A Note for the Serious Investor:
The material that follows is written for high-net-worth and accredited investors who are serious about understanding the use of commodity options in a professionally managed portfolio. Futures and options involve substantial risk of loss, are not suitable for all investors, and only risk capital should be used. This article is for educational purposes only and is not a recommendation to buy, sell, or hold any specific futures contract, option, spread, or commodity position.
Deciding to allocate capital to an option selling portfolio can create a maze of questions. When you are initially learning about selling options, especially if you are considering going it on your own, one of the first questions that enters your mind is “How do I know the best options to sell?”
Even if you have a managed account, where professionals select the options for you, you still might benefit from knowing the criteria they are using to take premium on your behalf.
While option selection for a diversified portfolio is a broad subject, this month’s Academy column will give you the “big 3” rules to follow to help keep you out of the red and hopefully power up your bottom line knowing, of course, that there is risk in every trade.
The Truth about Picking the “Best” Option
Mathematicians and quants might obsess over their calculators and software programs in an attempt to select the “perfect” option for any situation. But the truth is, there is no perfect option to sell. There is no “best” option to sell. Option selling is not graded on the A B C D F scale. It is pass/fail. If it expires before hitting your risk parameter, you sold the right option. Pass. You win. If it hits your risk parameter, fail, you lose. Therefore, any series of options could be the “right” one.
One of the big attractions to selling premium is you do not have to be perfect. Being good enough can win in the option selling game. That being said, there are some things you can do to ramp up your odds and hopefully give you a smoother ride to where you want to be.
Your Objective
Ideally, you want to pick options that not only expire worthless but quietly decay to zero – preferably well before expiration. At the same time, an adverse move can bring an increase in premium to your short option – potentially resulting in pressure on your position. While these may ultimately provide profits, they do not always work so well for your state of mind. Your objective is to select the former, avoid the latter. The same objective applies whether you sell options outright or structure them as credit spreads, where a further out of the money option is purchased to define your risk at entry.
Therefore, while there are no real “best” options to write in a portfolio, a good option to sell is any option that gives you a smooth ride to worthless expiration. Below find 3 Golden Rules we have found and honed for pursuing just that.
The Three Golden Rules
1. Know Your Fundamentals. Unlike equities, commodities are driven largely by physical supply-and-demand fundamentals, which often determine their long-term price direction. While institutional money and public sentiment can influence commodities in the short term, many commercial participants buy and sell futures contracts to hedge actual production or usage of the commodity.
These commercial traders are keenly aware of the actual supply and demand for these products. You should be too.
Fundamentals can give you a clear idea of where prices are unlikely to go and provide you with an advantage over the average commodity investor who is simply following a chart. Combining this knowledge with a probability-based strategy such as option selling can be a potent combination. There are many good sources of fundamental data for investors such as the USDA, the EIA, news wire services or private subscription sources. We get our data and information from a variety of sources. However, if you have the time to do your own research, one or two good sources of fundamental info should be all you need.
2. Sell Deep out of the Money. Select markets where premiums are available deep out of the money. 30, 40, 50 sometimes even 100% out of the money. Rarely possible in stocks. Quite feasible in commodities. This forces the market to make an extreme move against your position to put the option in the money. It also allows you to manage your risk based on the option value – not on the price of the underlying or its proximity to your strike. Investors who prefer a risk-defined structure can apply this same rule to the short strike of a credit spread. Purchasing a further out of the money option caps your exposure at entry, although it reduces the net premium collected, and losses up to that defined amount are still possible.
In the example below, call credit spreads that involved selling the $7.00 strike were available through much of 2025 and early 2026 which was 70+% out of the money.
Example: May Coffee
Selling deep out of the money can mean seeking strike prices up to 50-100% above or below the current (underlying) price of the commodity.
3. Trade Time for Distance: This is the cornerstone of the entire investment plan we recommend for high-net-worth individuals. Many books and courses that address selling options will advise selling options within 30 days of expiration to gain the fastest time decay. While this may make sense for option sellers collecting premium on open stock positions, I could not disagree more when it comes to premium collection in commodities.
Getting any significant premium with this little time means selling close to the money – too close for a person that enjoys their sleep as much as I do. Close to the money strikes may decay quickly if you are right the market. But even a temporary fluctuation can put your option in the money. Guessing short-term market direction is exactly what you are trying to avoid by selling options. Be willing to sell options with more time (3, 5, 7 even 9 months.) This enables you to sell deep out of the money strikes that are less likely to be affected by those short-term fluctuations in the underlying.
Of course, choosing the right strategy, managing risk, and structuring your portfolio are also essential. But it all starts with selecting the right options to sell. Whether you sell commodity options or credit spreads on your own or rely on a professional to do it for you, understanding how options are chosen can make you a more effective trader—or a better-informed investor.
Risk Disclosure: Trading futures and options on futures involves substantial risk of loss and is not suitable for all investors. Certain option-writing strategies, particularly uncovered positions, may involve substantial or potentially unlimited losses. Adverse market movements may also result in increased margin requirements and the need to deposit additional funds. OptionSpreaders.com primarily utilizes spread-based strategies intended to offset or limit certain risks, but spreads do not eliminate the possibility of substantial loss. Investors should carefully consider whether these strategies are appropriate in light of their financial condition, investment objectives and ability to bear risk. Past performance is not necessarily indicative of future results.
