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Complimentary 2009 Commodity Trading Guide

The Commodity Trading Guide provides valuable information to help you trade today's commodity markets with confidence. The guide includes exclusive fundamental and price charts that you will not find anywhere else in the industry, ten years of supply and demand tables, all-time contract highs and lows, over 350 charts & graphs, and much more! Get your copy of the guide today.

The commodity markets have been tremendously volatile and exciting in the past couple of years, and it certainly looks to me that this will continue for many more years to come. The advent of electronic markets has made it much easier for the average investor to participate in these types of markets. Most of these markets are now trading at night as well, contributing to periods of record volume and record open interest. This trend of heightened volatility should continue due to the basic fact that prices were at record highs historically in many of the commodity markets and then sold off tremendously in the matter of a couple of months. The breadth of the selloffs lead me to believe that there are some real bargains at this point and time.

The exchanges have raised margins on many of the markets which makes it more difficult for the small investor to be able to hold on to outright futures positions .What does this mean for the average investor and how can someone make money in these types of volatile markets? One can decide between trading the outright futures contracts and using some type of put, call, or option spread. This depends on how much money one is willing to risk on each given trade.

My general feeling is to risk between 2% - 5% on each trade, which will allow a trader to place trades in several different markets. The most important feature of trading is money management. Most people can call the markets pretty well over a course of time, however people are generally very poor at placing stop loss orders and very poor at taking small losses. From my experience, traders take giant losses and very small wins all the time. One must hold on to a position if it is a winning trade and just raise the stop, if trading outright futures. My opinion is to generally cut losses when the trading account has lost between 2 to 5 percent. This discipline will help successful traders in the long run, but this also means there most likely will be many more losing trades than winning trades.

Putting into practice the trade management and money management techniques, while considering the volatility in many of the commodity futures markets, I would like to present a couple of ideas for bull call spreads in the soybeans and silver markets.

SOYBEANS

The soybean and most grain prices had been going higher for well over a year into last summer; however they have since declined by about 50% in the last five months due to many reasons. The soybeans have had around a $6.00/bushel dollar dip in that period due to such things as an ample crop that has already been harvested plus the economic slowdown across the world. This is a positive situation for people who still think prices could go much higher during the upcoming growing season. It is my opinion that based on carryover the supply of soybeans is tight. If some resemblance to recent demand from countries such as China and India returns, coupled with possible adverse crop development caused by excessive heat or precipitation in the upcoming growing season, prices could move sharply higher very quickly. I want to focus on the November '09 Soybean $10 - $13 bull call spread which expires in late October. The nice aspect of this trade is the time remaining until expiration is about 10 months, allowing plenty of time for the position to work if circumstances turn favorable for an upside move.

The volatility in the soybean market is at lofty levels, and may only get worse during the growing season. This type of strategy allows one to withstand some tremendous price fluctuations and be able to sleep at night because there is limited risk in bull call spreads, as opposed to the unlimited risk in trading the futures contracts.

Presently, November '09 Soybeans are trading around $10.00/bushel. I am recommending the $10/$13 Call Spread, which will cost approximately $4,250 per spread. The maximum gain is approximately $10,750, less transaction costs, if at expiration the beans are trading at or above $13.00/bushel. The reward:risk on this trade is roughly 2.5:1 which in my experience is good, plus there is 10 months left on the trade. If one were trading the futures contract, $4,250 is only an 85 cent move. If the soybean market starts to really swing again, this would mean that means if you are on the wrong side of a futures trade you could lose that $4,250 in a matter of days. This is why I suggest the option spread - because of the simple fact that the risk is limited and an 85 cent will not stop you out of the market.

Depending on the size of your account you can do as little as one strategy or as many as 100 strategies, if the risk is tolerable. I believe this trade is very capable of working because it is right at the money with the $10.00 Call, and soybeans can move up to 70 cents on any given day. Plus, it helps to be long the soybeans during their most volatile part of the year which is often the summer months and harvest time. This is not the only option spread in the soybeans, one can use different strike prices and different months. Speak to an advisor and find out which type of bull call spread is best for your portfolio.

SILVER

Contributing to the volatility in this market has been the considerable moves in the US Dollar and gold prices. Gold prices in 2008 had been as high as over $1,000/ounce and as low as under $700/ounce. Silver experienced huge swings up and down in 2008, also, trading above $20/ounce and below $9/ounce. My opinion is that we have not seen the end of upswings in the price of Silver, and in consideration of the volatility I suggest another bull call spread.

The way to play this type of volatility is to buy the September '09 Silver $13-$17 Call spread. This option spread will expire in late August which, allowing approximately eight months for it to work. This spread will cost approximately $3,600, and the reward will be is $16,400 per strategy (less transaction costs). At expiration if September '09 Silver is at or above $17/ounce, the net gain would deliver a 450% return if one pays $3,600 for the spread. Again, one may go to different strike prices or months depending on the risk preference. These types of trades generally need some type of financial advisor to help with the ups and downs during volatile periods. If you are bullish the silver market, option spreads can definitely help accomplish your financial goals. One of the great things about these spreads is that the limited risk involved allows peace of mind.

We've come out of the most volatile markets that I can recall in the last 20 years. I urge traders to be careful, maximize rewards, and limit risk as much as possible. If the dollar goes through another bout of selling, or perhaps just stays in a sideways pattern toward recent lows, this may very well help stimulate strong demand for these precious metals. I think that most of these commodity markets are in a consolidation period for a little while, maybe two months more or so, however my opinion is that we have not seen the end of bull markets.

If a trader were to buy one of each of the recommended Soybean and Silver call spreads, the combined risk would be approximately $7,850 (plus transaction costs) if they expire worthless. However, if they rally and expire above the top strike price the reward can be nearly as high as $27,000, which is an outstanding return in such a short period of time. Thank you, and have a great new year.

Complimentary 2009 Commodity Trading Guide

The Commodity Trading Guide provides valuable information to help you trade today's commodity markets with confidence. The guide includes exclusive fundamental and price charts that you will not find anywhere else in the industry, ten years of supply and demand tables, all-time contract highs and lows, over 350 charts & graphs, and much more! Get your copy of the guide today.