Trading - Thinking "Outside the Box"
Wouldn't it be great if we could buy an option with five
months left until expiration and sell an option with 2 months
left until expiration for the same price? You couldn't lose.
Well we can't. I love options spreads so much I realized
something very important. We can buy a spread that has a
lot of time value left at almost the same price as we can
sell one with less time value left. The reason really opened
my eyes and gave me new insight into options. Here is what
I came to realize.
Rivera of DeltaNeutralTrading.com
I started comparing how expensive options were in relation
to the other strike prices in the same month and to the
other months. I wanted to know based on the price per
day which options were more expensive.
The first 1 or 2 option months, as everyone knows loses
time value quickly. The at the money strike prices are
very expensive compared to the out of the money strike
prices. Since there is not that much time left, how much
can they charge for an out of the money option? Not much.
The next several months, the opposite is true. Compared
to each other, the strikes that are closer to the money
are cheaper in terms of price per day than the options
further out of the money. Let me explain it another way
using the S&P market.
6 days left at the money option cost 12 points
6 days left out of the money option cost 2 points
70 days left at the money option cost 43 points
70 days left out of the money option cost 29 points
There is more than 10X the time left but the 70 day at
the money option (43 points) is only less than 4X the
price than the 6 day at the money option (12 points).
The 70 day out of the money option (29 points) is almost
15X the cost of the 6 day out of the money option (2 points)
but only has 10X the time value. We will buy the cheaper
options and sell the more expensive ones.
Sell 6 day at the money and sell 70 day out of the money.
Buy 6 day out of the money and buy 70 day at the money.
This will be done for a 4 point debit. We are now buying
a spread that has 10X more time value than the one we
are selling and are only paying 4 points for it.
When the 6 day options expire we can sell the next month
to take in more premium, still keeping the 70 day option
What goes up, must come down!
We have all heard this before in reference to the laws
of Gravity. We have laws in the commodity markets as well.
What comes down, must go up! The greatest traders of our
time like Warren Buffet know this. He is perhaps the greatest
Stock trader ever. He had never traded commodities until
a few years ago. He bought silver in the futures market.
When the market went even lower he bought more.
The "smart money", commercials will not be
scared into selling when
a market they have purchased drops even further. They
than anyone that a commodity has real value and will always
There is a famous book, "You Can't Lose Trading
Commodities". The author buys commodities and then
just waits for the market to go higher. He would purchase
more as the market fell.
You need a big bankroll for this. Personally I know corn
won't go to $1.00 but what if it did? I want to minimize
the risk in case I want to end the trade.
I started trading the Soy Complex this way several years
ago. Not with options. Strictly futures. I bought what
was similar to a crush spread. I increased the contracts
as the market went against me until the spread rebounded
a little. Since I increased the contracts I didn't need
the market to come back to where I started. It only had
to rebound to the next level.
Black Jack players did this until Casinos caught on and
put limits on bets. It is a known fact that futures traders
make good gamblers and professional gamblers make good
futures traders. I am against gambling but even gambling
done with a system is not really gambling.
These card players would bet something like this: $5
lose, $10 lose, $20 lose, $40 lose, $80 win. The losses
add up to $75. They would win $80, so the profit is $5.
Not a lot, but they would do this all day. Black Jack
is just under 50% probability for the
The problem is there is a slight chance that you could
lose 40 times in a row. Now with Commodities we have a
50% probability and we won't lose 50 times in a row because
the market can't go below zero.
Now before I go any further, I need to tell you that
I am not recommending you double down on your trades.
What you can find are markets that are near their lows
where you can do a small scale trade. Spreads offer even
better opportunities. They have a closer range (high to
By now you can see we only use this to go long a market
since we can never be sure how much a market can go higher.
First we need to find a market that is low already so
we won't have to wait that long and also so there will
be less capital needed.
I prefer to trade this using options. There are many
ways to do this. You could buy an option in a market like
soybeans and choose how many cents the market will drop
before you buy more. The problem is, an option is a wasting
asset. The Theta (time decay) would cause you to lose
I use spreads so I am not paying for time decay. I will
probably sell more Theta than I buy, so if the market
does nothing I will make money just on time decay.
Article by Dave Rivera of DeltaNeutralTrading.com.
You can find the above 2 techniques in depth and learn more
about their unique commodity options system that is unlike
anything we've seen before by visiting: DeltaNeutralTrading.com