Even the most basic of observers cannot help but notice the extreme volatility that has besieged the markets. Markets in months have had larger trading range than they have had in years. For example in just two months crude oil had a range of over $30, from a low of $68.63 in the week of 8/24 to a high of $99.29 the week of 11/23. This is even more impressive when we compare it to all of last year when the range was only from $54.86 to $78.40.

Precious metals also experienced big moves. Gold from a low the week of 8/17/7 of $642.90 to a high of $884.10 the week of 11/9/7. In less than two months moved over $240. Again, overshadowing the move for the entire year of 2006.

In the same time frame the Canadian dollar, Australian dollar, British pound, wheat, soybeans all far and exceeded their trading range for the entire year of 2006 in just two months.

In the energy sector the volatility and upside movement have been caused by lower stockpiles, increased world usage and instability in oil rich regions of the Middle East and Nigeria. While in the U.S. no new refinement facilities have been built or modernized.

This instability and uncertainty has also caused gold and the precious metals to respond with violent upward moves. Due to recent Fed rate cuts, to provide liquidity and stimulate the economy, inflationary fears have surfaced thus increasing demand for commodities that are perceived to hedge against inflation.

The grains have jumped on the volatility bandwagon. The USDA storage numbers were down at a time when the Australian plains were in dire need of rain. Adverse weather caused the Ukraine to be net importers rather than exporters of grains. These supply side shocks were exacerbated by large demand from China and India.

With this surge in volatility are there pitfalls to avoid or perhaps opportunities to take advantage of in the markets?

Futures and Options are the two most liquid and viable ways to invest in the commodities markets. Futures trading represents dollar for dollar profit or loss depending on the directions of the underlying commodity. Because of the strong leverage involved the profits or losses can be extreme, especially in these volatile times. Stops can help control these wild swings; but remember stops are like wearing a seat belt; they should lessen the hurt but are not fool proof. An accident can still occur.

Many "day traders" have been whipsawed because of increased volatility. Position traders that act as trend followers have faired much better assuming their stops were strategically placed thus enabling them to remain in a trending market. However, with stops placed so far from the current level, more risk exists. Regardless of which type of future trader you are one thing remains imperative for your success: you must accurately predict the direction of the markets. This can be very difficult in these volatile and uncertain markets, especially when we enter levels never before seen.

Due to the current extreme volatility and uncertainty options have become extremely over-valued. Since when purchasing an option your risk is predetermined but profit potential may be unlimited, (in the case of a call), naturally the premium (cost) of an option increases significantly. In my twenty-five plus years of managing options investments I have never experienced a better time to sell options than right now. Think about it logically. You are not only able to sell something overvalued, but you can trade in a manner where you do not have to predict the market direction in these uncertain times.

Selling options and collecting premium, in my experience, has never been more attractive. We can use the volatility and uncertainty that has increased the option premiums to our advantage by collecting more money.

To illustrate just how over-valued and expensive options are lets compare November of last year to November of this year.

In the first week of November of 2006 the March British pound contract was trading at 191.20. A March British pound 195 call could have been written for 124 points. Each point in the pound is $6.25. Therefore 124 x $6.25 = $775 could have been collected prior to any commissions or fees. The option was less than 2% out of the money with 4 full months till expiration.

Currently with the March British pound trading at 205.80 a March 214 call can be sold for 128 points. Therefore 128 x $6.25 = $800 can be collected prior to any fees or commissions. The option is about 4% out of the money with less than 3 1/2 months to expiration. This shows just how inflated current premiums are. You can collect more money for less time with a farther out of the money option.

Even more dramatic are the crude oil options. At the same time (late November of 2006) with crude trading at about $60 per barrel a February $72 call and $50 put could be sold for a combined $900 minus any commission or fees. This strangles legs (strike prices) were $22 apart; the call being 20% out of the money, while the put was 16.6% out of the money.

Today’s numbers are staggering. With crude oil currently trading at $97 a barrel a $120 call and an $80 put for February can be sold for $1000 prior to any commissions or fees. The option seller has a $40 difference between the call and put; the call being 23.7% out of the money and the put being 17.5% out of the money. Considering you are collecting more money even farther out of the money, with a bigger spread, this is a far superior position then that of last year for the option seller.

There are many ways to take advantage of a volatile and uncertain market with options. Collecting instead of paying overvalued premium is a key. Different markets require different strategies. Some markets are better suited for credit spreads. These spreads give you predetermined risk and staying power. Other markets should be attacked by ratio writes. This means buying a closer to the money option while selling perhaps three to five farther out of the money options. Although if not adjusted this can in certain cases have unlimited risks it can have extreme profit potential when one considers profit to margin ratio. Finally even naked options can be written to take advantage of certain situations. Like all traders know your exit strategy and your tolerance of risk. A skilled professional should be able to implement a strategy that fits not only your desired goal but that adjusts to current market conditions.

Mr. Ed Carr graduated from Allegheny College with a Bachelor of Science in Economics. He continued his education by obtaining a Masters in Business Administration in Finance from Fairleigh Dickinson University. His initial career foray was as an account executive of a large commodities brokerage firm. In five years he was ranked as a top producer and was promoted to management. Shortly thereafter he was recruited by a major brokerage firm and became their Vice President.

In 1987 he put his experience to use and founded Carr Investments Incorporated. Carr Investments had professionally handled thousands of clients worldwide for ten years. In 1998 the assets of Carr Investments were acquired by Trader's Edge Inc. Mr. Carr took over the role of President and Jonathan Lubow as Vice President.

His vast experience has enabled him to market four unique ways of trading options that have been utilized by many firms, as well as individuals. Mr. Carr has appeared as a guest on several investment shows and given numerous seminars and lectures to professional investors, corporations and individuals throughout North and South America. Mr. Carr has been married for over twenty-five years, has four children and resides in Morris County New Jersey.

Mr. Carr with over 25 years experience is a contributor to Optionsscholar.com.