July 2018 Podcast
James Cordier and Michael Gross

Michael: Hello everybody. This is Michael Gross of OptionSellers.com. I am here for your July Podcast. This month’s podcast will be in audio format. I’m here with head trader James Cordier. James, welcome to the show.

James: Thank you very much, Michael. Always happy.

Michael: Great. The topic of this month’s podcast is Fast Cash from Selling Options in Over-Bought or Over-Sold Markets. James, as you and I know, we’re not really in the business of looking for fast cash, but we’re more in the business of long-term investments. Every once in a while, when you’re selling options, there comes certain opportunities where there might be a place to sell the option and you see that time decay in just the first 30-60 days. Often times that can be when markets get to an extreme, like some markets we’re seeing now. Wouldn’t you agree with that?

James: Michael, it’s interesting, we are very long-term investors. When we’re looking at seasonal positions or headlines that create a slightly shorter-term opportunity, then we do look at things like timing and certainly all the headlines going on right now with trade are probably offering some really good opportunities of the slightly shorter variety and we’re looking forward to taking advantage of those over the next 10 days or so.

Michael: Great. I know, as you and I have been discussing, as are most investors right now, the big topic is trade tensions with China. I don’t know if we call it a trade war yet, but certainly having got some investors attention and pushing the stock market around. Maybe talk a little bit about how that’s affecting commodities right now.

James: Michael, if this doesn’t turn into a trade war, this is the most well played game that I’ve ever seen between the U.S. and China. I mean, we are right to the brink of what could be quite a significant trade policy coming down the pike. It is definitely worrying some investors that are looking at certain parts of the global economy. Uncertainty is always not welcome. Anyone who is looking at investing for their company or inventories or what have you, when they see uncertainty they usually hold back and that is probably going to be swelling some economic growth globally if this doesn’t come to a head here in the next week or two.

Michael: Okay. As most of you listeners know, as far as being an option seller, it doesn’t really matter to you which way the market or prices are moving, especially when you’re trading different uncorrelated commodities. Often times, situations like this can create opportunities and that’s what we’re going to talk a little bit about today. James, would you like to go ahead and move into our feature markets?

James: Michael, certainly. Natural gas is one of the markets that are very near and dear to our hearts. In the very heart of winter and the very heart of summer, which is coming up relatively soon, we did take positions in natural gas much earlier this year, trying to sell put premium. We were fairly successful doing that. Generally, the market bottoms in winter and rallies into spring and the natural gas market did that. Right now, we are looking at a seasonality for natural gas. It has had a very nice rally over the last 3 months or so and basically a lot of headlines talk about the need for natural gas in summer for cooling homes and cooling businesses, of course. We think that’s quite overplayed. Generally speaking, when it’s extremely cold in the U.S. or throughout Europe, demand for natural gas does spike and that is real. As far as buying natural gas for summer cooling, I don’t think the numbers dive exactly. It takes approximately 25% of the natural gas to cool a home in the summer as it does to heat a home in the winter so, generally speaking, when natural gas rallies because the warmer temperatures are ahead, that’s usually something you want to fade. Of course, at that time, inventories are usually being built in a very big way. So, we’re looking at selling natural gas calls over the next 2-4 weeks to take advantage of that seasonal position.

Michael: Yeah, you make a good point there, James. The seasonal tendency for natural gas used to get a little bit of a spike in summer and, yeah, you can but it seems like the tendency over the last 5-10 years seems to be more of, as they build that inventory into spring and summer as those supplies rise, it tends to just kind of overlook the summer demand for just the reason you mentioned. Now we’re seeing a seasonal where the seasonal prices tend to start declining in June and keep going right through fall so it appears they’re following that pattern right now. Now, we’re not at a particularly high level of natural gas supplies right now. From what I’m seeing we’re a little bit under where we typically are this time of year. Is that what you’re seeing as well?

James: We are. Natural gas supplies in the U.S. are under the 5-year average and they’re below levels from last year, not a great amount, but what a lot of market participants are looking at is all the drilling all around the U.S. Of course, the bi-product of that is natural gas. A lot of investors and a lot of the analysts in natural gas feel that $3 natural gas is probably a fairly decent price considering that drillers are getting it for free as a bi-product. So, it used to be that natural gas was produced in the Gulf of Mexico in Louisiana, and when you had demand shocks it really moved the market a great deal. The beauty of option selling is that some of that volatility is still in the market even though we’re now producing natural gas all over the country. We have just massive fines in Oklahoma, Arizona, and Kansas, the Dakotas, Pennsylvania, Ohio. The supply is always going to be there for natural gas right now and taking advantage of small swings, up and down, during the year should be fruitful for selling options and that’s why we think selling calls over the next few weeks is probably going to be a very good idea.

Michael: You know, James, you made several good points there. In talking about the seasonal tendency, when we go back to where you were talking about selling puts in the spring when we recommended that in the newsletter, prices have rallied almost 10% since that point. Now, with supplies building, as you said, it can start putting a little bit more pressure on the price of natural gas, at least that is what you’re expecting. We’re going back to Fast Cash from Selling Options in Over-Bought Markets… I think two points, and maybe you can hit on both of them, one is natural gas, as of at least a couple days ago, hit a pretty good level where it was and looked pretty over-bought, especially for this time of year when you have a seasonal. Technically, the market is over-bought, that tends to push those option premiums up higher to where they get to an over-valued level at some point, especially with a little jolt like that. Also, natural gas is probably one of the markets that would be least affected by any type of Chinese trade tariff. Would you agree with that?

James: Michael, the natural gas market that we trade here in the United States is purely a domestic market right now. It’s not coffee, it’s not steel, it’s not sugar. Those are all world traded markets and the natural gas market is probably 99% influenced by the supply and demand that happens within the 50 states. Of all the markets that we follow, several won’t be affected by the tariffs and natural gas is definitely the bull’s-eye of the one that will probably deem what goes on with tariffs probably be the least of all of them that we follow.

Michael: Okay. So, we’re here at the beginning of a potential seasonal downturn here, at least that’s what we might be looking for. When you talk about this, and for those of you listening, natural gas is the feature market in our upcoming July newsletter, which you can keep an eye out for. It should be out on or before the 1st of July in your mailbox or e-mail box. James, in that, you’re recommending taking a look at selling call strikes at the $4 or above level. Right now natural gas is under $3, so we’re looking at strikes at least 25% above the current market. So, you’re not really calling a top right here, what you’re saying is, “Hey, it’s a 3, it’s not going to go to 4, especially at a time of year where supplies are building.”

James: Michael, it certainly does look like an opportunity. The natural gas market has risen off the lows that we spoke of earlier this year and the ones you just mentioned recently. Natural gas was down to $2.50 and $2.55 earlier this year. Right now it’s approximately $3 so it has had a decent rally. We’re looking at strikes at $4, $4.50, and $5 and we think that the time to probably jump into those positions is really soon. We have had a nice rally in natural gas. A lot of it is based off of the hot temperatures that we’ve had in the Midwest and the Northeast recently. I’m looking at the 14-28 day forecast and it cools off quite a bit. While I don’t make that big of a deal over the temperatures exactly, a lot of traders do. That’s why I think we got this rally and we really like selling it here right about this level that we’re at right now.

Michael: We go back to what we’re talking about here… The Fast Cash in Over-Bought Markets. Even if you’re going out deeper out-of-the-money contracts, which you recommend going out to December and maybe even March contracts, if we do get a typical seasonal move, which there’s no guarantee that happens, but if the price does and we get a pretty decent price drop over the next 30-45 days, I’m guessing what the market is still looking a little bit over-bought, you could see some pretty significant decay in those options. Is that what you’re looking at as well?

James: It is. The decay on these options that we’re co