So as i drink my morning coffee and prepare to fly out with my family to Chicago I am reading through hundreds of reader email and I came across this one. Boy I would be as rich as Bill Gates if i charged a dime for each, “just one more question” lol

No truthfully I love it.

I really enjoy helping subscribers when I can.

So when I get an email like the one I got today I feel compelled to answer it since I love to trade and I love helping people… Read On… Best, Kevin

—–Original Message—–
From: Andee
Sent: Friday, August 01, 2008 4:35 PM
To: RTA Kevin Kerr
Subject: Revised question

What is the difference between all these numbers: for example 1250, 1500, 1700, 1800 in commodities?
When I’ve reviewed your online portfolio and alerts, you’ve chosen sugar calls that are between 12 and 18. When I review option quotes, 9 thru 20 are available. If we chose the example of corn, you picked a 520/580 call, in a field that expands from 140 thru 1000. Or in OJ, you pick a 160, in a field of 80 thru 250.

1) What are these numbers?
These are the strike prices. They are a range of prices you can choose from that the underlying commodity futures may or may not trade. Every commodity is different in which “strike prices” they offer and months they trade, pricing can often be different too. The best way is to check the contract specifications for the particular commodity.

2) Are some of these contract numbers more commonly traded than others?
Yes, usually strikes that are closer to where the underlying futures are at trade more, not always though. For exmaple if gold futures are trading at $900 and you look at the $910 calls or $890 puts they will likely have much more activity than the $1500 calls or $600 puts, simply because there is more chance of those prices actually trading. A deep “out of the money” or call would be to buy a $1500 call, it is a long way off, at least for now. Does that make sense? A deep in the money call would be say if you bought the $800 calls, since gold is at $900 those calls already have intrinsic value, that is a deep int he money call where a $1500 call would be deeply out of the money, far away in other words. The more an option (put or call) is in the money the more it is worth, or the more you will pay depending on how you look at it.

3) Would some contract numbers show a more profit margin than others?
Well yes as I describeed above, you are going to have to plunk down a lot more equity for an in the or “at the money” (in other words the strike price is exactly the same as the underlying price at the moment) Now if you bought a deeply out of the money option, say gold calls and tommorrow we wake up and find out gold is at $1300 your $1500 calls would have gained a ton of premium and at the same time you would only have invested a little…SO clearly your profit margin will be huge. Problem is those major moves often do not occur , although lately they have become the norm which is why trading options has been so lucrative.

4) Is this a median between the lowest and the highest? I am not sure I understand the question, the median I guess would be wherever the futures prices are currently trading. If gold is at $900 then an “at the money options would be the 900 strike price for both puts and calls.

If you entered a trade as a spread, do you always have to sell it as the same package or can you just sell the short end of the trade instead of the whole thing? Let’s use the example of the Dec 08 1000/1050 Gold spread. Could I have just sold the short 1050 call and still held onto the long 1000 call? I’ve never seen anything written on it so I’m assuming you can’t, but I don’t know why? Yes actually you can but it gets complicated.

Let me try and simplify it. When you buy a spread all you are doing is basically funding the purchase of an option with the sale of another. In this case you bought the 1000 call and sold the 1050, it limits your initial outlay of premium ($) but it also caps the profit potential to, it tops out at the maximum for the spread, in this case I think $5000 but don’t quote me on that. Now spreads are traded in two ways, “outright” and by “legging”, for the sake of RTA I assume everyone is trading the spreads as outright as legging can get messy.

Outright is done just as it sounds, the spread is traded as it’s own entity both options at the same time. Legging means that you are doing one option at a time. If say you wanted to buy back the 1050 call (not sell it because you are already short the 1050, so you have to buy it back. Once you do that then you would take a profit on the short leg (1050 call) and now just be long the 1000 call for a loss, make sense.

It is a good strategy, especially if you think gold will then rally again at some point, just make sure you know exacgtly what you are doing to cove the legs of the spread and evaluate all costs associated with doing it. But yes to answer your question, yes you can.

I’m sorry for my depth of ignorance and any insight you can toss my way will be greatly appreciated.

Thanks, AnneD

There are no bad questions and if I don’t have the answer I am the first to admit it and I will find you the answer, that’s my job. Most of all don’t get frustrated, this stuff is very easy and I suggest getting a copy of my book as I outline a lot of this in very simple language in my book. Best, Kevin

Bookmark It

Hide Sites

This entry was posted on Saturday, August 2nd, 2008 at 6:13 am and is filed under Mailbag: Your Questions.... Answered!, Maniac Trader Rants and Raves, Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.