by Lee Lowell, Investment U’s Stock and Commodity Option Specialist

Wednesday, September 8, 2010: Issue #1340

Forget the dotcom sector.

Forget the real estate market.

If you want to see bubbles and busts on a regular basis, just head to the commodities world.

Need I remind you about oil prices, which topped out at an all-time high of $150 per barrel in July 2008, only to plummet back to near $35 a barrel just a few months later?

Or how about natural gas  hitting a record high of $14 per mmbtu in 2008 before excess supplies saw the price tumble to $2.50 per mmbtu about a year later?

And not to be left out, wheat prices also hit an all-time high of $13 per bushel in 2008, only to slide by 65% to $4.50 per bushel just a few months ago before the recent Russian wildfires drove the price of wheat back up.

Both the oil and natural gas moves resulted in a staggering change in equity of $115,000 per single contract. Imagine having 100 contracts on the table! An investor on the right side of those trades could have pocketed a cool $11.5 million.

And while wheat players could have bagged a much smaller $42,500, that’s still a solid gain for anyone playing that market.

Fortunes like that can (and do) happen in the commodities markets. And although we’ve seen some of the most extreme moves in history over the past few years – ones that only occur every 10-15 years or so – there are many smaller moves that happen almost every year in various other markets.

And here’s another market experiencing such “froth” right now…

The Best Time to Score Commodity Profits

One thing you need to know about agricultural commodities during the summertime is that crops are totally dependent on Mother Nature to make or break their final outcome.

Since the growing season for the majority of them is early spring to late fall, that’s when the biggest volatility and price swings occur.

For example, if there’s the prospect of a drought or too much rain, speculators will come out of the woodwork and send these markets to dizzying heights in anticipation of a weather crisis affecting the crop yield.

In most cases, after these markets reach bubble status of unsustainable heights, cooler heads will prevail and the commodities return to “normal” prices. And it’s during this pullback phase when many of the big profits can be made.

Make no mistake, though: it might feel like you’re running into a burning building while everyone else is piling out. But if you believe that the true fundamentals will prevail, you can be a big winner playing the pullback.

You can do that in the cotton market right now…

The Cotton Supply Outlook is Pointing Down

Current U.S. cotton production estimates for the 2010-2011 season total 18.5 million bales – a full 52% higher than last year.

While that certainly alleviates any supply concerns, the global picture suggests that cotton supplies will be tightened this year. In Pakistan, for example, the recent devastating floods have wiped out some of its supplies. And that’s bad news for the market, as the country is the world’s fourth-largest cotton grower.

With this, the U.S. Department of Agriculture has pegged future global supplies to hit a 14-year low.

Question is: How do you weigh domestic supply versus global supply?

Having been in the commodity business for almost 20 years now, I can tell you that whatever supply number looks worse, the speculators will concentrate on that and take the market to “frothy” levels.

Eventually, the market gets to a point where it can move no higher, as traders realize there’s ample crop supply and prices end up falling hard.

So is cotton at that bubble level yet? It could be getting close. Take a look…

History Repeating? It Could Be 2008 All Over Again for the Cotton Market

As you can see, cotton is currently matching its highs from the 2008 surge when the market experienced similar supply numbers as today.

But look at what happened next. The market crashed from $.9200 per pound (92.00 cents per pound) all the way to $.3800 per pound. In cotton terms, that represents a move of $27,000 in equity.

Chart Source : Futuresource.quote.com

Will the slide happen again? It’s very possible. But if speculators want to keep buying, we could see more upside ahead in the near future.

However, the U.S. growing season will start winding down over the next few months, which will put a lot of pressure on cotton prices. And once the price starts falling, the move will accelerate, as everyone tries to bail out at the same time.

So what’s the best way to play this scenario?

Safest Way to Invest in the Cotton Market

The safest and purest way to play the cotton market is by using cotton option contracts that trade on the floor of the ICE (Intercontinental Exchange) in New York.

At the moment, the December 2010 and March 2011 cotton futures contracts offer the best options contract. This gives you either two months or five months for the supply situation to work itself out.

To err on the side of caution, stick with the longer-dated March 2011 cotton futures contracts (these options actually expire in February 2011, as commodity options always expire in the previous month to the one quoted.) They’re currently trading at $.8985 per pound (89.85 cents per pound).

In this case, since you’ll be looking for prices to decline, sticking with limited-risk/limited-reward put option debit spreads could be your best bet.

For example, you could buy the March 2011 $.9000/$.8500 put option debit spread, which will cost roughly 245 points, or $1,225 for each spread purchased.

This is where you’d buy the $.9000 put option and sell the $.8500 put option as a single spread trade.

The 245 points ($1,225) would be your maximum risk in the trade, while your maximum potential gain would be 255 points, or $1,275 per spread. So you’d be risking $1,225 to possibly make $1,275 – a little over a potential 100% gain on the trade. This will occur if the March 2011 futures move below $.8500 per pound at option expiration in February 2011.

If you think there could be more upside ahead, you can always wait before jumping in on the short side. Just adjust the put option spread strike prices up to where the futures are trading at that time. For instance, if March 2011 futures move up to $.9500 per pound, then you can look to establish a $.9500/$.9000 put option debit spread.

Please note that these trades are just examples, not recommendations that we’ll be following. Talk with your commodity broker before entering into any of these trades to make sure they’re compatible with your risk parameters.

Good trading,

Lee Lowell

by Lee Lowell, Stock and Commodity Option Specialist
Monday, August 16, 2010: Issue #1324

When the stock market behaves erratically and volatility is the order of the day (as it is now), what can you do to combat the upheaval?

Many investors surge en masse towards gold. No surprise there.

But gold isn’t the only shelter from a market storm. Its sister commodity – silver – enjoys just as much “safe haven” status as the headline-grabbing yellow metal. Not only that, it boasts great intra-day trading ranges and solid liquidity, too, which makes it excellent for trading.

Question is: What’s the best way of investing in the silver market? By using put option credit spreads, here’s more on this strategy…

The Spread Trade… A Better Way to Buy Silver

Let’s face it… the uncertainty in the equity markets will likely remain for a while. That should ensure that silver is a good bet on the long side.

However, instead of just buying shares in a silver company or ETF, here’s a trade that allows much more room for directional error and still has the potential for a good payout.

It’s called a spread trade.

As you can see on the chart below, the December 2010 silver futures contract is currently trading around $18.50 per ounce, with good support near the 200-day moving average at the $17.80 level.

To see the image in it’s original size, click here.

The Put Option Credit Spread Explained

Since silver prices will likely continue to move higher in the near future (or at least not move much lower), you could play the market using a put option credit spread.

(Please note that the following trade is just an example of how this strategy works, not a specific recommendation. We won’t be tracking this trade.)

With a put option credit spread, you sell one put option, while simultaneously buying another put option in the same transaction.

• For example, using that December 2010 futures contract, you could sell the December 2010 $16.250 put option and buy the $16.100 put option for a limit spread sell price of $.03 (cents)
• In silver options, 1 cent = $50, so you’d receive $150 for each spread you sell. (If you sell 10 spreads, you’d receive $1,500.)

In a trade like this, you’re considered the seller of the spread because you collect money from the option spread buyer.

• Risk/Reward: Whatever you receive from the option spread becomes your maximum potential gain. In this case, it would be 3 cents per spread, or $150.
• Maximum Potential Loss: This would be 12 cents – or $600 per spread (this is because the spread is 15 cents wide, so if you sell for 3 cents, the loss would be 12 cents). Now, it may seem counter-intuitive to enter a trade where your maximum potential gain is less than your maximum potential loss. But in the world of options, it all comes down to probabilities…

You see, we wouldn’t necessarily need silver prices to move higher in order to win on this trade. All you want is for it to remain above the $16.25 per ounce level by option expiration day.

And with the December 2010 futures currently at $18.50 per ounce, it gives a $2.25 cushion. Only if silver moves below $16.25 per ounce would you need to put risk management plans into action.

Give Yourself a 3:1 Winning Advantage With Credit Spreads

In other words, you have three chances to win on this trade – and keep the full $150 per spread:

1. If silver moves higher.
2. If silver moves sideways.
3. Even if silver moves lower than its current price (but not below $16.25).

On the other hand, the buyer of this spread can only win in one scenario: Silver must move below $16.25 per ounce.

This gives the seller a 3:1 advantage as far as the directional probability goes. But what about the true probability of winning? Well, you know that before entering the trade, too…

Want to Know Your Chance of Winning on This Trade? Here It Is…

Based on the previous movement of silver futures, there’s an 80% chance that silver will remain above $16.25 per ounce at the time of option expiration. You can see that on the probability calculator below…

To see the image in it’s original size, click here.

So the spread seller has an 80% of winning, while the buyer’s odds are only 20%.

This is why the potential payoff for the seller is smaller than the risk, but I like the seller’s odds much better. An option credit spread like this can be a safe way to receive cash right off the bat with a high probability of winning.

Good investing,

Lee Lowell

by Lee Lowell, Stock and Commodity Option Specialist
Tuesday, July 6, 2010: Issue #1295

It’s one of the most valuable and most actively traded assets on the planet.

It boasts great intraday trading ranges, with tons of liquidity, which makes it easy to enter and exit and very fair prices.

And with the stock market’s recent jump in volatility and sharp declines, it’s the asset of choice for many people seeking some shelter from the storm.

I am, of course, talking about gold.

And the question I’m going to address today is simply this: What’s the best way for you to invest in it?

Why You Need Gold in Your Portfolio

Since the stock market hit an 18-month high back in April, it’s trended lower. And on several days, we’ve seen all-out chaos and panic – for example, when the “flash crash” sent the Dow tumbling by 1,000 points in just a few minutes.

As the market has stumbled through the spring and summer, gold has moved higher, as investors hunt for protection from the volatility.

Gold should make up a part of your portfolio anyway but, with the market’s erratic behavior expected to continue, it’s even more important to have exposure to some gold.

One of the best ways to achieve that is by selling naked put options. Sounds sexy – and it is!

Buy Gold for $100 With Put Options

Now that we’ve decided to add gold to our portfolio, how about we decide the price at which we’d like to buy it? Not only that, how about we grab some instant cash from the deal, too?

Sounds like a no-brainer, right?

Even better… with gold having pulled back by about $60 per ounce over the past few days, this dip could represent an excellent time to buy.

Okay, so our first job is to decide what level we’re interested in buying gold. Then we just need to sell put options at the corresponding price (known as the “strike price”).

To make life easy, we’ll concentrate on the exchange-traded fund that tracks the price of gold futures contracts on the COMEX in New York – the SPDR Gold Trust (NYSE: GLD). One of the other benefits that GLD has is that it trades at about one-tenth the size of the underlying futures contract, making it viable for many smaller, everyday investors.

As an ETF, GLD, trades just like a regular stock on the NYSE. It’s currently trading for about $116.50 per share and when it comes to picking the price you want to pay for it, there are plenty of choices available.

For example, you could base it on the 200-day moving average line, which shows support at $110. That would be a nice $6.50 discount. But what if you want to go even lower and buy at $100 per share?

In this case, we could sell the December 2010 GLD $100 put options for about $2 per contract. Because there are 100 shares in each contract, we’d get an instant $200 for making the trade, based on selling one contract (100 shares). If you feel like buying 1,000 GLD shares, you could sell 10 option contracts, dumping a quick $2,000 into your account.

So what does that do for us?

Get Gold At the Price You Want… And Get Cash, Too

Simply put, it means we’re now obligated to buy GLD for $100 if it drops to that price by expiration in December. And for that obligation, we collect cash.

Sounds like free money, right? Well, it is – as long as you’re comfortable buying the corresponding number of GLD shares at your chosen level. So with GLD currently at $116.50, you’d be contracting yourself to buy it at $100 – a $16.50 per share discount.

What’s the catch? Not much, except that the price of GLD could drop lower than $100 per share after we’ve obligated ourselves to buy it at $100. But that’s the risk with any investment – the price can go lower.

However, if you’re comfortable buying GLD for $100 and know how to manage a stock position, then it could be worth your while to have someone give you instant money in return for having the chance to buy a stock at a much cheaper level than its current price.

Your Six-Step Put-Sell Trade Checklist

Before you execute a put-sell trade like the one above, you need to be aware of a few important things…

1. You’re selling put options as the initial transaction, not buying them.
2. For the duration of the trade, your broker will ask you to keep a portion of the total cost for the shares available, in case you’re obligated to buy them. As such, your options trading account will need to have margin capabilities.
3. Whatever strike price you sell put options for, that will be your maximum profit potential at first.
4. In order to actually purchase the underlying shares at your chosen price, the stock must close below that level on expiration day. So in our GLD example, the stock must close below $100 per share on expiration day in order to receive your shares. And you must have the cash to pay for the shares in full at that time.
5. If the stock you choose closes above your strike price level on expiration day, you don’t get to buy the shares. But you do keep the initial cash you received. At that point, the trade expires.
6. Remember that whatever stock you choose can drop below the price at which you buy it, so make sure you have a risk management plan in place. In addition, you can always buy back the options you sold before expiration if you want to lock in a profit.

In terms of receiving passive income, selling put option contracts can be a great way to generate income throughout the year.

When you sell at levels significantly lower than the current price of your chosen stock, the chances are high that you won’t have to buy the stock. In fact, up to 90% of the time, the options simply expire. So while this means you won’t get to buy the stock at your desired price, you do get to keep the cash over and over again.

Good investing,

Lee Lowell

P.S. The GLD trade above is just an example of how a put-sell trade works and not a specific recommendation.

by Lee Lowell, Stock and Commodity Option Specialist
Friday, March 26, 2010: Issue #1225

When I was a floor trader on the NYMEX in the 1990s, a “big” day occurred when oil futures moved by $0.50 intraday. And it would take all day for that to happen.

Today’s fluctuations make those days look like bingo night at the church hall.

It’s not uncommon to see the price of oil move $2 in mere seconds. And intraday moves can easily span $3 to $4.

The question is: Why such a dramatic change between then and now?

I chalk much of it up to the new electronic technology in the market today, which has opened the door for many more investors. All you need is a commodity trading account and you can be in the market in a flash. That’s led to commodity trading seeing a surge in popularity over the past few years.

In addition, you’ve got large, speculative moves from hedge funds and institutions, which only makes the moves bigger – often whipping markets into an all-out frenzy in the process.

Some investors curse this volatility. But they’re missing the point. Volatility is the engine that drives profits – particularly with commodities. And if you know what you’re doing, there are some great trading opportunities…

How to Profit From Oil’s Big Moves… With Little Risk

Take the oil market, for example…

• After the price hit its 2010 high of $85 back on January 11, it then plunged by $15 per barrel in just one month. That equates to a $15,000 move on one futures options contract.
• Many thought the market was ready to fall even further. But in typical fashion, the price rallied back up to $83 just as fast – another $13,000 move on one contract.

At the moment, crude oil is hovering around $81 per barrel. If you want to get involved, the easiest way is to look at the ETF that tracks front-month oil prices – United States Oil (NYSE: USO).

If you want to invest in the market more directly, you can go for futures options, which trade on the NYMEX.

• If You’re Bullish: With the momentum currently pointing higher, buying call options, or using strategies like call option debit spreads, offer limited risk with unlimited reward.
• If You’re Bearish: Right now, this would be a contrarian play. But if you want to play the downside, you can buy put options or put option debit spreads.

Either way, select options that expire in three-to-six months time (June 2010-September 2010).

Sudden, wild moves aren’t restricted to the oil market, though. We’ve seen gold trade the same way. But again, if you know how to capitalize on the moves for as little risk as possible, you can beat 99% of the “regular” crowd.

Heck, you can even get paid for it, too. Let me show you how…

The Easiest Way to Play Gold

As 2009 ended, gold futures topped out at $1,230 per ounce. But after a fast start to 2010, the price dipped back to $1,045.

This is when it’s crucial to look at technical support levels. These are areas below which the price generally won’t fall before buyers re-enter the market and shore up the price.

With gold, solid support came in around the $1,020 area back in February. Sure enough, the decline stalled just short of that level and gold rallied again – all the way up to $1,140 per ounce, in fact.

To see the chart in it’s original size, click here.

Since then, we’ve seen gold prices drift down a little. But as I mentioned back in December, I believe we’ll see another strong year for the gold market, interspersed with bouts of profit-taking.

Like oil, it’s easy to play the gold market through an ETF. The most popular and liquid one is the SPDR Gold Trust (NYSE: GLD), which tracks the price of front-month gold futures.

This is exactly what we did in The White Cap Report recently…

The Benefits of Executing a Put-Sell Trade on GLD

As we’ve seen in the commodities sector many times, once a market gets going, it doesn’t take much to bring the big hedge funds and institutional traders (i.e. speculators) to the table. This merely intensifies the bullish fever.

With that in mind, we used a put-sell strategy on GLD that would accomplish three things…

• Take advantage of the upside.
• Allow us to participate for minimum risk.
• Put money in our pocket just for executing the trade.

We did it by selling the December 2010 $85 put options on GLD for $1.60 per contract. Here’s what the trade gave us:

~ Cash: Because there are 100 underlying shares in each option contract, that immediately put $160 in our account ($1.60 multiplied by 100 = $160) for every contract sold.

~ A Discount: When you implement a put-sell trade, you basically get to name the price at which you’d be comfortable buying the underlying shares. In this case, the aim was to buy GLD for $85. At the time, that was $27 less than the price of GLD – a 32% discount. So if you sell one put option contract, you’re obligated to buy 100 shares of GLD for $85 per share. This is the equivalent of gold trading for $850 and represents a great long-term play.

So how do you manage a put-sell trade?

The Two Put-Sell Scenarios

When you execute a put-sell trade, you’re essentially reversing a regular stock purchase. You’re simply selling the put options before either buying them back at a lower price and locking in a profit.

Or, if you hold until options expiration, there are two scenarios:

• If GLD trades below $85 by December 2010: We’ll be obligated to buy the shares for $85. We’ll own the shares and must manage the position like any other regular long stock holding.
• If GLD closes above $85 at December 2010: The put options will expire worthless and we’ll keep the $160 that we received when we executed the trade. That’s the maximum gain and the trade would then be closed. So although we wouldn’t be able to buy GLD for $85, we’ll at least get to keep the money from selling the options.

For any put-sell trade, you must be prepared to buy the shares if you’re called upon to do so. In this case, that means you’d have to buy 100 shares for every put option contract you sold. Your broker will require you to keep a portion of the total value available for the duration of the trade – a “margin” requirement.

At the moment, the GLD December 2010 $85 puts are trading for around $1. That means we could bank a $0.60 profit per contract if we chose to buy them back. But since there’s plenty of time left until expiration, we’re holding.

You can find out much more about this put-selling investment strategy here.

Good investing,

Lee Lowell

by Lee Lowell, Stock and Commodity Option Specialist
Wednesday, February 10, 2010: Issue #1194

So much for the oil rally.

The market started 2010 in blazing fashion, with March oil futures tagging $84 a barrel. Next stop: $100, right? A price not seen since the fall of 2008. Not so fast…

The market has suddenly lost its momentum and the price slumped to under $70 last Friday – its lowest level in five months.

If you want to know why, look no further than the U.S. dollar, which has warmly welcomed 2010 and rallied higher (just as my colleague Alexander Green predicted, by the way). A higher dollar generally makes commodities more expensive for other countries, thus prompting a sell-off in oil and other commodities.

As you can see from the chart below, oil futures are currently trading below the all-important 200-day moving average – a level that many market makers (as I used to be at the NYMEX) follow in order to set the price.

To see the chart in its original size, click here.

Bottom Line: If oil can’t pop back above that line within a few days, there could be more room to go on the downside – particularly if the dollar keeps rallying.

How to Profit: Depending on your outlook, there are two ways to play the oil market.

• United States Oil (NYSE: USO): This is the ETF that tracks the front-month oil futures.
• Oil Futures Options: If you want to play oil more directly, head to the futures options market on the NYMEX. Always stick with limited-risk option strategies, since oil is pretty darn volatile.

Gold Loses Its Glow

Speaking of the dollar, two commodities that had a massive party while the greenback got spanked were gold and silver.

But they’re flagging a bit now.

Take gold, for example. Having topped out at $1,230 an ounce in late December, the price has now dropped a sizeable $160 to around $1,070. Looks like that run to $2,000 that some pundits have predicted is on hold for now. It may be a long time before gold ever trades that high.

To see the chart in its original size, click here.

The Bottom Line: As you can see from the chart of April gold futures above, the technicals suggest that the $1,020 level is a solid support level.

How to Profit: If you’re looking to play the market from the long side, the main options are similar to oil…

• SPDR Gold Shares (NYSE: GLD): Like USO, the ETF tracks the front-month gold futures.
• Gold Futures Options: You can also go for futures options that trade on the COMEX. Again, stick to limited-risk option strategies.

How to Hedge Your Bets As Silver Breaks Below Support

As for silver, it’s followed gold’s lead, except for one key factor: It’s currently trading under the 200-day moving average. Having traded up to a high of $19.50 as recently as December 2009, it’s now hovering around $15.20. That’s $21,500 per single contract. Imagine holding 100 contracts?!

To see the chart in its original size, click here.

The Bottom Line: Because it’s breached that 200-day support level, silver might not hold up as well as gold in the near future. But if gold starts to move higher, silver will be sure to follow. Tread lightly with this market, as it can move fast.

How to Profit: If you’re not sure which way a market will move (in this case, silver), there are two options strategies that can take advantage of a move in both directions – a straddle or a strangle. In a sense, you’re taking a bullish and bearish position at the same time. And while it costs more money to execute both trades (since you’re buying two options at once), the reward is unlimited.

• iShares Silver Trust (NYSE: SLV): This is the ETF and trades in the same way as USO and GLD.
• Silver Futures Options: These trade on the COMEX.

Getting An Early Jump on the Beans

Finally, let’s hit the soybean market.

The bulls start to come out of the woodwork in the early spring/summer here, with traders trying to gauge planting intentions, based on the carry-over amount from the previous year’s crop. In short, they’re trying to figure out if there will be enough supply to make it through the season.

But with the threat of drought, frost, or excess rain over the growing months, most traders like to gamble on the upside movement of soybeans. This is when you can see outrageous bullish spurts occur… only to be reversed within the next few days.

With soybean futures currently trading at near-term lows, taking a small bullish position at good levels now could reward you later.

The only way to truly play this market is via futures options that trade on the floor of the CBOT. Soybean options trade in the pit and on the CME electronic platform during the day and then exclusively on the electronic platform during the night.

You can buy outright call options, or call option spreads. I suggest looking at the November 2010 options to give plenty of time for the trade to mature.

Good investing,

Lee Lowell

Editor’s Note: It’s no surprise that commodities are volatile. After all, they’re essential, everyday products that take their cue from renowned economic forces like supply and demand. Toss in any geopolitical disruptions, adverse weather conditions, and a hefty bout of speculation from hedge funds and institutions and you’ve got the recipe for a roller coaster.

And it’s this kind of volatility that baffles regular investors. Trying to judge which way an asset will move… when it will move… and how far it will move is a tough task. But when you know how to buy the stocks you want (be they commodities stocks, or otherwise) for the price you choose (a big discount to the current price) and get paid passive income for it, you’re way ahead of the game. It’s a strategy that Lee Lowell has perfected better than anyone else we know – and you can find out about it here.

by Lee Lowell, Stock and Commodity Option Specialist
Tuesday, January 12, 2010: Issue #1173

“So what do you expect from the commodity markets in 2010?”

If I had a dollar for every time I’ve been asked this question over the past few weeks, I’d be able to buy myself an ounce of gold!

I’ll tell you what I’ve told my friends and colleagues: More of the same. Just because it’s a New Year doesn’t mean we should expect commodities to behave much differently than they did in 2009.

In my final Investment U column of 2009, I highlighted the crude oil and gold markets as the ones to watch as we head into this year. And neither has disappointed so far.

Although both have enjoyed impressive upward runs, they’re set to remain the key drivers within the commodities sector.

Here’s my latest analysis, along with some tips on how to profit…

Investors Locked In Oil and Gold Profits in 2009

It was no surprise to see investors lock in some profits from the gold and oil markets as 2009 came to a close.

In fact, oil futures shed $10 a barrel over the first half of December, striking a low of $70.83 before almost retracing the entire move. It ended 2009 with an $8.50 run to close out the year at $79.36 – a gain of around 43%.

As for gold, investors grabbed some major end-of-year profits here, too, sending the metal’s price down by $130 per ounce in December. Still, the 2009 closing price of $1,095 represented a gain of about 26% for the year.

But with 2010 now in full swing, the bottom-fishers and bullish participants have come back out to play, driving both of these markets right back up. Here’s what to expect…

Why Oil and Gold Will Head Higher… And How to Profit From It

As you can see from the charts below, traders haven’t hung around.

The price of oil has rallied by $4 to a 15-month high of $83.50, while gold has bounced off its December lows and added $45 an ounce to around $1,157.

To see this chart in its original size, click here.

To see this chart in its original size, click here.

From here, I don’t see any reason why oil and gold won’t continue their bullish moves. Consider these two factors…

• Inflation: We’re likely to see inflation tick higher at some point in 2010 – a scenario that bodes well for both commodities, as investors use them as hedges against higher prices.
• Speculation: Over the past year or two, both oil and gold have gained massive momentum from speculation. Once a commodity market gets going, speculators (such as banks, hedge funds, and large institutional traders) can drive the price considerably higher. This merely intensifies the move.

And there are a few ways to participate in bullish moves…

• ETFs: The easiest, quickest and often most cost-effective way to invest in oil and gold is to buy one of their respective ETFs (exchange-traded funds). They trade just like stocks on the major exchanges and aim to track the price of the underlying commodity. For example, you can go for United States Oil (NYSE: USO) or SPDR Gold Shares (NYSE: GLD) – playing the upside by either buying the shares outright, or through call options.
• Futures Options Contracts: A more direct way to play the oil or gold market is through futures options contracts, which trade on the NYMEX and COMEX, respectively. However, be sure to employ limited-risk investing strategies like credit spreads and give yourself a time horizon of at least three to six months with the options to protect yourself from price fluctuations along the way. The June 2010 contracts are very popular and liquid in both oil and gold.

Lastly, I want to highlight a commodity market that typically offers the best trading opportunities just once a year – during hurricane season – but which is facing a serious problem right now, too…

How Ice Could Heat Up Your Commodity Portfolio

Even Florida hasn’t been immune to the brutal cold snap affecting much of the United States at the moment.

But despite the cold, orange juice farmers in the state are sweating. The record low temperatures have the potential to hurt the orange crop.

The orange juice futures market has reacted to the lower crop yield scenario by scooting higher over the past two weeks. But beware: While conventional wisdom might be to play a continued price rise, the rally could be for naught. So far, we haven’t seen damage to the orange crop and a contrarian trade might be the best move here.

To see this chart in its original size, click here.

So if you’re looking to buck the trend and play this potentially overheated market to the downside, a bearish trade could prove very profitable if the orange crop emerges relatively unscathed. I suggest you look into limited-risk put option strategies, specifically put option debit spreads, using May 2010 options. Futures options on orange juice trade on the ICE/NYBOT exchange in New York.

Good trading,

Lee Lowell

by Lee Lowell, Stock and Commodity Option Specialist
Thursday, December 17, 2009: Issue #1160

If you’re looking for some calm during the market’s ongoing storm, don’t expect to find much in the commodities sector.

Not that this is a bad thing.

If you know what you’re doing, commodities offer some of the most lucrative and potentially explosive profits anywhere in the investment world. And because simple supply and demand is the key driver for many of these everyday products, it’s a sector ripe for volatility and speculation from hedge funds and large institutions.

Heck, you only have to look at the oil market to see that in action.

It’s not uncommon to see prices cycle from highs to lows and back to highs again in a relatively short time. And it’s this rapid-fire, rollercoaster movement that causes many would-be commodities investors to park themselves on the sidelines, rather than risk their cash.

But this is often a mistake – particularly since there are some quick and easy ways that investors can take advantage of the world’s commodities. So let’s see what 2010 has in store…

Why The Price of Oil Is Headed Back to $100

It wasn’t long ago that oil prices blasted to all-time highs around $147 a barrel (July 2008, to be exact).

But they then set off on a remarkable decline that culminated with the price sinking to lows around the mid-$30 level by early 2009 – a full $115 or so lower than the record high, which equates to a staggering $115,000 move in equity on just one contract.

But as the chart below illustrates, oil has spent most of 2009 busily clawing back a sizeable chunk of the downward move – and I expect that trend to continue in 2010.

To see this chart in its original size, click here.

With momentum still on the bullish side, oil prices should continue to rise next year, due to the following factors…

• Global oil demand is ticking higher.
• Geopolitical issues are ongoing in the Middle East and oil-producing parts of Africa.
• Oil is a great speculator’s market – a fact that the massive amount of media attention helps to perpetuate.

In addition, the price of oil currently sits just above a major support level – the green 200-day moving average.

Right now, oil is still about $10 away from its high of $82 in October, but look for the price to test the $100 level again in 2010.

So how do you play the move?

Two Ways to Trade Rising Oil Prices

It’s not as difficult or risky as some in the media would like you to believe. The easiest way to trade oil, aside from investing in individual oil stocks, is to go for the very popular and liquid, exchange-traded fund (ETF).

• United States Oil (NYSE: USO): This trades like any other stock on the NYSE and gives investors a safer, cost-effective way to capitalize on the movement of oil prices. It also has options available.

If you’re familiar with commodities trading, though, you can opt for this route…

• Futures Options: You can trade oil directly through the futures, or futures options market on the floor of the NYMEX. But I suggest you steer clear of futures contracts and stick with limited-risk call option strategies.

The June 2010 options offer the best value right now, and whether you play them through the futures options market, or USO, it should give plenty of time for your directional prediction to play out.

But given the volatility of the oil market, if you have profits, take some money off the table.

Now onto the gold market…

Gold $2,000? How to Play New Highs for the Yellow Metal in 2010

They say a picture tells a thousand words, so just take a look at the chart below…

To see this chart in its original size, click here.

Having begun 2009 trading around $850 an ounce, gold has spent the year shooting higher. The frenetic run culminated with an all-time high of $1,218.

The reason is two-fold: The U.S. dollar’s demoralizing decline, coupled with the weak state of the U.S. economy that has seen many investors flock to traditionally safer investments like gold. Mix in a hefty bout of bullish speculation and you’ve got the recipe for higher prices.

But with gold prices falling from that lofty perch over the past couple of weeks, we may well see plenty of investors trying to “buy on the dip” and take advantage of the next upward move. These are likely the same investors who believe the dollar will continue to languish, so expect to see gold set more new highs in 2010. Some analysts are even calling for gold to top $2,000 per ounce.

In the short-term, however, we could see gold continue to pull back to the 50-day moving average line just under $1,100. And if that line is breached, there is solid support at the 200-day moving average at $985.

If you want to take advantage of the pullback by buying gold on the current dip, there are a few ways to play your prediction…

• SPDR Gold Trust (NYSE: GLD): Like USO for oil, GLD represents an easy, cost-effective, safer way for you to capitalize on the movement of gold prices. But if you want more leverage, you could buy call options on GLD. This allows you to put less money into the trade while potentially making a much larger percentage return than just buying shares of the ETF outright.
• Gold Futures Options: If you want to go to the source, you can buy gold futures and/or gold futures options that trade on the COMEX in New York. But given the high risks associated with trading futures contracts, we recommend you stick with limited-risk call option trades instead. Go for option expiration dates at least six months in the future. June 2010 gold options are your best bet.

Good investing,

Lee Lowell

Editor’s Note: “I’m not a big investor, but I’ve collected $11,591 so far.” That’s what one subscriber had to say about Lee Lowell’s Instant Money Trader service. Another writes in and says, “In just a few months I’ve already collected $13,121.”

There’s no catch, no gimmicks and no tricks. The money comes courtesy of a simple investing strategy that Lee uses, which gives investors the chance to buy the stocks they want at huge discounts and pocket passive income while they wait for the shares to hit that level.

And so far, it’s generated $13,470… and counting. To learn more – and find out how you can get on Lee’s “instant money code” list – please click here.

by Lee Lowell, Stock and Commodity Option Specialist
Wednesday, November 25, 2009: Issue #1145

Forget Black Friday. The stock market has 3,000 items on sale – and ready to give you cash back… instantly.

Over the past few weeks, I’ve discussed how you could have sold put options to go long on gold or silver through their respective ETFs – the SPDR Gold Shares (NYSE: GLD) and the iShares Silver Trust (NYSE: SLV).

However, I’m going to show you how it works equally well on regular stock options, too. And with more than 3,000 stocks that have options available to trade, you’d better believe there are plenty of opportunities for you to grab the double benefit of being able to buy stocks at a discount to the current price and also get paid.

This is something I do all the time in my Instant Money Trader (IMT) service, using put options on quality Dow Industrial and S&P 500 companies. Here’s how it works…

Why You Should Sell, Not Buy Options

When it comes to buying options, here’s the phrase that doesn’t pay: time decay.

Most buyers tend to overlook this crucial factor when they buy options contracts. That’s because while an option is in existence, it will lose a bit of its value every single day, as it heads toward expiration.

Simply put, if the stock or commodity doesn’t make the desired move in the allotted time, the option value just melts away, giving the buyer almost no chance of making money.

The facts bear this out, too. The Chicago Mercantile Exchange reports that up to 80% of out-of-the-money options will remain that way at expiration and expire worthless.

So if buyers lose out, it stands to reason that sellers profit in their place. This is the overriding reason why we like to sell out-of-the-money options. The bottom line is that our chances of profiting are greater.

Not only that… if we’re obligated to buy shares of our chosen company at options expiration, we get to buy the stock at the price we selected – one we deem extremely attractive.

Here’s how it works in reality…

The Breakdown of a Put-Sell Trade

In March 2009, we initiated a put-sell trade in my IMT service on one of the largest companies in the world – General Electric (NYSE: GE).

At the time, GE was trading near $10 per share – a level it hadn’t seen since September 1995. We felt that potentially buying GE even lower would represent an outstanding long-term bullish trade if we got the opportunity. Specifically, we aimed to buy it at $7.50 per share.

• We sold the June 2009 $7.50 put option contract for $0.65 per contract.
• Since each option contract obligates us to buy 100 shares of stock, that’s $65. In our model portfolio, we sold 10 contracts – equivalent to 1,000 shares.
• At that point, we were obligated to buy 1,000 shares of GE at $7.50 per share if GE traded down to $7.50 by June 2009 option expiration.
• With the $0.65 per contract that the option buyer was paying, we collected a cool $650 ($0.65 multiplied by 10 contracts = $650).

So the trade was simple: We decided that we’d be happy buying GE for $7.50 per share, sold the corresponding put options at that strike price and collected “instant money.”

As long as you’re comfortable with your buy price ahead of time, you’re entering into a win-win scenario. You not only get to collect money upfront from the option buyer, but also potentially get to buy a stock at the price you want.

As you can see on the chart below, GE did dip below $7.50 (it actually traded down to $5.72), but popped back above $7.50 before expiration.

The deciding factor in whether you’ll be able to buy the stock at your price is if the stock actually closes below the strike price at which you sold the options on expiration day.

In our case, GE stayed above $7.50 by option expiration, so the option expired worthless. We would have kept the full $650 that we collected on day one of the transaction, but we opted to take the trade in a different direction…

Trade Not Working Out? No Problem… You Can Still Profit With Put Options

As with any transaction, you can always offset your position by bouncing to the opposite side. If you buy an option, you can offset it by selling it. And if you sell an option (as we do in IMT), you can offset the trade by buying the option back.

This is what we did with GE.

• When GE started to move back up towards $12 per share, we opted to buy the option back for $0.15 per contract and closed the trade.
• Remember, we sold the option for $0.65, so we locked in a $0.50 gain per contract.
• On one contract, that would be $50, but because we sold 10 contracts, it equated to a $500 gain.

There’s nothing wrong with closing out a trade before option expiration. In fact, you can close any option trade at any time you choose.

So, although we never got to buy GE at the price we wanted ($7.50 per share), we still got $500 for our trouble while the trade was active. This is the exact type of trade that we execute in IMT all the time. And with a few positions open each month, we can collect a tidy sum over the course of the year, giving your account value a nice boost.

Good trading,

Lee Lowell

Editor’s Note: Stay tuned for a special “pre-parade, pre-turkey” report on Lee Lowell’s Instant Money Trader service in your e-mail first thing tomorrow morning. But if you don’t want to wait until then, or will be waist-deep in Thanksgiving activities, you can take a look at it right now.

by Lee Lowell, Stock and Commodity Option Specialist
Monday, October 26, 2009: Issue #1123

When it comes to the energy sector, this market is the undoubted leader of the pack in terms of making large intraday moves and the effect it has on the broader economy and other markets.

And right now, it’s moving like a wildfire.

I’m talking about the oil market, of course.

Back in my August 25 column, I forecast that speculators would drive oil to $80 in the near-term, with $90 probably right behind.

Sure enough, December 2009 crude oil futures (the front-month contract right now) has just tagged the $82 per barrel level. What’s more, it came after hitting a recent low of $65.55. Even for the oil market, a two-week, $16.50 non-stop run is an impressive move.

To see the original, click here.

So what’s coming next for this highly influential commodity?

Two Ways to Take Advantage of Oil’s Continued Rise

With the perception that the U.S. economy is finally moving out of the doldrums, all the hedge fund and speculative money that has sat on the sidelines for months is finding a home in the oil market. Depending on which report you read, world demand for oil is expected to pick back up, and this is adding fuel to the fire.

Since hitting its lows in March, you can see the unabated move higher. Oil is trading above all three popular moving average levels, which just adds to the bullish momentum.

Once oil moved above $76 per barrel, it was off to the races. But we should see a touch of consolidation here, as all markets need to take a breather after such a strong move.

After that, we don’t see any reason why oil shouldn’t continue to keep moving higher. The $90 level is next in line and we could even see $100 again by the end of the year.

To play the move, you could do the following…

• Buy shares or options of exchange-traded fund (ETF) like United States Oil (NYSE: USO). It tracks the movements of the crude oil market, but allows you to trade it directly from your stock brokerage account.
• Go directly to the source – the trading pits of the New York Mercantile Exchange (NYMEX). This is where a majority of the trading volume still takes place and it offers a safe forum for buying and selling futures and futures options contracts. Although you’d need to conduct a trade through a commodity broker, you can access these markets electronically. Stick with limited-risk option strategies.

Four Reasons Why Natural Gas Has Set a Low… and is Ready to Rise

Having hit major new highs in the summer of 2008, it has been a long ride down for natural gas.

Simply put, that’s because natural gas supplies are reaching maximum capacity. With the Energy Administration Information’s announcement last week that supplies reached a record 3.734 trillion cubic feet, there’s not much room left to hold all the supplies, which are reaching full U.S. storage capacity.

Naturally, traders have jumped on this huge supply as a “no-brainer” shorting opportunity. But as we’ve seen over the last few weeks, natural gas prices have only gone up. This leads to a few conclusions:

1. Shorting the natural gas market was a great strategy for a year, but it’s finally reached an end.
2. No matter how bad the fundamentals may be, all the news finally gets factored into prices.
3. Winter is approaching and colder weather could draw down supplies.
4. Those who were too late to short to the market are being forced to buy back their positions.

At this point, I believe this market has finally put in a solid bottom and should see higher moves going forward. It looks like the technical side of the market is the driving force right now and with the price holding above key moving averages, we should continue to see it move upward.

To see the original chart, click here.

There are two ways to play the natural gas market…

• The United States Natural Gas (NYSE: UNG) ETF. Like USO, you can play UNG directly via regular shares, or options contracts through your stock brokerage account. Be warned though: UNG is undergoing potential changes to its holdings profile, as the Commodity Futures Trading Commission (CTFC) is discussing possible regulatory legislation that would curtail futures contracts purchases by large speculators and impose caps on the number of futures contracts they can hold.
• Futures and futures options contracts in the commodity trading pits at the NYMEX. Once again, we recommend sticking with limited-risk option purchases or option spread purchases.

These Two Grains Are Making Gains

Like natural gas, corn and wheat have remained stuck in the doldrums since hitting highs in the summer of 2008.

However, over the past month, both have tacked on impressive gains. I profiled both markets on August 25 and October 13 and noted how higher prices could ensue, given that crop sizes could be lower this year.

In addition to the fact that it’s tough for corn and wheat to move much lower, we’ve got cold, wet weather starting to hamper prime growing areas in the Midwest. This coaxed bullish speculators into the market and the upward moves began.

Corn: We pegged $3.90 per bushel for the December 2009 corn futures as a first upside resistance point, as that coincides with the 200-day moving average. Not only has corn hit that mark, it has powered through it, hitting $4.05 late last week.

To see the original chart, click here.

Although there is no quality exchange-traded fund for the corn market, you can still participate through the use of futures options contracts that trade on the floor of the CBOT (Chicago Board of Trade). The March 2010 and May 2010 options contracts are the best choices.

Wheat: We’ve seen an equally impressive move in the wheat market. It has tacked on a solid $1.10 per bushel move ($5,500 per contract) and looks set to continue its trek higher.

Based on the December 2009 futures contract (the most active contract), we could see wheat move up to $5.70 before it tackles the next psychologically important level of $6.00. We could easily see this occur, especially if the weather continues to hamper the harvest.

To see the original chart, click here.

Like corn, wheat futures and options trade on the CBOT. Again, focus on the March 2010 and May 2010 expiration periods. Grain options are worth $50 per cent, so if you bought an option for 10 cents, it would cost you $500 per option. That’s a small investment for a potentially unlimited upside.

Good trading,

Lee Lowell

Editor’s Note: Commodities expert and former NYMEX pit trader Lee Lowell is on a roll this year. With two months of 2009 still to go, he’s notched up a 93% win rate from his recommendations in the Instant Money Trader advisory (15 out of 16 winners). The strategy behind this extraordinary success is a uniquely powerful one that allows you to buy the stocks at the price you want – and receive “instant money” in your account, just for doing so. For more information, check out his full report here.

PR: wait… I: wait… L: wait… LD: wait… I: wait… wait… Rank: wait… Traffic: wait… Price: wait… C: wait…

by Lee Lowell, Advisory Panelist
Tuesday, September 29, 2009: Issue #1104

So what exactly is the best way to grab profits from the important and often explosive world of commodities?

In my column last week, I showed you some of the spectacular moves that the four most actively traded commodities (oil, natural gas, gold and silver) have made over the past couple of years.

And when you see the wide trading ranges, it also gives you an idea of just how lucrative they can be.

But you don’t need to be an expert to take advantage. You just need to know how to play them intelligently, using strategies that minimize your risk and maximize your profit potential.

Easier said than done, right? Nope. That’s what I’m here for. And today, I’m going to show you how to add commodities to your portfolio in a much easier way than through futures or futures options, and a much better way than by just buying commodity stocks outright.

Two Reasons Why You Should Use A Put Option Strategy

Perhaps the best way to play commodities is through the options market.

But if you think “commodities and options” in the same sentence sounds scary, think again! Let me explain to you how you can do so, using one of my favorite strategies when you want to take a bullish stance.

It’s called “put-option selling.”

Let’s run through the basics first…

In the options market, a buyer of put options has a bearish stance on the underlying asset (be it the overall market, or stock). Alternatively, a seller of put options is adopting a neutral or bullish stance on the underlying asset.

And the flexibility of the options market allows you to sell options as an opening transaction instead of having to buy them.

In this case, we’re the put-option sellers – a technique that has a superb double benefit.

• You receive income upfront – yours to keep, no matter what happens with the rest of the trade.
• You have a chance to buy the underlying asset at the price you want – and at a large discount to the current price.

Here’s how it works…

Create Your Own “Discount Store”

Whenever you sell an option contract (either a call or put option), the option buyer pays you for it. This money is yours to keep and it gets immediately placed into your trading account.

When you sell a put option contract in particular, not only do you get the immediate cash payment, but you are also giving yourself the chance to buy the underlying asset at the (strike) price you select.

In short, someone is paying you cash so that you can buy the asset at the price you want. How great is that?

Let’s run through a hypothetical example – using the commodities market – to show how put-option selling is as simple as it seems…

Say you’re bullish on a gold stock, but the price has run up too much for your liking. You want to wait for a pullback to the 200-day moving average area before you buy.

Now that commodities exchange traded funds are an extremely popular and easy way to trade commodities, you decide that you’re going to use the SPDR Gold Shares ETF (NYSE: GLD). Here’s how…

How to Buy Gold At the Price You Want

GLD tracks the price movement of physical gold and is roughly one-tenth the size of the front-month gold futures contract.

And because it’s an ETF, it trades just like a stock, so you can buy and sell it through a regular stock brokerage account.

However, with it currently trading around $97, you want to wait for a pullback to the $91 area before buying, as that’s the price at which you feel comfortable owning the shares.

So what’s the best way to take advantage? Regular investors may put in a stock buy order at $91 and hope GLD comes down to that level. But if it doesn’t, you’ve wasted your time.

Here’s where the put-selling strategy comes into play.

• Instead of placing a buy order, you could opt to sell a GLD December 2009 $91 strike put option contract (GLD-XM) for $1.40 per contract.
• What does this do for us? Well, for every put option contract you sell, the option buyer will immediately pay you $140 (because there are 100 shares in each options contract – $1.40 multiplied by 100 = $140).
• If you sell 10 of these put option contracts, you’ll receive $1,400 into your trading account.

That’s right… instant cash just for placing a trade. So what’s the catch? Only that you’re obligating yourself to buy those GLD shares at $91 – which is the price you want!

However, you must ensure that you only sell as many contracts as corresponds to the number of shares you want to buy. For example, if you sell just one contract, you’re obligated to buy 100 shares of GLD for $91 by options expiration. And if you sell 10 contracts, you’d be on the hook for 1,000 shares at that $91 price.

Get Proactive Through Put Option Selling & Get Cash

So instead of just sitting and waiting to see if GLD gets back down to $91 before you buy it, at least when you sell put option contracts, you pocket $1,400 in cash (on 10 contracts) while you wait.

It’s a win-win situation: not only do you get paid money while you wait, you still gain the opportunity to buy GLD shares at the price you want ($91) if it trades back down there by options expiration.

Speaking of options expiration, let’s cover that scenario…

Your Two Scenarios At Options Expiration

Only two scenarios will occur when the December options expiration rolls around…

• If GLD is still trading above your strike price of $91, then the put options will expire worthless and you just keep the $1400 free and clear. The trade is now over.
• If GLD is trading below your strike price of $91, then you’ll be “assigned” the shares on your put options and will become a regular shareholder of GLD at $91 per share. At this point, you’ll have to pay cash in full for the shares. But remember, you get to buy GLD at your chosen price.

A few points to remember:

• You’re selling the put option contract as the opening transaction, not buying it.
• You can buy the option back any time you wish. You don’t need to wait for option expiration to take action.
• You must be approved to trade option contracts through your stockbroker. The broker will also require you to keep a portion of the money it would cost for the shares in your account during the trade (a “margin requirement”) – but not the full amount.
• If you’re assigned the shares, you simply take the same risk management actions you would for any other bullish stock position you own.

The Bottom Line on Selling Puts

If you’re bullish on a stock, but find the price is too high, why just hang around and wait for it to decline? You can earn some cash while you wait through the put-selling strategy.

If the stock ends up below your strike price (the price you want to buy the shares) at option expiration, then you succeeded in your quest. You’ll be able to buy the shares at your comfort level, while still retaining the cash paid to you on day one of the transaction. A no-brainer in my book.

Good investing,

Lee Lowell

Editor’s Note: Let the media and regular investors fret about what the stock market is doing on a daily basis. As you can see, the put-selling strategy is one you can use in any market and still get the same two great benefits: Instant cash and the chance to buy the stocks you want at the prices you want – usually at a hefty discount.

It’s the very same strategy that Lee uses in his Instant Money Trader service – a service that has generated 13 winning trades out of 14 since it launched in November 2008. For more details on this “instant money” and discount-buying strategy, take a look at this report.

PR: wait… I: wait… L: wait… LD: wait… I: wait… wait… Rank: wait… Traffic: wait… Price: wait… C: wait…