Commodities are attractive at this market juncture as a way to reduce the overall correlation of your portfolio to the market. During periods of market turmoil, stocks will tend to follow market fluctuations. Exposure to precious metals, energy and interest rate products offers greater opportunities for diversification and flexibility.
In general, I expect interest rates on U.S. debt to rise over the long term, and I am bullish on precious metals. For assets like oil, natural gas and agricultural commodities, I think it makes sense to keep a shorter-term and more nimble orientation.
Keep reading to get two commodity option trades I like right now.
#1 Natural Gas Options
Natural gas futures expiring in June recently closed at $4.258. After declining in early 2010, natural gas has traded around the $4 level for almost two months. Technical momentum has been building quietly, and traders who have a bullish view on gas may consider a vertical call spread to capture upside movement while reducing their risk and capturing higher implied volatility in out-of-the-money calls.
The 4.3 NG call options expiring June 25 are about 26.5 cents, while the 4.5 calls can be sold for about 18.5 cents. Buying this spread for an 8-cent debit means you’re risking $800 to potentially make $1,200; the position will break even as long as natural gas is above $4.38 at expiration.
#2 U.S. Treasury Bond Options
U.S. Treasury bond options saw a sizable lift in implied volatility in early May as investors rushed to the relative safety of Treasuries at the height of the Greek debt crisis. Those high option premiums persist, and this provides an attractive opportunity for option sellers.
Buying the 115 puts and 125 calls and selling the 117 puts and 123 calls — all to expire in June — will generate a net credit of about 45/64. This iron condor will be profitable if bond futures close between 116.32 and 123.72 at expiration, and entails risking roughly $1,300 to make $700.
Because the situation in Europe is still rather fluid, it is advisable to delta-hedge this trade on at least a weekly basis.
If commodity options are new to you, we can help. Just keep reading.
