Hedging Options » Commodity

Option Strategies: Profit-Making Techniques for Stock, Stock Index, and Commodity Options (Wiley Trading) [Hardcover]

admin — Thu, 29 Jul 2010 21:38:56 +0000

Updated and revised to include a decade of growth in the scope and complexity of options, Options Strategies: Profit-Making Techniques for Stock, Stock Index, and Commodity Options, 3rd Edition is a comprehensive guide to options trading strategies written in clear, non-technical language. In addition to insight into options issues like carrying changes, strike prices, commissions, interest rates, and break-even points, new chapters show how to predict the direction of implied volatility. Accessible examples, charts, and graphs will help you obtain the information you need to succeed in the high-risk, high-profit world of options.

From the Back Cover

Praise for Option Strategies, Third Edition “Finally, a book on option strategies even guys like me can understand. Whether you’re an options veteran or not, Courtney’s years of experience will be of value to you.” —Larry Williams, author of Trade Stocks & Commodities with the Insiders: Se (more…)

Commodity Trading Strategies – The Spread

admin — Sun, 24 Jan 2010 18:56:20 +0000

Many of the more common commodity trading strategies actually serve two purposes. The turn of a profit is but one. A hedge is the other purpose. Hedging is a method of minimizing risks by attempting to purchase some form of insurance. As well as minimizing risks, it also usually caps potential profits. One of the strategies to accomplish this is known as the spread.
The majority of the commodities trades do not involve trading the commodity directly, but more in buying or selling a futures contract. “Going long” and “going short” are two of the most basic strategies
To go long means to purchase a futures contract while anticipating that the price will rise before the contract expires. Futures contracts are very similar to stocks or options because vary rarely do the traders or specialists have any actual contact or participation with trading the commodity itself.
Conversely, to go short means to sell the contract while anticipating that the price will drop before the contract expires. Many novices are often perplexed by this strategy. The have trouble wrapping their mind around the concept that the contract is sold by the trader before they even own it.
While the notion may be confusing, the practice is quite simple. While the technicalities remain unseen by the traders, the inner workings are rather simple. The contract is borrowed and the one is bought to make of the shortfall later.
An illustration of this concept is as follows: Trader X sells a futures contract in May for September wheat for $6.00 per bushel. The contract will be written for a minimum amount, which is typically around 5,000 bushels. The price falls in August to $5.40 per bushel. This will yield a profit of 60 cents on each bushel, which equals $3,000, excluding commission. The profits and losses for these ventures are settled daily for trading accounts and the broker balances the books by buying a contract of the same type on the trader’s behalf with the trader’s money.
Effective trading strategies are a combination or different types and lengths of contracts. Throwing in some form of spread is one of the simplest. There are a number of varieties that can be executed, but a simpler approach is sometimes the best move.
An example of this more simple approach is illustrated in this hypothetical situation. In May, the price for a July wheat contract is $5.90 per bushel and for a September contract the price is $6.00 per bushel. By predicting the spread between these two and by anticipating changes before July to greater than 10 cents – and to be correct in that prediction could yield a profit by selling the July and purchasing the September. By shorting July and going long in September, you do profit.
This profit is incurred by watching carefully the behavior of the contracts and acting accordingly. In June, the July contract may have risen to $6.00 per bushel and the September to $6.25 per bushel. By liquidating both positions, in other words, settling both contracts, this results in a 10 cent loss on the July contract, but a gain of 25 cents on the September contract. This means a 15 cent profit per bushel. A small commission will be incurred on the turn around, but it is minute. On a contract that covers 5,000 bushels, this means a net gain of $750.
While a larger gain would have resulted had July not been shorted, but all trading carries risks and it is impossible to predict the future, especially in the stock market, with any degree of certainly. Hence, the term, speculation is used to refer to these activities.
There is an element of rationale for betting against yourself by shorting and by going long at once allows the trader to hedge their best on whichever direction they expect the market to take. Utilization of this spread strategy as well as with many other variations does succeed in capping the potential for profit. However, it does work to minimize downside losses as well.

Managing Commodity Risk: Using Commodity Futures and Options (Kindle Edition)

admin — Sun, 17 Jan 2010 14:30:45 +0000

Most businesses will face commodity risk in some form. It is how the company manages this risk that will help to determine the success of the firm. In this highly practical book, John J. Stephens explains in a clear concise manner the best techniques for managing such risks. Aimed at the ordinary businessperson, this book is a practical primer for those who wish to manage and minimise the risk to their industry, through instruments such as commodity futures, without wishing to have the technical knowledge of professional financiers. This book provides the ideal starting point for the good manager not only to minimise commodity risk but to gain benefit also.

From the Inside Flap

Commodity risk and commodity futures are not merely used by financial traders, they can also be an invaluable tool for the everyday business manager. This book examines, in a balanaced and objective fashion, the extent to which the commodity futures markets can be used to the (more…)

Hedging â What is It, and Itâs Uses in Risk Management

admin — Thu, 14 Jan 2010 19:27:06 +0000

The second of a two part articleâ¦. Before I discuss the use of hedging to off-set risk, we need to understand the role and the purpose of hedging. The history of modern futures trading begins in Chicago in the early 1800âs. Chicago is located at the base of the Great Lakes, close to the farmlands and cattle country of the U.S. Midwest making it a natural center for transportation, distribution and trading of agricultural produce. Gluts and shortages of these products caused chaotic fluctuations in price. This led to the development of a market enabling grain merchants, processors, and agriculture companies to trade in contracts to insulate them from the risk of adverse price change and enable them to hedge. The first commodity exchange was the creation of the Chicago Board of Trade, CBOT in 1848. Since then, modern derivative products have grown to include more than the agricultural industry. Products include Stock Indices, Interest Rates, Currency, Precious Metals, Oil and Gas, Steel and a host of others. The origins of the commodity and futures exchange was created to support hedging. The role of speculators is beneficial as they add trading volume and important volatility to what would otherwise be a small and illiquid market place. You can view a complete listing of the worlds different exchanges at: http://www.genuinecta.com/World_Exchanges_Commodities_Trading_Advisors.htm A bona-fide hedger is someone with an actual product to buy or sell. The hedger establishes an off-setting position on the futures or commodity exchange, thereby instituting a set price for his product. Someone buying a hedge is known as being âLongâ or âTaking Deliveryâ. Someone selling a hedge is known as being âShortâ or âMaking Deliveryâ. These positions known as âContractsâ are legally binding and enforced by the exchange. Entering your trades either for speculation or hedging is done through your broker. Commodity Trading Advisor, Genuine Trading Solutions President Dwayne Strocen, states that âCommodity and Futures exchanges are distinct from Stock Exchanges, although they operate using the same principals. They are regulated by different agencies such as the Commodity Futures Trading Commission who are responsible for regulation of retail brokers in the USA as well as Commodity Trading Advisors such as us.â Now letâs view some real life examples of hedging or mitigation of risk by using exchange traded derivatives. Example 1: A mutual fund manager has a portfolio valued at $10 million closely resembling the S&P 500 index. The Portfolio Manager believes the economy is worsening with deteriorating corporate returns. The next two to three weeks are reports of quarterly corporate earnings. Until the report exposes which companies have poor earnings, he is concerned of the results from a short term general market correction. Without the privilege of foresight, he is unsure of the magnitude the earnings figures will produce. He now has an exposure to Market Risk. The manager thinks of his options. The greatest risk is to do nothing, if the market falls as expected, he risks giving up all recent gains. If he sells his portfolio early, he also risks being wrong and missing further rallyâs. Selling also incurs substantial brokerage fees with additional fees to buy back again later. Then he realizes a hedge is the best option to mitigate his short term risk. He begins by calling his CTA (Commodity Trading Advisor) and after consultation places an order to sell short the equivalent of $10 million of the S&P 500 index on the Chicago Mercantile Exchange âCMEâ. Now his result is when the market falls as expected, he will off-set any losses in the portfolio with gains from the Index hedge. Should the earnings report be better than expected, and his portfolio continues upward, he will continue making profits. Two weeks later the fund manager calls his CTA and closes the hedge by buying back the equivalent number of contracts on the CME. Regardless of the resulting market events, the mutual fund manager was protected during the period of short term volatility. There was no risk to the portfolio. Example 2: An electronics firm ABC has recently signed an order to deliver $5 million in electronic components of next years model to an overseas retailer located in Europe. These components will be built in 6 months for delivery two months after that. ABC instantly realizes they are exposed to two risks. 1. the rising and volatile price of copper in 6 months may result in losses to the firm. 2. the fluctuation in the currency could easily add to those losses. ABC being a young firm cannot absorb these losses in view of the highly competitive market from others in the field. Losses from this order would result in lay-offs and possibly plant closures. ABC telephones their CTA and after consultation places an order for two hedges, both for an expiry in 8 months, the date of delivery. Hedge #1 is to buy long $5 million of copper effectively locking in todayâs price against further price increases. ABC has now eliminated all price risk. The risk of plant closures is greater than the lure of increased profit should copper price fall. After all, ABC is not in the business of speculating on copper prices. Hedge #2 is to sell short the equivalent of Euro Currency vs US Dollars. Since ABC is effectively accepting EC in payment, a rising US dollar and a weak EC would be detrimental and erode profits further. The result of the hedge is no risk and no surprises to ABC in either copper or currency levels. A risk free transaction and full transparency is the result. In 8 months with the order completed and the customer accepting delivery, ABC notifies the CTA to close the hedge by selling the copper and buying back the Euro Currency contacts. Many examples exist to demonstrate the mitigation of risk to an institution or financial portfolio. Dwayne Strocen states that new products are constantly created and available on both over-the counter and exchange traded markets. If would be wise to consult with a qualified Commodity Trading Advisor or broker to discuss the analysis for an on-going risk management solution or a one time only hedge.

Commodity Options: Trading and Hedging Volatility in the World??Ts Most Lucrative Market (Kindle Edition)

admin — Mon, 21 Dec 2009 14:33:22 +0000

This is the eBook version of the printed book. If the print book includes a CD-ROM, this content is not included within the eBook version.Don’t Miss out on Today’s Hottest Trading Arena: Commodity Options! Investors worldwide are discovering the enormous opportunities available through commodity options trading. However, because commodities have differing underlying characteristics from equities, commodity options behave differently as well. In this book, two of the field’s most respected analysts present strategies built from the ground up for commodity options. Carley Garner and Paul Brittain begin with a quick primer on how commodity options work, how they evolved, and why conventional options strategies often fail in the commodity options markets. Next, using detailed examples based on their own extensive research, they show how to leverage the unique characteristics of commodity options in your own trades. You’ll walk through trades from “top to bott (more…)

Commodity Options: Trading and Hedging Volatility in the World’s Most Lucrative Market (Hardcover)

admin — Fri, 18 Dec 2009 11:50:27 +0000

Don’t Miss out on Today’s Hottest Trading Arena: Commodity Options! “The authors have written the definitive work on trading commodity options. Their in-depth knowledge of this subject is legendary among industry professionals and expert traders alike, and their ability to relay their knowledge through text, pictures, and the spoken word is unparalleled in our industry.” –Lan Turner, CEO, Gecko Software, Inc. “This book captures the realities of commodity option trading in a simple and easy- to-read presentation that will be beneficial for traders of all sizes and skill levels.” –Chris Jarvis, CFA, CMT, Caprock Risk Management, LLC “Even the most experienced investors often overlook the fact that options on futures are fundamentally different from options on stocks. This book fills that gap and sets the record straight with clear and concise descriptions that are easy to understand. Guaranteed to become a true source of value creation for anyone interested in tradin (more…)

Managing Commodity Risk: Using Commodity Futures and Options (Hardcover)

admin — Tue, 15 Dec 2009 15:48:42 +0000