By David Rivera
Wouldn't it be great if we could buy an option with five months left
until expiration and sell an option with 2 months left until
expiration for the same price? You couldn't lose. Well we can't
. I love options spreads so much I realized something very important
We can buy a spread that has a lot of time value left at almost the
same price as we can sell one with less time value left. The reason
really opened my eyes and gave me new insight into options
. Here is what I came to realize.
I started comparing how expensive options were in relation to the
other strike prices in the same month and to the other months
. I wanted to know based on the price per day which options
were more expensive.
The first 1 or 2 option months, as everyone knows loses time value
quickly. The at the money strike prices are very expensive
compared to the out of the money strike prices. Since there
is not that much time left, how much can they charge for an
out of the money option? Not much.
The next several months, the opposite is true. Compared to each other
, the strikes that are closer to the money are cheaper in terms
of price per day than the options further out of the money
. Let me explain it another way using the S&P market.
6 days left at the money option cost 12 points 6 days left out of the money option cost 2 points
70 days left at the money option cost 43 points 70 days left out of the money option cost 29 points
There is more than 10X the time left but the 70 day at the money
option (43 points) is only less than 4X the price than the
6 day at the money option (12 points).
The 70 day out of the money option (29 points) is almost 15X the
cost of the 6 day out of the money option (2 points) but only
has 10X the time value. We will buy the cheaper per day options
and sell the more expensive per day ones.
Sell 6 day at the money and sell 70 day out of the money. Buy 6day out of the money and buy 70 day at the money. This will be done
for a 4 point debit. We are now buying a spread that has10X more time value than the one we are selling and are only paying
4 points for it.
When the 6 day options expire we can sell the next month to take
in more premium, still keeping the 70 day option spread.
What goes up, must come down! We have all heard this before in reference
to the laws of Gravity. We have laws in the commodity markets
as well. What comes down, must go up! The greatest traders
of our time like Warren Buffet know this. He is perhaps the
greatest Stock trader ever. He had never traded commodities until
a few years ago. He bought silver in the futures market.When the market went even lower he bought more.
The “smart money”, commercials will not be scared into selling when
a market they have purchased drops even further. They know better
than anyone that a commodity has real value and will always
be worth something.
There is a famous book, “You Can't Lose Trading Commodities”.The author buys commodities and then just waits for the market to
go higher. He would purchase more as the market fell.
You need a big bankroll for this. Personally I know corn won't go
to $1.00 but what if it did? I want to minimize the risk in case
I want to end the trade.
I started trading the Soy Complex this way several years ago.Not with options. Strictly futures. I bought what was similar to
a crush spread. I increased the contracts as the market went against
me until the spread rebounded a little. Since I increased
the contracts I didn't need the market to come back to
where I started. It only had to rebound to the next level.
Black Jack players did this until Casinos caught on and put limits
on bets. It is a known fact that futures traders make good
gamblers and professional gamblers make good futures traders
. I am against gambling but even gambling done with a system
is not really gambling.
These card players would bet something like this: $5 lose, $10lose, $20 lose, $40 lose, $80 win. The losses add up to $75.They would win $80, so the profit is $5. Not a lot, but they would
do this all day. Black Jack is just under 50% probability for
The problem is there is a slight chance that you could lose 40times in a row. Now with Commodities we have a 50% probability and
we won't lose 50 times in a row because the market can't go below
Now before I go any further, I need to tell you that I am not recommending
you double down on your trades. What you can find are
markets that are near their lows where you can do a small scale
trade. Spreads offer even better opportunities. They have a
closer range (high to low).
By now you can see we only use this to go long a market since we
can never be sure how much a market can go higher. First we need
to find a market that is low already so we won't have to wait
that long and also so there will be less capital needed.
I prefer to trade this using options. There are many ways to do this
. You could buy an option in a market like soybeans and choose
how many cents the market will drop before you buy more.The problem is, an option is a wasting asset. The Theta (time decay
) would cause you to lose money.
I use spreads so I am not paying for time decay. I will probably
sell more Theta than I buy, so if the market does nothing
I will make money just on time decay.About the Author: David Rivera has traded commodities and options for one of the largest cash trading firms in the world.He has written a course on futures options which contains 2 specific trading techniques. You can find the above 2 techniques in depth hereSource: http://www.isnare.com/