by Lee Lowell, Advisory Panelist
Tuesday, August 25, 2009: Issue #1075

If you’re looking for what I call a “blast-off” move, look no further than the sugar market.

Since April, the commodity has embarked on an extreme upside move, shooting to highs not seen since sugar hit $0.45 per pound in 1981. The chart below illustrates it perfectly…

Sugar Chart: http://www.investmentu.com/images/sugar_082509.gif

The main reason for such a large jump was news from India, which indicated a potentially low sugar crop.

Over the past couple of weeks, the sugar market has surprised many analysts by trading even higher. I say that because while fundamental news like this often results in impressive-looking moves, its impact has a limited lifespan.

So be warned. Moves like this usually indicate that the news is factored into the price and we’re entering the last phase of the bullish run.

Based on my experience in the commodities markets, where I’ve seen this type of pattern many times, I believe we’re headed for an inevitable turnaround for the sugar market. Here’s what you can do to profit form this, and two other commodities to keep an eye on.

How to Play the Sugar Market to the Downside

If you want to play the sugar market to the downside, I suggest you buy put option contracts, or by selling limited-risk call option spreads. At the moment, the October 2009 and March 2010 option contracts are the most active.

As you can see on the chart of the October 2009 futures contract above, the price surpassed the $0.2300 per pound level twice, moved back to $0.2150 per pound, then trotted past the $0.2300 mark again.

This is what technical analysts call a “triple top” and if sugar doesn’t move above $0.2300 again, we can seriously count on the market having a big retracement lower – most likely between $0.1900 and $0.2000 per pound.

So if you play the downside and it does make that retracement, I’d suggest taking profits at that $0.1900 to $0.2000 level.

Oil Heading For $80… And Beyond: Three Ways to Play the Move

Given the historic rise and fall of the oil market and the current state of the global economy, you’d never think that it could even consider the idea of moving higher again.

But the market continues to amaze everyone with its resilience and strength, with the current price hovering around the $74.50 per barrel area.

And with conflicting reports on the global demand for oil over both the near term and long term – plus weekly inventory reports that show a strong buildup of supplies one week, followed by draw-downs the next week – it’s easy to see how this can be a very treacherous market.

Here’s the deal: Regardless of what statistics are released and how Congressional attempts curtail oil trading limits, it’s clear that the oil market continues to bring in speculators from all levels – and will most likely keep trekking higher.

Check out the oil chart below. The price is currently trading above all three main moving averages (20-day, 50-day, 200-day) and is now looking to pop above the recent high of $75.27 from June 11. If that happens, we could easily see oil shoot to $80 from there – with $90 probably right behind.

Oil Chart: http://www.investmentu.com/images/oil_082509.gif

There are a couple ways to play the oil market – be it on the long or short side…

• The futures and futures options that trade on the floor of the NYMEX. This is usually best for experienced commodities investors.
• Through an ETF like United States Oil (NYSE: USO), which tracks the price performance. This gives you broad exposure to the market through one investment, rather than playing individual companies. It’s also a less expensive way to play the market and doesn’t require a commodity trading account.

You can either play the USO shares directly, or the options on the ETF. No matter whether you’re bullish or bearish, pick an option expiration period at least three to six months in the future, as that will give your directional call ample time to mature.

The Grain Markets: Summertime Means We’re on “Grain Watch”

Finally, let’s hit the grain markets (corn, wheat, soybeans)…

During summer, these markets can really turn to the upside, as the growing season can be extremely volatile, particularly if the weather is less than ideal.

The June-October period typically sees more speculation in the grain markets than any other time of year, purely because of the prospect of more volatility. Regardless of what any fundamental data may show, nothing can compare to the sheer panic-buying when we receive weather reports that show how a drought could wipe out a year’s worth of crop.

And some of it doesn’t even need to necessarily happen… it’s merely the potential for it happening, based on previous history. Fortunes can be made or lost in just those few summer months.

Buy Corn Commodities Low… And Ride the Bullish Move Higher

This year, for example, we’ve seen corn and wheat prices shuffle around their annual lows, due to government reports that show ample planting, high carry-over levels from last year and crop production that is ahead of schedule.

Corn Chart: http://www.investmentu.com/images/corn_082509.gif

With corn currently at its lows, if any potential weather disruption does occur over the next few months, taking a bullish position here could be a low-risk way to get involved.

Like with the sugar market, the best way to play corn is through limited-risk option strategies. Stick with expiration months of December 2009 or March 2010, so that you give the market plenty of time to mount a bullish move.

Good trading,

Lee Lowell

Editor’s Note: Lee Lowell has worked in the commodities markets for almost two decades, including a six-year stint as a market maker on the trading floor of the NYMEX, where he helped set the daily prices for oil and natural gas. He now runs a successful commodities trading service – The Triple-Zone Profit Trader – where he runs down the moves in all the main markets – and shows investors how to take profitable advantage through specific recommendations. Find more information about The Triple-Zone Profit Trader.

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

by Lee Lowell, Advisory Panelist
Saturday, August 1, 2009: Issue #1056

I’d like to focus today’s segment on the markets that typically see heightened activity during the summer months, due to the fact that it’s their prime growing season.

Specifically, that means the grains and orange juice markets.

As we’ve mentioned before, these products are heavily dependent on the weather for their yield. So if erratic weather patterns affect the crops’ growing cycles, it’s very likely that their prices will rise.

These products aren’t just consumables either. The farmers and food/drink companies that are front-and-center of their production use these markets for income production, too. They do this by using commodity futures and options contracts as hedging mechanisms.

So let’s hit the grains market first…

How To Play The Grain Market Upside With Commodity Futures

A few weeks ago, we keyed in on corn and wheat, stating: “Most of the speculators who play these markets are bullish in nature, so a majority of them are placing bullish bets, either in the form of outright long futures contracts or long call option contracts.

“Right now might be one of the best times to get into the grain markets on the long side because not only are we right smack in the middle of summer, but the prices of corn and wheat have just undergone a five-week massacre to the downside.”

Both commodities markets are still meandering around their lows, which offers another good opportunity to get in on a speculative bullish move. Here’s how to do it…

Take a look at the daily charts below for the corn and wheat December 2009 futures contracts.

If you believe in the seasonality of bullish moves for the grains, and are willing to take a speculative bet, now is a good time to consider a trade.

Your best bet is to hit the futures options contracts that trade on the floor of the Chicago Board Of Trade (CBOT). But make sure you do so in a way that gives you limited risk and unlimited reward possibilities.

For example, that could include entering a call option spread or just buying call options.

For call options, look to play the December 2009 or March 2010 options expirations, which will give enough time for any major weather scares to produce a good upside run.

• Corn: Specifically, consider December 2009 & March 2010 call options with strike price levels from $3.50 and higher.
• Wheat: Use the December 2009 and March 2010 call options that have strike prices between $5.60 and $5.80, or higher.

You can also trade these contracts through the Chicago Mercantile Exchange’s electronic platform, where you can bypass the brokers in the option pits. These contracts are exactly the same as the other, so you can trade them whichever way works best for you.

The Orange Juice Markets – A Hot Spot For Speculators

Having last broken down the orange juice market one month ago, this market has become a hot spot for speculators, as hurricane season got underway.

At the time, the market had carved out a low and we mentioned that it was shaping up for a “potentially lucrative seasonal trade.”

It certainly didn’t disappoint. Over a two-week period, orange juice futures launched higher to the tune of 2700 points. Usually, a move like that will take a good portion of the summer to develop, but with the oversold conditions that existed, it was stronger and quicker than normal.

This served all call option buyers well – especially those who took our advice to buy the January 2010 $85 cent call options. At the time, these options were available to buy for roughly 900 points or lower. And with the 2700-point surge, they tripled in price, fetching prices of over 3000 points.

So what now?

At this point, we wouldn’t advise buying these options anymore. The feverish move has already happened now and OJ prices are beginning to fall back. This is usually a one-time event every year, and unless orange juice drops back down into the low 80-cent area quickly (based on the January 2010 futures), we don’t recommend buying calls at this time. Markets move fast and timing is very crucial.

Let’s take a quick look at our other favorite “weather-prone” commodity – natural gas…

Commodity Futures – Waiting on a Natural Gas Bull

We’ve been bullish on natural gas for a while now, as it slinks along the lows it’s carved out since it reached manic highs last summer (along with many other commodities).

Natural gas will eventually hit a bottom, as it’s an in-demand natural resource that will be around for a long time. We just have to wait patiently for the turnaround, as the market grapples with high underground storage supplies.

Like with the orange juice market, though, we know hurricanes can cause huge upside moves, as the majority of drilling rigs are centered in the Gulf of Mexico. If a few storms go rumbling through that area, it could be the impetus that eventually brings this commodity out of the doldrums. But until then, we’ll bide our time.

One of the ways we’re playing this market in my Instant Money Trader (IMT) service is by selling out-of-the-money naked put option contracts on the natural gas exchange-traded fund – United States Natural Gas (NYSE: UNG).

This ETF tracks the movements of natural gas futures contracts, giving investors a lower cost way to enter this market.

And by selling put options, it allows us to collect the option premium, while having an opportunity to buy natural gas at unbelievably low historical levels. Check out this article for more information on how to sell put options.

That’s all for this time.

Good investing,

Lee Lowell

P.S. If you’d like to find out more about profitable option transactions, take a look at The Instant Money Trader.

by Lee Lowell, Advisory Panelist
Stock and Commodity Analyst, Mt. Vernon Research
Monday, June 29, 2009: Issue #1029

Let’s say you’ve been interested in buying Microsoft stock and you feel $20 is a good price to pick up some shares. It currently trades at $23.50 per share, so you’ll need it to fall in price a bit before getting filled on the trade.

Most stock traders would just put in a “limit buy” order to buy the stock if/when Microsoft falls down to $20 per share. But there’s no guarantee that Microsoft will ever fall to $20 per share, and there’s no one paying this stock trader upfront for his time while they wait to buy Microsoft at $20…

That is unless you’re using a put selling strategy…

As an option trader, you can take the transaction one step further by selling a Microsoft $20 put option contract – you’ll receive the going rate for that option and receive instant income.

I recently showed Investment U readers some of the ins and outs of put options – you can read all about them, but right now I’m going to show you how to profit from a real life example of selling puts options.

Selling Naked Put Options – Strike Prices & Option Chains

When selling naked put options, it can be hard to grasp how the strike prices and contract prices work together until you understand what an option price list – or option chain – looks like.

Take a look at Microsoft’s option chain below:

Chart: http://www.investmentu.com/images/iu062909chart.gif

This is a typical option chain for Microsoft options that expire in January 2010.

• The strike prices are listed in the column in black. Since we’re interested in the $20 strike price, we look at the JAN10 20.00 line.
• Scan over to the “bid” column that shows how much you can receive for selling that $20 put option contract. The bid column shows $1.30 as the price. This translates into $130 you will receive for every $20 put option contract you sell because all prices are in listed in per share costs. And an option contract controls 100 shares of stock.
• For a typical 1,000 share stock trade, you can sell 10 put option contracts and instantly receive $1,300 in your account, no questions asked.

This is money for you to use anyway you see fit. No matter what happens, this money is yours.

In exchange for selling those 10 put option contracts and receiving your instant $1,300, you are obligating yourself to buy 1,000 shares of Microsoft at a price of $20 per share until the expiration day in January 2010.

At this point, you know ahead of time that you will be obligating yourself to buy 1,000 shares of Microsoft at $20 per share, for a total investment of $20,000.

Not only do you get to collect $1300 upfront just for placing the option trade, but you’re also giving yourself a chance to buy a stock that you want to own, at the price you want.

How great is that?

As long as you know this potential future transaction is within your financial means and trading plan, then it is a win-win situation for you.

When Selling Options, What Happens On Options Expiration Day?

So, when selling put options or any options, people often ask what happens when options reach their expiration date?

Only two things can occur at expiration – either the price of the stock is above the chosen strike price or it’s below.

• If the stock finishes above the strike price, then the trade is over and the option expires worthless. The option buyer walks away with nothing while the option seller gets to keep the upfront cash with no further obligations.
• If the stock finishes below the strike price at option expiration, the option buyer will “exercise” his right to the contract and you will be required to fulfill your end of the agreement – which means you end up having to buy a stock you wanted at the price you wanted.

Sounds pretty good to me. And all the while you still get to keep the upfront cash.

So in the case of our Microsoft example above…

• If Microsoft closes below $20 in January 2010, you will be obligated to purchase your 1,000 shares at $20 each. With the $130 received upfront for each option contract, this essentially reduces your cost basis to $18.70 per share once the transaction is complete. Not bad.
• If Microsoft closes above $20 at January 2010 expiration, the trade is over and the option expires worthless. You keep the $1,300 and are free to repeat the process again for another expiration period. This is the key to income generation.

As I mentioned in my article about selling naked put options article that up to 90% of option contracts will expire worthless, leaving you with the upfront cash payment.

After implementing this strategy for a while, you will come to see that most of the trades will expire and you’ll keep padding your account with instant income.

Using a Put Selling Strategy – Six Tips to Selling Options

A few guidelines to keep in mind when selling naked put options:

• Only sell put options on stocks you want to own. Do not use this options trading strategy on high flyers just to receive the upfront income.
• Only sell enough contracts to stay within your comfort zone. If you normally trade in 500-share blocks, then only sell five option contracts.
• If you are uncomfortable at anytime during the trade, or do not wish to own the stock at the strike price you’ve chosen, then you can unwind the trade at any point. All you have to do is buy back the put options you’ve sold.
• The option price will fluctuate during the course of the trade. It may get cheaper or more expensive while you hold it. The bottom line is – you’ll either get to buy the stock at expiration or the option will expire with no value.
• You will need to have an approved “option trading account” with your broker. This needs to be set up before making these transactions.
• You’ll always know ahead of time what your potential total outlay will be if obligated to buy the shares. No surprise endings.

That’s all there is to selling put options. It’s easy, simple and much safer than most investors imagine if you just stick to my six tips above.

Using Put Options With The Instant Money Trader

These are the profitable types of trades we execute in The Instant Money Trader service.

In fact, since launching in November 2008, we’ve had a 100% win streak, meaning all the options have expired worthless, allowing us to bank all the money paid to us upfront from the option buyers.

Although we concentrate on selling put options on high quality stocks within the Dow Industrials and S&P 500 that we’d be more than happy to own, we’ve yet to have to fulfill our obligation and purchase them.

This is mostly because we sell the put options that have the high percentage of expiring worthless. It’s fine with us, as we’ll gladly keep accepting all the instant money we get from these transactions.

We’re able to pick quality stocks that are paying good money to us, all the while knowing that we’ll either take possession of these great stocks or repeat the process for the next month.

Good investing,

Lee Lowell

P.S. If you’d like to find out more about profitable put option selling, take a look at The Instant Money Trader.

by Lee Lowell, Advisory Panelist
Stock and Commodity Analyst, Mt. Vernon Research
Friday, June 26, 2009: Issue #1027

Right now, bunches of savvy investors are getting paid cold, hard cash for nothing more than agreeing to buy stocks. Investors are giving them money to buy stock that they were looking to purchase anyway.

Sound crazy? Well it isn’t.

There’s an incredibly profitable, but little-known trading and investment strategy that you will come to love as much as I do because of all the “instant cash” it can generate for you.

In the lucrative world of options trading, this strategy is called “selling a naked put option.”

Sounds sexy, and to some it is, but really it’s an incredibly simple way to buy stock you want to purchase at a specific price – while having someone pay you to do it. It’s easy to do but there are a few things you need to know first…

Here’s how you can use this powerful options strategy to get paid for buying stocks.

Understanding Put Option Contracts

If someone has a bearish outlook for a particular stock, they can either sell the stock short or purchase a put option contract. My colleague, Karim Rahemtulla, discussed put options at length in “Short Selling Strategies” last week, but there are some terms to be aware of.

• When you purchase a put option contract, you gain the right to sell that particular stock at a particular price within a specified period of time. To do this, you must pay a fixed amount of money upfront, which is called the “option premium” to the option seller.
• The option seller gets to keep this upfront cash regardless of any future outcome of the transaction.
• The amount at which you can sell the stock is determined ahead of time by the “strike price” – the only price you’ll sell the stock at.
• The time period that the option is active for is also determined ahead of time – and it’s referred to as the “expiration date.”

So as a put option buyer, if the stock you choose ends up falling in price below the strike price you have chosen within the time frame, you will have a winning trade.

It sounds simple enough for most investors to make money hand over fist, but it’s not.

• In about 80% to 90% of option buyer’s transactions, the option will expire worthless and the option buyer ends up forfeiting the option premium he paid upfront to the option seller.
• Most option buyers (both calls and puts) do not end up picking the correct strike price and expiration period to give them a profitable trade.

So who really comes out ahead? The option seller of course – he gets to walk away free and clear with the money. So let’s put ourselves on that side of the trade.

The Secret to Selling Options

Sounds like being an option seller is no-brainer? Well, it is – if you do it correctly.

For getting paid upfront, the option seller also has an obligation to fill if certain conditions arise. His obligation is to buy the stock from the option buyer (remember, the option buyer wants the stock to fall in price) if the stock falls to a certain price within the expiration time period.

Here’s where it gets good.

As a put option seller, you also can determine ahead of time where you would feel comfortable buying a stock if it dropped in price, and then collect the cash from the option buyer.

This is how to be a smart put-option seller – only sell put option contracts at strike prices at which you would like to own the stock if called upon to do so.

That’s it.

The secret to selling naked put options is to pick a stock that you would potentially like to own at a cheaper price than where it currently trades, sell the corresponding strike price, collect the money from the option buyer, and then sit back and wait until option expiration to occur.

These are the profitable types of trades we do all the time.

In fact, since launching The Instant Money Trader service in November 2008, we’ve had a 100% win streak, meaning all the options have expired worthless, allowing us to bank all the money paid to us upfront from the option buyers.

And it couldn’t have been easier.

Good investing,

Lee Lowell

P.S. I know this might sound a bit overwhelming, so next week I’ll walk you through an example to see how simple this strategy really is. In the meantime, if you’d like to find out more on the put option selling, take a look at The Instant Money Trader.