Leveraged options are options traded on the US Futures Exchanges. “Leveraged” options is just another word for options on Commodities Futures Contracts. These include physical products such as corn, crude oil, silver, coffee, soybeans, and cattle.
These options trade on federally regulated US Exchanges, including the Chicago Mercantile Exchange (CME,) the Chicago Board of Trade (CBOT,) the International Commodities Exchange (ICE,) and New York Mercantile Exchange (NYMEX) in New York.
For a list of recommended futures contracts most friendly to option selling – see our recommended futures contract list with contract sizes and point values included.
You may have heard a lot of things about commodities futures trading.
But there are some built in advantages you may have never heard of. And in my opinion, that is probably the way the pros want to keep it.
Lets have a look.
Most high net worth investor’s experience with options is in the world of stock options.
If you’ve traded stock options, you may have already come to the conclusion that selling them is the way to go. Whether you are selling covered calls or selling puts in hopes of buying the stock at a discount, selling stock options can be a solid beginner’s strategy for generating both income and return.
However, it has its drawbacks.
Here are the main drawbacks of selling stock options:
If you sell stock options but are tired of these kind of limitations, it may be time for you to graduate to a whole new playing field.
Have you had some success selling stock options and now feel you’re ready to move up to the big leagues?
Are you a high net worth investor who believes in diversifying your assets through bona fide alternatives?
Are you a traditional investor with little experience in trading options but desire an investment that can potentially offer outsized return, real diversification and potentially profit in bull, bear or sideways markets?
If you answered “yes” to any of the above, selling leveraged options either on your own or through a professionally managed option selling account with OptionSpreaders.com may be for you.
Should you choose to enter into the world of leveraged option selling, you will enjoy these benefits:
Now, to be clear: leverage magnifies risk just as it magnifies return.
But used responsibly with spreads, risk limits, and smart sizing it becomes a powerful tool to put capital to work intelligently.
Futures options are automatically leveraged by the exchanges. This means that the options are too. There is no need to “borrow” money on margin or any of the aspects of trading on margin involved with stocks. In futures, this is automatically done and its how everyone trades them. This automatic leverage is what makes the big returns on futures options possible. Of course, with potential for bigger returns come increased risk of loss. Only risk capital should be used in a futures account.
If you sell a stock option and take a $200 premium, you are generally paying 10 to 20 times that amount in margin to hold that position. In commodities options, you can sell options for
Thus a margin for a $500 option premium may only require a $750 to $1,000 margin requirement from you. We’ll let you do the math.
Suffice to say, if you get satisfaction from targeting potentially high ROI on your investments and are comfortable with a certain degree of risk, leveraged option selling on futures can be an outstanding choice.
Using commodities leverage safely and to your advantage is covered thoroughly in our free guide The High Net Worth Investor’s Guide to Selling Leveraged Options available at OptionSpreaders.com/Options-Guide.
As we discussed in the Why Sell Options page, deep out of the money (DOM) strikes offer the options with the highest probabilities of expiring worthless. In futures, strikes up to 50% or more above or below the underlying’s price are often available at attractive premiums. You’ll rarely find that in stock options.
These available strikes are another advantage that automatic leverage brings to the table.
A commodity option selling portfolio offers a true diversifier – a freedom that is rare in the financial markets. Option Selling can be the key to the chains that bind you to your overweighted stock portfolio. Now you may argue that either
or
Both of these statements could be true. And they would also both be irrelevant. For a commodities option selling portfolio can be totally uncorrelated to anything else, even the commodity indexes themselves. Why?
Two reasons.
We all remember 9/11. How about the financial crisis of 2008? Remember Lehman Brothers and Bear Stearns? How about the COVID Pandemic? On the days and weeks those events occurred, when companies and paper collapsed in value, some becoming virtually worthless overnight.
But guess what? During those perilous days – people still woke up and ate their corn flakes and drank their orange juice. They still put gasoline in their cars and drove to work (some of them) where they drank their coffee and ate their chocolate doughnut made with wheat, sugar and cocoa. And to comfort themselves, they went home to their nice warm natural gas heated home, got out a pound of ground beef (raised on USDA approved soybean meal) for dinner and retired to their den. Here they retrieved their gold and silver coins they had hidden in the safe and counted them to comfort themselves in the moment. Why? Because they had value. And they feared when they turned on their computer screen tomorrow, all of that paper they had their money in would not.
“Sugar can’t go bankrupt. Soybeans can’t go out of business.”
Does this mean the commodities are always a better investment than stocks? Not at all. One is not necessarily superior to the other. Are we suggesting that stocks are more dangerous or “risky” than commodities? Of course not.
What it does mean is that no matter what goes on in the world, commodities, such as the ones listed above, will always have some kind of demand. And where there is demand there will always be value. It may not always be the same value. But a value nonetheless. A pound of sugar will always be worth something to someone. Same for a barrel of oil or a bushel of wheat.
As a high net worth investor, you are likely already aware of the crucial practice of diversifying your assets. With commodities, you gain an extra feeling of security in knowing you have a component of your assets in investments you can hold in your hand –a lump of silver, a gallon of gas, a bushel of corn – things you can touch, feel, use.
No matter what happens in the world, it remains likely that Americans are still going to want breakfast in the morning and dinner at night, fill up the gas tank, stay warm or cool, and feel “safe” with some precious metal in the closet. The same cannot be said for pieces of paper that have names like “Enron” or “Lehman” printed on them.
Sugar can’t go bankrupt. Soybeans can’t go out of business.
** This advantage is enjoyed exclusively by commodities option sellers
If you think you pay your “fair share” and then some, commodity option selling could be the right strategy for you. Profits on option selling are taxed on the “60/40” rule – 40% as short term capital gains but 60% at the same rate as dividends. This makes them a favorable investment for those in high tax brackets.
In addition, your end of year taxes on your commodity option selling account are surprisingly simple. You get a straight 1099 (profit/loss) statement and you pay your taxes based on that one figure. No more reconciling each and every trade for the year.
This aspect makes the investment both simple to account for and tax efficient.
With benefits, of course, come drawbacks. As a sophisticated investor, you know the gold rule: There is no free lunch. Every investment comes with its own drawbacks.
Leveraged futures options are no different. And it is this: The leverage that makes futures options so attractive, is the same leverage that can drive some investors away.
Why?
The risk. With increased profit potential comes increased risk. Bigger risk means bigger potential losses. If you are not comfortable taking bigger risk for bigger return, selling leveraged options may not be for you.
That being said, OptionSpreaders.com has taken a big step towards managing that risk in a responsible fashion. It is our trading plan and philosophy that we call The Ultimate Evolution of Option Selling™. This plan seeks to hedge risk through the exclusive use of covered credit spreads. This just happens to be our specialty.
To learn more about this strategy that many investors find to be a more comfortable way to trade leveraged options, visit our Why Credit Spreads page.
Feeling a bit overwhelmed? Not to worry. OptionSpreaders.com was created to help investors just like you – interested, capable, capitalized, but lacking the experience or time to trade leveraged options on your own. That’s what WE are here for! To learn more, request our Investor Information Pack below.
Why Sell Leveraged Options?
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