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.

Source: Commodity Futures: Playing The Grains & Orange Juice Markets

The “buy-and-holders” just got killed again…

With the market’s plunge last week, many regular shareholders have seen their portfolios awash with more red numbers.

Tough break for them. But savvy investors know that this offers a great chance to value shop and buy back in. And one of the most effective and profitable investment strategies that you can use in a market like this is one that generates income… no matter what happens.

This can be done by selling put options.

So let me show you a little more about this options trading strategy – how it’s done and how easy it can be for the average investor.

Busting The Myths of Selling Put Options

If you’ve gotten this far, you’re on the right track. Many investors hear the words “put options” and “selling” in the same sentence and head for the exit. Too complex. Too confusing. And downright scary. Or so the myth goes.

Let’s bust that myth right away: Selling put options isn’t difficult to execute. In fact, it’s actually easier than most investment methods.

When you place a put-sell trade:

• You don’t have to buy a stock.
• You don’t have to sell a stock.
• It’s got nothing to do with bonds or currencies.
• And there are no complex parameters to the trade.

Here’s the deal: You’re either going to make money, or you’ll end up investing in a company at a ridiculously low, discounted price.

What you try to do is buy stocks for the price you want. And just for trying, you get paid. Think of it like Priceline.com – where customers name the price they want to pay for airfare and hotel rooms – except with stocks. The biggest difference is that you’re getting paid for your time.

It works in rising markets… falling markets… flat markets… any market. It’s a regular stock-buying strategy with a profitable twist upfront. Here’s how you can use it…

Selling Put Options In Four Easy Steps

Have you ever wanted to buy a stock but passed because the price is too high for your liking?

Most ordinary investors would simply sit on the sidelines and wait for the price to fall to a better level. But smart investors know they can still get in the game by selling a put option on it instead.

Here are the four steps you need to take when selling put options:

• Pick your chosen stock.
• Decide on a lower price, where you’d feel comfortable buying the shares.
• Check the put option prices for that level. For example, if the stock is trading at $20 and you want to buy it for $15, you’d select the $15 strike price and an expiration month.
• You then sell those put options. Since each stock option contract is equivalent to 100 shares, you’d sell five put option contracts if you want to buy 500 shares.

When you enter a trade like this, you’re obligated to buy those shares at your stated strike price by expiration. Keep that in mind when selling the contracts, so you don’t overextend yourself. For example, if you sell one $15 put option contract, you’ll need to have $1,500 on hand by expiration day to cover the cost of the shares ($15 x 100 = $1,500).

Note: You don’t need to have all that money on hand while the trade is open. Your broker will only ask you to keep a fraction of that amount available – known as a “margin requirement.” Consider the trade as a “buy now, pay later” type of deal. You’re putting off paying for the stock until a certain scenario occurs (see below).

In exchange, the option buyer will pay you for each contract you sell while you wait. This is known as a “premium” and is deposited into your trading account. (The farther out the expiration date, the more money you’ll receive when selling the option.) Meanwhile, ordinary investors are waiting for the price to drop without collecting any money.

Okay, then what happens?

On options expiration day, you’ll have two scenarios when selling put options:

• If Your Stock Trades Below $15: For every put option contract you sold, you’ll be obligated to buy 100 shares at $15 each. This is what you wanted – a 25% discount from its $20 price when you executed the trade. Plus, you get to keep the money that the option buyer paid you. The shares will appear in your account on the Monday after option expiration. It will now be a regular long position and you must manage it as you would any other stock. That’s why it’s important you pick a price at which you’re comfortable holding the shares.

• If Your Stock Trades Above $15: The put options will expire worthless. You won’t get to buy the shares at your chosen price, but you will get to keep the money for selling the contracts, just for trying.

So regardless of what happens, you keep the money from selling the put options upfront. Now let’s bust another myth…

But Isn’t Selling Put Options Riskier Than Buying Shares?

Selling put options is no riskier than buying shares outright.

• When you buy shares, the risk is that you lose your entire investment.
• When you sell a put option, you’re obligating yourself to buy shares, too… but at a much lower level than the current share price.
• And if you do end up buying the shares, your risk will be the same as a regular shareholder.

The difference is that nobody pays you cash to buy stocks outright – but they do when you sell put options. Selling puts is just another way to invest in the options market.

While some brokers see selling put options as riskier than stocks (and require that you keep more capital reserves on hand), your risk only kicks in if you’re obligated to buy the shares. And even then, you’d simply be long on the stock, with the same risks as with any stock holding.

Perhaps the biggest obstacle for most investors is that you need to be “approved” to sell puts. This means that you must apply through your brokerage. It’s a simple process , similar to filling out forms when you opened the account.

If you have questions, contact their customer service department and they can help.

An Important Note on Selling Put Options

Many folks don’t know about option trading strategies like put-selling, and Investment U will be working hard to bring you more like this in the coming weeks and months. But we wanted to give you an example of what’s working in the market right now.

It’s certainly not as risky or complicated as some people would have you believe.

And for those of you who know Lee Lowell, you’ll know he’s not a gambler. In fact, he’s one of the most conservative, risk-averse investors I know.

That said, selling puts isn’t necessarily for everyone. You’ll need to check with your broker to make sure you’re approved to trade options – and specifically, selling put options.

Source: Selling Put Options: How It’s Done & How Easy It Can Be

Let me begin by saying that options are tools, nothing more. Tools can be used to build something. Or they can be used to tear something down.

The key is to understand and master your tools and, more importantly, not destroy wealth when your intention is to create it.

Let’s start by defining our terms…

The Difference Between Put & Call Options?

Here are the differences between put and call options:

• A put option gives the owner the option of selling a stock at a specific price, again known as the strike price, over a given period of time.
• A call option gives its owner the option to buy a stock at a specific price, known as the strike price, over a given period of time.

The key advantage of buying options is that it allows you to control a large amount of stock for less money than it would cost you to buy the underlying shares.

• If the stock moves up rapidly in a short period of time, your percentage gain in the call options will be much larger than if you had bought the shares.
• By the same token, if the underlying stock suddenly falls off a cliff, your percentage gain in the put options will be much larger than if you had shorted the shares.

Under normal circumstances, however, few stocks move sharply in the near term. They tread water. They bounce around in a narrow range. Or they trend gently higher or lower.

When you have rare periods of extreme volatility – like the one we’ve experienced over the last three months – options become pricier, making it more difficult to score easy gains.

But the bottom line is this: The overwhelming majority of options expire worthless. Most people trading call and put options lose money.

Why Options Are Riskier Than Stocks

Why are options so much riskier than stocks?

• With stocks, time is your ally.
• With options, time is your enemy.

Built into the price of every option is a time premium. As time passes, that premium diminishes.

To make big money in puts or calls, the stock doesn’t just need to move in the right direction. It needs to make a sharp move in the right direction in a short period of time.

This is no easy trick.

And it’s exactly why selling options – collecting those premiums – is a conservative strategy, while buying options – paying premiums – is an aggressive one.

In the world of options, buyers are gamblers. Sellers are the casino.

Why Investors Continue To Use Option Trading Strategies

If the odds are long against long-term success with buying options, some might ask, why do so many investors continue to use option trading strategies?

Here’s an analogy …

If you’re a decent golfer playing a short par five, you may be tempted to go for the green on your second shot and give yourself a putt for an eagle.

The golf course architect knows this, of course. So what does he do? He puts a pond in front of the green and sand traps on both sides.

The smart thing – the percentage shot – is to just lay-up in front of the water and then chip on for a shot at a birdie.

Yet, often as not, the weekend golfer pulls out his three-wood or long iron and goes for the green. He realizes that his ball will probably end up in the cat box or the drink, but he goes for it anyway.

Why? Because if he pulls it off and makes an eagle, it will be the best thing he did all week. In short, he’s willing to risk it.

If it doesn’t pan out, well, what the heck, he knew the odds when he stepped up to the ball.

I guess what I’m saying is we’re all big boys and girls. Options are a “no-tears” investment. If you don’t understand this, you shouldn’t be trading them.

Puts and calls are neither good nor bad. They are simply tools.

Give a man a chainsaw and he’s likely to do some good work with it. Give it to a six-year-old and someone is likely to lose an arm.

Govern yourself accordingly.

Source: The Truth About Options: Buying Puts & Calls On Stocks

Today, the situation for the VIX is looking quite intriguing. The highly watched index found the momentum to drop below its 50-day moving average. The VIX is currently indicated at 58.93, just below the moving average’s level slightly above the 60 level.

This is only the second time since the end of August the index has traded below its 50-day average. The last time was in late November and the trend lasted for just a few trading sessions. If today’s drop below the resistance level stands up, it will be an indicator of positive action to come.

What does it mean?

As a derivative indicator, the VIX is simply a mirror of what the overall market is doing. By itself, it has no inherent fundamental value. When it declines, it simply tells investors that volatility in the overall market is on the decline.

For average buy-and-hold investors, the VIX has little importance other than telling them the volatile, nausea-inducing ride that is the equities market is beginning to calm. But for options investors, a falling VIX proves that options prices are falling and the spreads between put and call premiums has narrowed significantly. After all, that is what the indicator is designed to tell us.

For the past few weeks, it has been difficult to implement many traditional options plays because implied volatility (the premium added to an options selling price) has been so high. An underlying stock needed to make a sizeable move for the play to pay off. But now that volatility is on the decline, options prices will drop and the profit potential will return. In other words, we can get back to traditional options strategies.

One company worth watching is Arena Pharmaceuticals (NASDAQ:ARNA). In case you missed the news from this $289 million biopharmaceutical this morning, the company just announced clinical testing results for its closely watched obesity-fighting drug, lorcaserin. Of the 469 obese patients in the trial, a statistically significant proportion of them lost more than 5% of their body weight when compared to testers that received a placebo treatment.

While the drug still has a way to go before reaching the market, this is good news for the company in a highly competitive market. So far today, share price has risen by over 10%.

Options investors looking for a trading idea should look at the company’s January 5.00 calls (UGGAA).  Trading for just $0.15, these options have a strong shot at profits as more investors learn of the good news surrounding this company.

As the VIX surpasses its recent lows, more and more options trading opportunities will arise. Keep your eye out for high-potential plays and take advantage of the market’s latest trends.

Source: The VIX declines, Arena Pharmaceuticals (NASDAQ:ARNA) surges

More from Investment U:

Did you know that you could get paid to buy stocks at the price you want? That’s right, someone will actually hand you cash today for your promise to buy any stock you want at a cheaper price than where it’s currently trading.

All you have to do is decide which stock you want to buy, at what price you want to buy it, place the trade and collect your money.

Is this for real? Is this a joke? Is this legit?

This is absolutely for real, it’s absolutely not a joke and it is extremely legitimate. When was the last time someone gave you a wad of cash just for buying your favorite stock at rock-bottom prices? I’m guessing probably never, unless you’ve been using this very simple and safe strategy. I personally use it all the time, and many others “in the know” have been using as well.

Being a profesional options trader for the last 17 years, I’ve figured out exactly which options strategies are best to use at various times in different market environments. But one strategy can be used at almost any time…

It’s called “put option selling” and it’s a great way to get your hands on instant cash while at the same time giving yourself an opportunity to buy your favorite stock at a price much lower than where it’s currently trading.

Many people have never heard of, let alone used, this option strategy, but in my book there’s no better way to spend your time and effort while you wait for your stock to come down in price. I’m going to show you how you can use it to start collecting some of that cash that’s being handed out.

Being Paid to Wait With Put Option Selling

What do you usually do when there’s a stock you want to buy but it’s too expensive? I’ll bet in most cases, you enter into a limit-buy order for that stock using a price that’s lower than where it’s trading.

That’s how 95% of investors do it, so don’t feel bad.

But what are you doing in the meantime, while you’re waiting for the stock to drop in price? I’ll bet you’re just sitting there twiddling your thumbs and wasting valuable time. Has anyone given you cold, hard cash while you sit there and wait? Nope. Could you be doing something better with your time while you wait? Definitely.

Well, then put option selling might be right for you.

The actual mechanics of put option selling is quite easy:

• When you enter into a put-sell transaction, you’re entering into an obligation to buy the stock you want at the price you want.

• The person on the other side of the transaction, the put option buyer, pays you money today for your obligation to buy that stock sometime in the future at your price.

Put option selling is a bullish option trading strategy while put option buying is a bearish strategy.

When someone thinks a stock is going to fall in price, they can either short the stock or buy a put option contract. If they opt to buy the put option contract, they have to pay for it at the going rate.

That’s where you, the put option seller, comes in. Since you’re bullish, you want to sell that put option and the option buyer will gladly pay you the going rate for it. You keep that money, deposit it into your account and wait for option expiration to come. Easy enough, but let’s go over some specifics.

Options Trade As Easily As Stocks

Options contracts trade in the marketplace just as easily as stocks do. All options have “strike prices.” These are the levels in which you can buy or sell the stock if called upon to do so.

For example, IBM is trading at $90 currently. The options exchanges set up strike prices at various levels, like the $80, $90, $100, $120, $150, etc. You will buy or sell these strike prices at the going rate for each. An option like this, with say five months before expiration, could cost roughly $750.

All options have an expiration date that can span from days to years. When someone buys a put option whose strike price is set lower than the current price of the stock, it’s called an “out-of-the-money” put option.

Option contracts represent 100 shares of stock, so for every option you sell, you’re obligating yourself to potentially buy 100 shares of stock.

If someone chooses to buy the “$80 put option” today when IBM is at $90, they are speculating that IBM will fall below $80 per share by option expiration date.

Why would anyone want to sell IBM at $80 when it’s currently trading $90? Why don’t they just sell it now at $90? Good question. Probably because this person already owns IBM shares in their account and wants protection in case of a disaster.

If IBM happens to fall to $60 per share before expiration, the put option buyer can “exercise” the option and sell IBM at $80 even though it’s now trading at $60. This is how professionals “hedge their position.”

But what happens if IBM never falls to $80 by expiration? Well, the option expires worthless and the put buyer ends up losing the full $750. Who gets to keep that money? You, the option seller! It’s been estimated that up to 90% of out-of-the-money options will expire worthless, so in most cases, you’ll get to keep the money free and clear.

How to Buy Stocks for Less With Put Option Selling

Let’s say that you want to own IBM at $80 per share while it’s trading at $90. Instead of putting in that limit-buy order and waiting, you now know that you could sell the $80 put option and collect $750 for every option that you sell.

If IBM happens to end up trading below $80 per share at option expiration, then you’ll be called upon to buy your shares at $80 per share. That’s a good thing because $80 was the price you wanted to acquire it, and $10 cheaper than where it had been trading. Not only that, but someone paid you $750 extra per option just for your time and effort to buy your stock at your price.

Since options trade in 100 multiples, the option is quoted as $7.50. When it’s time to collect the money, you will receive $750 (100 shares x $7.50).

Even better, that $7.50 actually lowers your cost basis if you have to buy the stock. Even though you’re buying IBM at $80 per share, it’s really only costing you $72.50 per share when you factor in the $7.50 you received up front – an extra bonus.

Here’s a sample option chain for IBM options that expire in April 2009. The option chain lists all options activity and the options that trade for a particular stock and can be accessed online or from your broker.

Courtesy www.optionsxpress.com

You can see with IBM currently at $88.22 per share, the April 2009 $80 put option can be sold for $7.50 (splitting the bid/ask prices). So for every option you sell, you will instantly collect $750. If you sold 5 put options, you would receive $3750.

Put Option Selling & Option Expiration Day 2009

Here’s what goes down at option expiration day in April 2009:

1. If IBM is trading above $80 at expiration, then the options will expire worthless and you get to keep the full $750, no questions asked. You can then move on and do another put-sell trade for a future expiration period. Unfortunately, you will not be asked to buy any shares at $80. But at least you were compensated $750 per option for your time.
2. If IBM is trading below $80 at expiration, then congratulations, you will be called upon to buy the shares at $80 a piece. This is good news because $80 was the price you wanted to acquire them. Plus, you still get to keep the $750 paid to you on Day 1. The shares will show up in your account and you’ll be required to pay for the shares in full at that time. If you sold five option contracts, which is the same as 500 shares of stock, you will be required to pay out $40,000 at that time.

Just remember, you’ll only get to buy the shares if the price of the stock is trading below the strike price on expiration day

A few points to consider before implementing a put-selling plan of attack:

1. Only sell put option contracts on stocks that you want to own for the long haul, as you might be required to buy them at expiration. We use this strategy to acquire high-quality, top-notch stocks. Don’t sell put options on risky stocks that you have no intention of buying, or only do it just to receive the put option income.
2. You will need to have an option trading account set up with your broker in order to sell put options.
3. Only sell the amount of put options that correspond to your buy levels. If you eventually want to buy 500 shares, then don’t sell more than five option contracts.
4. You will need to keep a percentage of money in your account on hold at all times while the trade is active. This percentage is called the “margin requirement” and is set by your broker. In most cases, your broker will ask you to keep anywhere from 10% to 50% of the full purchase price of the stock while the trade is active. This is great, as you don’t need to keep the full $40,000 (in the IBM example) on hold at all times. This still allows you to use your funds for other trades

That’s it, put selling, in a nutshell. It’s an alternative way to acquire stocks while getting paid for your time and effort. You get to pick the stock you want and the price at which you’re comfortable owning it.

Just remember, stick with quality stocks that you want to keep for the long haul.

Source: Put Option Selling: Get Paid to Buy the Stocks You Want

So far, it’s been all plain English. But the witch doctors aren’t going to let us off that easily. We’ve seen volatility as a matter of “jumpiness” visible to the naked eye, as dollars and cents (ATR), as percent (Zigzag), as a relationship to an index (beta) and finally we come to “plain” volatility. And in the way of witch doctors, it turns out that plain old volatility is the most complicated version yet. Well, it’s time to bust their game.

Here’s something to get you started. The volatility of the S&P 500 is 20% at present. That seems pretty clear. It would mean that the S&P goes up and down by 20%, no?

Hah! Gotcha! Would you believe around 1.2% a day, but only on days when the market is open, not all year? The volatility that you hear quoted is actually an annualized daily standard deviation. Don’t faint. You have just read the hard part, and we’re not going to let the geeks wear us down.

Plain volatility, also called historical volatility or actual volatility is just a number that summarizes average daily movements then translates them to an annual basis with some standard statistical maneuvers.

Just a quick aside here, this current volatility level is very high, as you can see in the following chart of S&P volatility from 1928 to 2000:

To put this new volatility concept in simple terms, we’ll use some recent history. Lately, the S&P has had an average closing price of 1407. Some days it was higher, some it was lower. I could figure out how much it deviated from the average each day with simple math. If the average is 1407 and it closed at 1403, there’s a 4-point difference that day. I could even add up a series of deviations and figure out how much the average deviation is.

A standard deviation is pretty much the same simple process with frosting on top. Instead of doing the math straight, the statistician squares each deviation (4 x 4 =16, for instance), adds all these squares up, figures the average of that number, then “unsquares” the answer—that is, he takes the square root of his squared average.

There you have it, “standard deviation,” which sounds expensive, but is really nothing more than a simple average done with squares of numbers instead of the unadorned numbers.

Such a drill on the S&P lately would lead you to 1.2% daily standard deviation. To get from there to the stated historical volatility this daily variation is hocus-pocused one more way. It is annualized. (If you really want to know how…. the statisticians would take the number of trading days in a year, say 250, find the square root of that number and multiply it by the standard deviation.)

And thus, 1.2% a day or so in average movement, in either direction, turns into 20% stated volatility.