While investor attention turned to the bloodletting in the stock market this week, there appear to be opportunities arising quietly in the commodities markets as a result of this week’s activity.
U.S. equities dropped sharply from the one-two punch of a slide in the Chinese markets combined with investor fears that the U.S. economy could be headed for recession.
While some traders may site U.S. recession fears as the key reason for the decline, we are think the China issue was, and continues to be, the catalyst for this week’s slide in stocks. The Chinese have been desperate to find a way to cool their rapidly expanding economy and curb wild speculation by its citizens in the Chinese stock market. The Chinese government indicated that it might now begin a series of steps to limit economic expansion and speculation. These could include raising interest rates, reducing funds available for lending, taxing capital gains or limiting foreign investments.
Investors are betting that these steps could very well slow the Chinese economy or investment in the region. As a result, Chinese stocks collapsed 9% on Tuesday, setting off a chain reaction of market declines throughout the world.
But what is causing pain to many stock investors may very well have created some opportunities for commodities investors. In our commentary last month, we outlined a case for selling calls in the copper market in the first quarter of 2007. In our view, this new development only adds to the case for selling far out of the money calls in copper. If the Chinese economy does indeed begin to slow, expect copper prices to continue to slide in 2007. China is one of the world’s top consumers of copper and a slowdown will deal a considerable blow to demand. This in addition to the already bearish fundamentals currently affecting copper.
Last week we outlined a strategy of selling puts in the gold market should prices decline. While we didn’t expect such a sudden decline in prices, we feel that the longer-term picture still remains fairly bright for gold and that the sell-off is creating an opportunity.
The gold and silver markets recoiled sharply as a result of this week’s developments, largely as a result of fund and speculator liquidation. Slowing economies in China and the United States means less demand for goods and services and therefore, a lower threat of inflation. As gold and silver are seen as key hedges against inflation, speculators, who were heavily long the market) headed for the doors when the China news hit. We think precious metals were also sharply overbought which has exaggerated the selling this week. Yet, investment interest in precious metals remains keen and if global stock markets continue to decline or, at least produce anxiety, gold will eventually return to its status as a safe haven.
We’re not sure when the selling will run it’s course in precious metals but believe there will be opportunities in the next 7-10 days for selling gold puts at strike prices substantially below the October lows. Remember that when selling puts, prices only need to remain anywhere above the strike price at option expiration for the investor to profit. While not without risk, it is high probability and the only strategy we recommend.
James Cordier, Michael Gross
Liberty Trading Group
401 East Jackson Street
Suite 2340
Tampa, FL 33602
(800) 346-1949
www.optionsellers.com
Watch CNBC’s live interview with Liberty Trading’s James Cordier as James gives his outlook for 2007 gold prices. Now available on our website at www.libertytradinggroup.com/news.html
James Cordier is head trader and president of Liberty Trading Group, a futures brokerage firm specializing in option writing on commodities. James’ market comments are published by several international financial publications and worldwide news services including The Wall Street Journal, Reuters World News and Bloomberg Television News. Michael Gross is an analyst with Liberty Trading Group. Mr. Cordier and Mr. Gross’ book, The Complete Guide to Option Selling (McGraw-Hill 2005) is available at bookstores and online retailers now.
***The information in this article has been carefully compiled from sources believed to be reliable, but its accuracy is not guaranteed. Use it at your own risk. There is risk of loss in all trading. Past performance is not necessarily indicative of future results. Traders should read The Option Disclosure Statement before trading options and should understand the risks in option trading, including the fact that any time an option is sold, there is an unlimited risk of loss and when an option is purchased, the entire premium is at risk. In addition, any time an option is purchased or sold, transaction costs including brokerage and exchange fees are at risk. No representation is made that any account is likely to achieve profits or losses similar to those shown, or in any amount. An account may experience different results depending on factors such as timing of trades and account size. Before trading, one should be aware that with the potential for profits, there is also potential for losses, which may be very large. All opinions expressed are current opinions and are subject to change without notice.
