A strategy idea for options trading investors.

TRADE COMMENTARY: Continuing with our mantra of pain in the market, and buying what people need, not what they want … we recommend a buy-write on the PowerShares DB Agriculture ETF (NYSE: DBA). The Fund’s objective is to reflect the performance of the DBIQ Diversified Agriculture Index Excess Return.

With the euro debt crisis continuing, and US debt ceiling negotiations ongoing, we are nervous about the markets. Volumes in equities are a bit lower, and the movements tend to be much exaggerated both on the good and bad sides. No matter what happens with the debt ceiling, or how many more people sign up for Facebook, people are still going to have to eat. We have experienced unusual weather patterns for the last year and a half, not only in the US, but globally. This has effected farming and plant productions adversely.

We want to be long agricultural commodities in the foreseeable future, but be able to take advantage of any large upswing in the market. The maximum profit loss in this position is well defined, and knowing what your limits are is important before you get into any trade. We think this is the right way to play not only the agricultural markets, but the general market overall.

DATE: July 18, 2011

STOCK/INDEX:  PowerShares DB Agriculture ETF (NYSE: DBA)

STOCK PRICE: $32.50

OPTION PLAY: Covered Call

SELL: 1 OCT 34 Calls @ .90

BUY: 100 Shares of DBA @ $32.50

NET COST: 32.50 – .90 = $31.60

DOWNSIDE BREAKEVEN: 32.50 – .90 = $31.60

MAX PROFIT: (34 – 32.50) + .90 = $2.40

MAX LOSS: $31.60

CALL AWAY % RETURN: 2.40/31.60 = 7.6%

Stutland Equities is a premier futures and options trading company on the Chicago Board Options Exchange. Founded in 2005 and headquartered in Chicago, Stutland Equities specializes in volatility arbitrage across multiple asset classes.