Tuesday, October 10, 2006

How Iron Condors Put Cash Into Your Account

Wow, it's been some time since I've added some tips here. It's a long story, which I will go into over the next few weeks.

In the meantime, here's a reasonable approach to putting some cash into your pockets, while remaining protected.


An Iron Condor is just a quirky term for two credit spreads. One at the top of the market and one at the bottom.

Each spread consists of two options. You sell the first option and collect the premium. Then you take part of that premium and buy a second option.

The result is that you end up with a net credit in your account, because the option you bought cost less than the option you sold. That's right, you place the trade and you end up with money in your account!

For example, if you were to sell the April 1355 S&P 500 Index (SPX) call for $1.50 per 'share'. And then you were to buy the April 1365 SPX call for $0.80. You would end up with a net credit in your account of $0.70 per 'share' or $70 per contract.

As long as the S&P 500 Index did not trade above 1355, you would retain the entire net credit in your account.

And you know up front both the maximum gain and the maximum loss on your trade.

That's because the first option - the one you sold - determines the amount of your gains. Your total profit is simply the premium you collected less the cost of the option you purchased.

And the second option - the one you purchased - defines and limits your loss. That's because even if you lose money on the option you sell, you're protected by the option you purchased. Think of it as 'cheap insurance'. You can never lose more than the difference between the two options.

In the above example, the maximum you could lose would be if the S&P 500 Index were to trade above 1365.

In this case, you would be forced to deliver the 1355 calls because you sold the contract. But because you also purchased a 1365 call contract as protection, you would only be on the hook for the ten point difference. Or $10 per 'share'. Even if the SPX were to skyrocket to 1380, you couldn't lose any more than $10 per 'share' or $1,000 per spread.

And because you placed two credit spreads, one at the top of the market and one at the bottom, even if the market penetrates one of your credit spreads, your other spread should still be profitable.

So the market can go up and down like a roller coaster for all you care. As long as it doesn't come off the tracks, you could still profit.

Thursday, June 22, 2006

Flat and Lifeless

Well hasn't the past few months been up and down?

After the incredible rally in Gold, Silver, Platinum and Copper - the past month has seen all the metals tail right off.

If you survived the rise and didn't get caught out - then there hasn't been many trading opportunities for us since.

Crude Oil has been quite flat.

Orange Juice looks like it might present some near term opportunities.

Sometimes it's simply better to sit and wait for the right conditions.


Tuesday, May 02, 2006

Caution on Margins

A news report just came out suggesting that the current boom in commodities might be getting too warm.

The report shows that the London Metals Exchange is raising it's margin rates for different metals. Copper is going up from $6,700 to $14,575. Aluminium & Zinc mnargins have doubled also.

This means that the exchange is worried that investors don't have enough cash backing for the postions that have.

It would pay to make sure your margin to equity ratio is not getting out of hand.


Thursday, April 27, 2006

Gold & Oil

This post was recently published by Colin Twiggs, author and expert behind Incredible Charts software. His site is well worth looking at and contains great information and analysis like this.

For more information see: http://www.incrediblecharts.com/

The Gold-Oil Ratio

Gold and crude oil prices tend to rise and fall in sympathy with one another. There are two reasons for this:

  • Historically, oil purchases were paid for in gold. Even today, a sizable percentage of oil revenue ends up invested in gold. As oil prices rise, much of the increased revenue is invested as it is surplus to current needs -- and much of this surplus is invested in gold or other hard assets.
  • Rising oil prices place upward pressure on inflation. This enhances the appeal of gold because it acts as an inflation hedge.
Gold Price History

The chart below starts with the Yom Kippur war between Israel and its neighbors in 1973 -- and the resulting Arab oil embargo when crude oil rocketed from $3 to $12/barrel. This was followed by the 1978 revolution in Iran and the Iran-Iraq war in 1980 which lasted until 1988. Iraq then invaded Kuwait in 1990, but the ensuing Gulf War had a limited effect on gold prices.

Gold went into a decline until awakened from its slumber on September 11, 2001. The invasion of Iraq followed in 2003, initiating a strong up-trend, and prices have lately spurred even higher as tensions escalate over Iran's nuclear program.

Oil Price History

Yom Kippur started a huge spike in oil prices with the Arab oil embargo in 1973. This was followed by another spike in 1978 at the time of the Iranian revolution, culminating with the subsequent invasion by Iraq and the start of the Iraq-Iran war. The Saudis substantially increased production in 1985 and the Iraq-Iran ceasefire further eased shortages in 1988. The invasion of Kuwait and ensuing Gulf war caused a brief spike in 1990, but a relatively stable period then followed -- until 1998 when OPEC increased production while demand was falling due to the Asian financial crisis, causing a slump in prices. Subsequent production cuts saw price recover, before September 11 and the 2003 invasion of Iraq heightened fears of further shortages.

Readers need to bear in mind that the above prices are not adjusted for inflation. In today's dollars, oil traded at close to $100/barrel and gold above $2000 during the 1980 crisis.

The Gold-Oil Ratio

The easiest way to eliminate inflation from the above charts is to express price as a ratio: How many barrels of oil you can buy with an ounce of gold.

Gold-Oil Ratio = Price of Gold (per oz.) / Price of Crude Oil (per barrel)

The gold-oil ratio helps us to identify overbought and oversold opportunities for gold. The chart below shows solid support between 8 and 10 barrels/ounce of gold over the last 30 years, with occasional spikes carrying above 20 but seldom holding for any length of time.


The gold-oil ratio identifies:
  • Buying opportunities when the gold-oil ratio turns up at/below 10 barrels/ounce.
  • Selling opportunities when the gold-oil ratio turns down at/above 20 barrels/ounce.

You don't have to be a fantastic hero.
You can be just an ordinary chap, sufficiently motivated to reach challenging goals.

~ Edmund Hillary

Colin Twiggs

Wednesday, April 19, 2006

Gold to set course for $US1000

By Jeremy Naylor and James Poole in Singapore

JIM ROGERS, the former George Soros partner who foresaw the start of a commodity rally in 1999, says the boom in energy and raw material prices will endure, driving gold to a record $US1000 an ounce.

"The shortest bull market for commodities lasted 15 years, the longest 23 years," Mr Rogers, 63, said in Singapore on Monday. So if history is any guide, "they've got a long way to go".


Printed in SMH by Bloomberg

Wednesday, March 29, 2006

Market Spike

Over the past few days the Gold and Silver markets have really moved into a nice position for us. Additionally, Crude seems have spiked as well.

Gold is up 1.74% today and Silver 3.04%.

Crude is passing thru $66.50.


Friday, March 10, 2006

Beware of Silver

The enormous rally in gold may pale next to silver if the US authorities allow a silver ETF (Exchange-Traded Fund) to begin trading.

During the last 15 years, the aboveground silver supply has dwindled more than 55%. Yet demand continues to increase.

And, according to the Texas Hedge Report, the advent of a silver ETF might reduce the amount of available silver by more than 600 million ounces, because much of the available supply of aboveground silver would be diverted to back the silver ETF shares.

How could this happen?

For every $100 an investor puts into this ETF, the ETF would have to buy $100 worth of silver - and physically take delivery of it. The supply of aboveground silver could dwindle from a mountain into a molehill virtually overnight.

What does this mean for us?

Be very careful is using our strategy with Silver. As we're likely to see some interesting rises in Silver, that we've never seen before.

As for me, I'm steering clear.