the fundamentals of commodities, adjusting to the margin requirements, leverage and individual “point”
values of each commodity can take time and commitment. It can also pay off for those willing to take the time.
However, for those wishing to enjoy the benefits of selling commodity options but lacking the time or expertise to
get started, there is a short cut. Liberty Trading Group, North America’s Option Selling specialist, has been working
with high-net worth investors for over a decade in the option selling field. With $75 million currently under
management, Liberty Trading offers fully managed commodity option selling portfolios to investor-clients across 6
continents. No experience is necessary to get started.

Recommended First Steps

For more information on option selling portfolios with Liberty Trading Group,
you can request a Free Option Seller Information Packet complete with examples and
audio CD at www.OptionSellers.com or call 800-346-1949 (813-472-5760 Internationally).

Request a free trial subscription to Liberty Trading’s client newsletter The Option Seller by
visiting www.OptionSellers.com
(Note: Liberty Trading Group accepts only a limited amount of high net worth investor clients each month.
Information packets and sample newsletters are reserved for investors with over a $500K net worth.)

Author Bios
James Cordier is the founder of Liberty Trading Group/OptionSellers.com, an investment firm specializing
exclusively in selling commodities options. James’ market comments are published by several international financial
publications and news services including The Wall Street Journal, Reuters World News, Forbes, Bloomberg
Television News and CNBC. Michael Gross is an analyst with Liberty Trading Group/OptionSellers.com. His work
has been featured by Barrons, Yahoo Finance and Optionetics.com. Mr. Cordier’s and Mr. Gross’ book, The
Complete Guide to Option Selling 2nd Edition (McGraw-Hill 2009) is available at bookstores and online retailers
now.

Liberty Trading Group

401 East Jackson Street
Suite 2340
Tampa, FL 33602
800-346-1949
813-472-5760 (International)
www.OptionSellers.com

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** Price Chart Courtesy of CQG, Inc.

***The information in this article has been carefully compiled from sources believed to be reliable, but it’s accuracy is not guaranteed. Use it at your
own risk. There is risk of loss in all trading. Past performance is not necessarily indicative of future results. Traders should read The Option Disclosure
Statement before trading options and should understand the risks in option trading, including the fact that any time an option is sold, there is an
unlimited risk of loss, and when an option is purchased, the entire premium is at risk. In addition, any time an option is purchased or sold, transaction
costs including brokerage and exchange fees are at risk. No representation is made that any account is likely to achieve profits or losses similar to
those shown, or in any amount. An account may experience different results depending on factors such as timing of trades and account size. Before
trading, one should be aware that with the potential for profits, there is also potential for losses, which may be very large. All opinions expressed are
current opinions and are subject to change without notice.
Liberty Trading Group
401 East Jackson Street
Suite 2340
Tampa, FL 33602
800-346-1949
813-472-5760 (International)
www.OptionSellers.com