Option Sellers v2

HIGH NET WORTH INVESTOR SERIES
Option Selling
on
Steroids
How Stock Option Sellers Can Get
Bigger Premiums, Smaller Margins and
Real Diversification by Graduating
to Commodities Options
James Cordier, with Michael Gross

Authors of McGraw-Hills The Complete Guide to Option Selling.
Copyright 2016 by OptionSellers.com

All rights reserved. No part of this book may be reproduced, scanned,
or distributed in any printed or electronic form without permission.
First Edition: February 2016
Printed in the United States of America
ISBN: 9-781682-732700
2
Option Selling on Steroids
Introduction: James Cordier.......................................................... 5
Chapter 1 The Casinos Worst Kept Secret................................. 8
Chapter 2 Where Stock Option Sellers Come up Short............ 17
Chapter 3 Selling Optionson Steroids................................... 23
Chapter 4 How to Sell an Option on Steroids........................... 32
Chapter 5 Creating a Life-Long Asset....................................... 46
Conclusion ................................................................................... 57
Resources ..................................................................................... 60
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4
Introduction
This is an investment manual.
Not one like you get from Merrill Lynch or TD Ameritrade. Not 101
strategies you can use to get rich. And certainly not the common, sanitized
everything is too complex for you to understand so here is what you have
to accept fodder peddled by most books, newspapers or investment gurus
(Hint: Susie Orman wont like it.)
That being said, it is an investment manual for you. For if you bought this
booklet, chances are that you are not a common investor. You likely got
where you are today by doing things better than others. Thus, it stands to
reason, you expect more from your investments.
We do not know each other, yet. But I am willing to bet that you likely
possess some or all of the following traits: You are not satisfied with the
5%+ return your financial advisor tells you that you should be thrilled
with. In fact, you believe there are ways to do better maybe a lot better.
Youre not comfortable placing a considerable portion of your net worth at
the mercy of a stock market that seems to blow whichever way the wind
wants to carry it. Youve likely already discovered the magic of selling
options in your stock portfolio. And you probably bought this book
because you want to learn how to do it better whether that means
getting larger returns, more consistency, or profiting regardless of which
way the S&P lurches this year.
Am I close?
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Option Selling Like Youve Never Seen it Before
The good news is, youre going to learn how to do all of those things in the
short span of the following pages. Its not going to be in the way you might
expect. Youre not going to learn how to write a better covered call or how
to select the best stocks for cash secured puts. No, Im afraid were going
to have to go a little bit beyond that to get to real enlightenment.
Youre not going to read about this in Barrons, not going to hear about it
from your stock broker and youre not going to see it on Options Action.
You are, however, more likely to find it in the trading room of a hedge fund
or the quiet enclave of a seasoned professional trader.
Is this approach perfect? No. Can you still lose money? Absolutely.
But if you chose to take this journey, I promise you will be a better investor.
More importantly, youll springboard yourself onto an elite level of self
empowerment, capable of potentially generating cash for a lifetime, in
most any market condition, at levels of both return and consistency you
might not have thought possible. Use it to supplement or diversify your
existing portfolio or as a core portfolio in and of itself. You can use it
to potentially grow your wealth, help fund a retirement or simply build
security through diversification. You can employ it actively or passively
(as well learn more about later.)
How Do I Know?
How do I know? Because as founder and head portfolio manager of

OptionSellers.com, I have spent the last 15 years of my life helping
investors from around the globe harness and employ the power of this little
known, high odds strategy. Ive made it my mission to hone it, optimize
it, perfect it. The flagship book I co-authored, McGraw Hills The
Complete Guide to Option Selling has been on the market since 2004, is
published in 5 languages and has just been released in its fully updated,
2015 Third Edition. Almost every major financial media has featured
us, our book, or our strategy. I appear regularly on CNBCs Squawk on
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the Street and Closing Bell, Fox Business, and Bloomberg Television
as a guest analyst. I have been interviewed on this approach by dozens
of financial journalists including Larry Kudlow, Neil Cavuto, Robert
Lenzner of Forbes and Dr. Donald Moine of Morningstar Advisors.
I tell you this not to brag, but to let you know that this strategy is the real
deal. And the fact that few people have heard of it, let alone mastered it,
should make you all the more excited about it. Ive traded commodities
and options for over 30 years the last 15 exclusively selling options
on behalf of my high net worth clients. Theyre employing this strategy
365 days a year, in good and bad markets, calm or tumultuous geo-
political climates and through economic booms and busts. They dont just
sell options. They sell options on Steroids. You can too.
As you read through these pages, I believe youll come to the same
conclusion I have: Option Selling on Steroids is simply a smarter way of
investing.
Welcome to the club.
James Cordier
January 2016
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1
The Casinos Worst
Kept Secret
If You Currently Sell Options, Youre Already in on It.
I recently read a book on gaming theory where I learned that slot machines
in Las Vegas have a payout rate of about 95%, on average. Interestingly
enough, payout rates on Atlantic City machines are marginally lower, even
though there is a state mandated 83% payout rate for those machines.
A payout rate is the amount of money a machine takes in vs. what it pays
out. Thus, a 95% payout rate means that over the course of a day, a machine
pays out, on average, 95% of the money it takes in from players.
Where does the other 5% go? To the Casino, of course. You see, the Casino
makes money regardless of who wins or loses. Why? Because the odds
are stacked in their favor. Sure, theyll pay out to a player every once in a
while. Thats what keeps them coming back. But eventually, over time, the
Casino will get it all back, and then some.
The Casino operates in a gambling environment. But the Casino doesnt

gamble. It simply takes in money steadily, consistently, reliably over and
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over and over again. It does this by using odds to its advantage. Its the
Casinos worst kept secret.
In investing, operating your portfolio using the Casino model has a name
too. Its called selling options.
But if you sell stock options, youre already in on this secret. You know the
advantages. You know the potential boost in returns. You know the benefit
of percentages.
However, before we get to Option Selling on Steroids, lets first make sure
we fully understand why were selling options in the first place.
Buying Options: A Game of Hope and Losing
It's been said that of all of the emotions an investor can experience,
hope is the most dangerous.
Buying options is often a favorite strategy of small, individual investors

trying to take a small amount of capital and turn it into a large payload.
Theirs is a game of hope. As you might guess, their hope rarely pays off.
As my friend Dr. Alexander Elder, author of two of the most famous

trading books of all time once told me, Options are a hope business. You
can buy hope or sell hope. Which would you rather do? His source of this
wisdom is featured on the next page. (You can read, and listen to our latest
interview with Dr. Elder on our blog at www.OptionSellers.com/Elder)
The option buyer is the casino gambler, sitting at the slot machine,
hopefully pulling down on the handle. His risk is limited to his premium
investment. But the odds are stacked hopelessly against him. For on
average, about 80% of all options held through expiration will end up
expiring worthless. And thats ALL options. For deep out of the money
options (which many of these players prefer because they are cheap,) the
odds are worse. In some cases, much worse.
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As such, the premiums buyers pay to purchase these options (pull the
machine handle) will be entirely lost the majority of the time.
Where do these premiums go? To the sellers, of course. Selling options has
been a base strategy of professional traders and commercial hedgers for
years. They sell options, and small, often lesser capitalized investors buy
them. Most of the time, the options expire worthless and the professional
traders take the money.
on average, about 80% of all options held through

expiration will end up expiring worthless.
Is option selling guaranteed every time and risk free? Of course not. Selling
options entails its own set of risks. For now, know that as an option seller,
you begin every trade with the odds of success in your favor. That is more
than can be said for most any other investment strategy.
Why is it so Difficult to Make Money Buying Options?
Option buyers generally want the market to move towards or eclipse a

specific price level the strike price. An option will generally show its
greatest increase in value after the market has moved beyond its strike
price. It is for this reason that buyers of options generally need the market
to make a moderate to large scale move in order to show any kind of
profit. Complicating matters is that an option buyers timing must be nearly
perfect. Time begins working against him, eroding the options value the
minute he buys the option
Thus, an option buyer must

A. Correctly predict a large scale move, and the direction of
that move, in the underlying market
B. Predict the precise time period when this move will occur
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As you already know, the odds of hitting that trifecta are low. Most of the
time, the options expire worthless and the professionals take the money.
However, occasionally, a market will make a considerable move in favor
of the buyer in which case his small investment in the option can show a
substantial profit. This is what attracts small speculators to option buying.
And also what keeps all the books, courses and newsletters on Get Rich
in Options coming.
Options are a hope business. You can buy hope or

sell hope. I am a professional I sell hope. I come
to the floor in the morning and find what the public
wants. Then I price that hope and sell it to them.
Anonymous Market Maker, American Stock Exchange
from:Come into my Trading Room, by Dr. Alexander Elder
(John Wiley &Sons, 2002)
Yet the buyers biggest enemy is not the market. Its not even the option
seller. The buyers biggest enemy is time itself. Time decay is gradually
eroding the value of the option day by day. As the option enters its final
90 days, the rate of time decay accelerates until the value of the option
reaches zero at expiration. This phenomenon is illustrated in the graph
below:
Note how time decay accelerates during the 90 days prior to expiration
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As you can see, the reason it is so difficult to make money as an option

buyer is that the odds are stacked against you. You have so many factors
working against you as an option buyer, making any money at all can often
seem a matter of blind luck.
Using the Casinos secret to your advantage means taking those odds and
putting them in your favor. It means becoming the option seller.
But odds are just one reason to be an option seller. When you started
selling stock options, you had a reason for doing it. But you might not
have considered the other advantages that could come with it.
The Option Selling Solution
If buying options is a losing game, a smarter way of investing would seem

to be Selling Options.
If you remember the 1980s movie Wall Street, Gordon Gekko only
bet on sure things. While there may be no such thing in legitimate
investing, professionals are looking to stack the highest odds in their
favor before putting money at risk. Using strategies such as inter-
market spreads, swaps and arbitrage, pros can increase odds of success
without betting on outright market direction. Option selling fits squarely
into this category. The difference is, while the former strategies are
largely unavailable to individual investors, the strategy of selling
options is widely accessible to anyone willing to pick up a book and
learn how.
Mr. Gekko only bet on sure things.

While this does not exist in legitimate
investing,there is no rule against
stacking odds in your favor before
risking capital.
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Selling options, however, is not without its drawbacks. It takes a fair

amount of capital to implement the strategy effectively. If risk is not
managed properly, losses can accrue. Gains tend to accumulate gradually
instead of in large chunks. It takes an independent thinker to really grasp
its advantages over regular investing or trading. Most discouraging is
that many in the financial industry will discourage you from utilizing
such a strategy better to go with their stock pick of the week.
Therefore, you will not find great amounts of information about option
selling available to the general public. It is for these reasons that few
investors actually employ an option selling approach as a core portfolio
strategy, or for that matter, are actually familiar with the option selling
approach at all.
Yet, selling options is a strategy that has been practiced by professionals

and institutional traders for decades. It is only within the last several years
that the individual investor is beginning to catch on to what they are doing.
Why do so many professional investors choose option selling over other

investment strategies? Because of the many advantages it offers them.
These include those listed below:
Advantages of Selling Options over other

Forms of Investing
1. You Invest with High Odds of Success in your favor on Every

Trade
2. You put time ON your side. Thus timing of trades becomes less
important.
It Can Excel in Bull, Bear or Neutral markets Regardless of

3.
price direction, government policy or economic developments
4. An option selling portfolio can be uncorrelated to anything else,

even the underlying assets you are trading
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5. You do Not have to pick Price Direction anymore
Consistency Targets small, consistent gains over and over

6.
7. Potential for Outsized Returns
Tax Advantages for High Net Worth Investors

8.
Professionals and market makers like to play odds, not market direction.
They use the Casinos secret.
Selling options, however, is not a silver bullet. There are drawbacks to the
strategy as well. These include:
Drawbacks of Selling Options
1. Potential for unlimited risk on each trade if you allow losses to

run unchecked.
2. Profits tend to accrue gradually instead of suddenly, meaning it

can be boring for action oriented traders.
3. Your profit potential on each trade is limited to the premium

you collect
Becoming an Option Seller
If you become (or already are) an option seller, you give up swinging
for the fence on every trade (what everybody else does) and do the
opposite. In other words, you give up your chance to hit a home run in
order to hit a series of singles, over and over and over again. Babe Ruth
led the league in home runs for many years. But he also led the league in
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strike outs. That may have worked for the Babe. Not so much if youre
simply looking for a solid way to grow your wealth without a lot of drama.
I dont buy options. Buying options is another

fast way to the poorhouse. Someone did a study
for the SEC and discovered that 90 percent of
all options expire as losses. Well, I figured out that if
90 percent of all long option positions lose money,
that meant that 90 percent of all short option
positions make money.
Jim Rogers, Co-Founder
(with George Soros) of the Quantum Fund
As a seller of options, you do not require the market to make a big move
in order to profit. An option seller wants the options to expire worthless
for in that circumstance, he makes his profit. And the option will expire
worthless, as long as the strike price has not been reached. Therefore,
unlike the option buyer, you as the seller of an option can profit if the
underlying market moves in your favor (away from the strike price),
remains steady, or even if the market moves moderately against your
position.
Not only is Asset Appreciation not required, no movement at all is

required. When selling options, you do not have to pick where the asset
price is going to go. You only have to decide a far away price level (strike
price) on either side of the market that the price of the underlying asset
will not go.
The risk to the seller is that the underlying market price moves beyond
the strike price of the option. There are, however, many ways to manage
this risk.
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Trying to get rich off of the next big move is for amateurs. It sells books
and courses and draws in the inexperienced investor looking for a home
run.
The pros are playing the odds. If you are serious about achieving consistent
growth in your portfolio regardless of bull, bear or sideways markets,
you may want to follow their lead.
You, the Option Seller
But as a stock or index option writer, you already know all this. You picked
up this book because you already sell options. This chapter just confirms
that you are on the right track. You just want to learn how to do it bigger,
better and more consistently.
Were getting to that.
But before we discuss putting your option selling on Steroids, we have to

first address the weaknesses in what you may already doing.
Thats the subject of the next, very important chapter.
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2
Where Stock Option
Sellers Come up Short
Lawrence G. McMillan authored Options as a Strategic Investment in
1980. It was, and remains an all time classic text for any aspiring options
trader. I still remember as a newly registered broker, buying and devouring
it as though it were wisdom from the heavens. It remains a staple in my
desk side library and I still refer to its guiding principles, over 35 years
after its original publication.*
I mention this because Options as a Strategic Investment was where I

first learned about writing covered calls on stocks. It was the very first
strategy covered in the book. And it is probably the #1 strategy employed
by stock option sellers today.
To quote McMillan The strategy of owning the stock and writing the call
will outperform outright stock ownership if the stock falls, remains the
same, or even rises slightly.
That sounded pretty good. And it is good. If you currently sell covered
calls on stocks that you already own, youre a savvy investor.
(* Lawrence was recently a featured guest columnist)
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A second common strategy stock option sellers employ is selling cash

secured puts. This is an approach championed by a number of authors as
well. This involves selling naked puts on stocks you would like to own,
and taking the premium. If the stock price never makes it down to your
strike you keep the premium. If it does make it to the strike price, you
get the stock at the lower price, and you keep the premium. Champions
of this strategy bill it as a win or win scenario. While this isnt the case
all the time, this is certainly a viable approach and I know many investors
who have done well with it.
There are hundreds of ways to sell options on stocks and these are simply
two of the most popular. Ive met hundreds of high net worth investors
from around the United States and the world and can tell you that selling
options on stocks is very popular among that crowd.
But its not perfect.
The Drawbacks of Stock Option Selling
In fact, it has some substantial drawbacks. Among the biggest complaints

I hear are these:
1. My Margin Requirements are High: Ill never forget the first time I
went to sell a put option on a stock I wanted to own. I would have
taken the stock but I was really just after the premium. The stock
was at $110 and I wanted to sell the 105 put. It had a premium of
$100. I was ready to sell it until I discovered the margin requirement
was just over $10,000. Thats a 1% return on my money. Granted
it would have been over a 45 day period which perhaps is not a
bad ROI. But it seems a lot of money to tie up for such a small
payoff. This is a common complaint I hear among stock option
investors I meet with. Margin formulas can vary based on the
brokerage and your level of clearance. However, most stock
option sales have a 1 to 2% ROI over 30-90 days. At the end of the
year, that might be alright, if you win most of the time. But one or
two bad months can erase a whole lot of work.
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2. I Have to Sell Strikes Close to the Money: Youll notice that in most
stocks most of the open interest, volume and more importantly,
premium, is concentrated in the first 1 2 or 3 strike prices out of
the money. After that, there really isnt enough premium to make it
worth your while. That means, if you selling stock options, puts
or calls, youre likely selling them very close to the money. This
usually means having a willingness, or even intention of also trading
the underlying at some point. That may be fine, but there are plenty
of moving parts in that equation. For pure option sellers who just
want premiums, it can be nerve wracking.
3. The Premiums I get are Small: This is the sister complaint of #1.
Unless youre trading a $1,000 stock, most of your premiums are
going to be tiny. Most of the major stocks on the S&P 500 have
strikes 1, 2, 3 strikes out of the money offering premiums of $60,
$70, $80. Some, if youre lucky, will pay you $100 even $200. It
seems to be a lot of work for such paltry amounts. I know they may
add up over time. A lot of work, babysitting and funds invested in
margin nonetheless.
Ill openly admit that my trading experience with individual stock options
was limited to some personal experimentation many years ago. I gave up
on it then in pursuit of a better path. I do however, work closely with many
investors who either have or continue to trade stock options extensively.
I can tell you that these 3 complaints are nearly uniform and consistent
amongst all.
Some, however, believe they can solve this dilemma by graduating to a

higher plane.
Is Selling Index Options the Solution?
Selling index options is a wildly popular strategy amongst semi-

sophisticated investors. And for good reason. You get all the benefits of
option selling mentioned in chapter one. But you also avoid some of the
weaknesses of selling options on individual stocks.
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Selling index options can offer better premiums and deeper out of the
money strikes. This opens up the possibility of option spreads. A favorite
strategy of many I speak with is selling iron condors on the indexes.
I have nothing bad to say about selling index options. Only a word of
warning. There was an early, more famous option selling advocate, whos
name I will not mention here,* who made both a name and a fortune off of
selling index options.
Then he blew up.
This gentleman was (and is) a brilliant investment mind and eventually
recovered. But he made one big mistake. He considered indexes a fully
diversified market because everything was included in the index. But all
of his positions were in one market the index! Thus, if he gets it really
wrong, just once, it can hurt real, real bad. He did, and it did.
You dont want to make that mistake. Indexes can be a great market for
selling options. But they should only be a small portion of your option
selling portfolio. Unfortunately, its a mistake too many investors, even
high net worth investors, make.
(* If you know your index option legends, you know the name. I do not identify him here
for legal reasons and because I do not wish to dwell on the misfortunes of colleagues)
The Millionaires Biggest Investing Mistake
CNBC recently ran an article on their website entitled Millionaires Top 5

Investing Mistakes. The piece was based on a study by the deVere Group
which surveyed high net worth investors from around the globe.
The most widespread mistake according to the survey?
Failure to Diversify.
How can this be? Modern investment theory holds that 20-30% of an
investors overall portfolio should be held in alternative investments.
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This is especially true for the affluent.
In addition, high net worth investors are awash with choices when it
comes to investing in alternatives. Hedge funds, private equity, real estate,
precious metals, art, and of course options! How could any intelligent
investor not be adequately diversified?
There is an entire industry claiming to serve the high net worth investment
community. Whether they be brokers, bankers, advisors, consultants,
traders, reporters, authors or educators, all tend to preach the values of
diversification. So why is this a problem for so many?
...when the index dives as a whole, your

diversified stock portfolio suddenly doesnt
look so diversified.
For most, the answer is comfort. Many option sellers start out in stocks
and/or indexes and end up staying there. It is, as many have told me, what
they know. Its a fair strategy and if this is you, I wish you the best of
luck.
You of course, will need it when the index takes a dive. For when trading
stocks, or even selling options on stocks, when the index dives as a whole,
your diversified stock portfolio suddenly doesnt look so diversified.
And option selling suddenly doesnt taste so good (especially if youre
short the puts).
Stocks are great and there is a place for them. But at the end of the day,
they are all really just a bunch of different colored eggs in one big basket.
It doesnt have to be that way.
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A Real Alternative
So what are you to do? Youre a high net worth investor. You already sell
stock or index options and know the value of it. But you also know its
limitations. And you know in todays investing climate, under diversification
can be financial suicide. Selling options on stocks or indexes is a good
first step, but it's not enough. And it's not diversified. Real alternatives
offer diversification of strategy and diversification of asset class.
This book is about applying the option selling concept to a better

diversified, and in my opinion, more favorable asset class for the option
selling strategy. You can get jumbo premiums. You can get substantially
lower margins. And you can finally get the diversification you know you
must achieve for security, growth and peace of mind.
You were smart enough to get the option selling part of it right. Now its
time to graduate to Option Selling on Steroids.
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3
Option Selling
On Steroids
If you already have experience selling stock options, you probably already
knew much of the information included up to this point. What you may not
know is that there is another, potentially superior asset class where you can
apply the option selling advantage. The asset class is commodities. If you
like selling stock options, youll find selling commodities options a similar
endeavor, but on steroids.
Before you close the book and throw it in the garbage as if its burned your
fingers, hold on for one moment and consider this:
Before becoming my clients, over 90% of our investors were STOCK or

INDEX OPTION SELLERS, with little or no experience in any type of
commodities investing.
What are Commodities?
When we say commodities, were are referring to commodities futures

contracts. There are financial futures products such as interest rates,
currencies and the stock index futures, and there are commodities futures
contracts such as corn, coffee, crude oil and gold. We recommend the
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latter for reasons that will be explained later.
In the meantime, know that these markets are traded on major, federally
regulated US exchanges such as the Chicago Board of Trade (CBOT)
the Chicago Mercantile Exchange (CME), the New York Merchantile
Exchange (NYMEX), and the Inter-Continental Commodities Exchange
(ICE).
Commodities are traded in contracts. 1 contract = a certain quantity of

that commodity. Thus a contract of wheat = 5,000 bushels of wheat. As an
option seller, you wont be trading these contracts only selling options
on them. You dont have to be a great commodities trader to be a profitable
option seller.
Why Sell Commodities Options?
So if you have been successful in stock option selling (or not), why would
you want to allocate capital to selling options in commodities?
Commodities options can offer all the benefits of selling stock options
(Favorable odds, more consistency, time decay working for you,) but with
some key advantages.
Youll find 5 of the biggest ones listed below:
5 Big Advantages of Commodities Option Sellers

vs. Stock Option Sellers
1. Real Diversification: Worry less about stock values because you

have something completely uncorrelated working for you now: As
a high net worth investor, you might already have plenty of exposure
to the equities markets. Selling commodities options allows you to
diversify into the commodities arena without having to trade high
speed futures contracts. Unlike stocks, commodities markets tend to
correlate less with each other. For example, the value of a pound of
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coffee has very little to do with the value of a barrel of oil or an ounce
of silver. In addition, as options can be sold on either side of the
market, a portfolio of short options in commodities can be
completely uncorrelated to the performance of any other asset class
even commodities themselves!
2. Jumbo Premiums/Deep, Deep out of the Money Strikes: The

automatic leverage provided in commodities means that high
premiums can be collected on options with deep out of the money
strikes. How deep? Think 30, 50 even 100% out of the money (ie:
double the actual market price of the underlying) While this leverage
can mean higher risk on individual positions, it also means lower
risk of options going in the money. What does that translate to? The
ability to sell options with very, very high probabilities of
expiring worthless. It also means a much greater cushion to be
wrong the market.
3. Low Margin Requirements: If youre used to paying a margin

requirement that is 10 to 20 times the premium you take in, youll be
stunned at how low the premium to margin ratio can be in
commodities. Depending on the brokerage firm you use, margins
can be as low as 3x, 2x or in some cases, even 1 to 1 with the premium.
For example, if you sold an option for $800, your margin requirement
might be as low as $800. That means a 1 to 1 payoff if it expires
worthless. This can mean higher potential returns (the upside of
leverage) but also potentially higher risk (the downside of leverage)
4. A Fundamental Advantage: Commodities can be much more price

responsive to their core supply/demand fundamentals than are
stocks. There are no P/E ratios to calculate, no earnings to measure,
no corporate board decisions to ponder. As an old time soybean
trader once told me nearly 30 years ago when all else fails, you
count the beans. This in contrast to a share of stock which can be
more adversely affected by media headlines, the whims of a CEO or
the mood of the general public. I am convinced that anyone who
spends just a little time studying the supply and demand fundamentals
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of any commodity can give themselves a tremendous advantage

in the market. In addition, commodities are real. You can hold them
in your hand. They will always have a use and always have a value.
In the stock market crash of 2008, people still had their corn flakes
and coffee for breakfast, still bought chocolates for the wife on
Valentines Day, and still had to fill their cars and heat their homes
with gasoline and natural gas. Sugar will never go bankrupt. Silver
will never be declared too big to fail.
5.
Youre Now Directionless: Stock option sellers are often still
trading directionally. In commodities, this doesnt have to be the
case. The ability to sell deep out of the money strikes changes the
game, allowing you to potentially profit if the market moves up,
down or not at all. This means there are many scenarios that can
play out and still allow you to make money but only one in which
you lose (a quick and extreme move against your position.) For
you, it means less stress about the next story from Syria, Iran, China,
Washington or the Federal Reserve. Youre no longer guessing at
market direction. Youre simply picking a least likely scenario and
betting (on all other outcomes, just like a casino.) against it. You
become a pure optionseller (using the method we advise). No more
owning the underlying.No more getting put to.
Commodities Concerns
Is selling commodities options a perfect investment? Of course not. There

is no such thing. Like any investment, it is not suitable for every investor.
But many investors have a misguided notion about what commodities
are and how they work. Below youll find some of the most common
misconceptions, and the real facts behind them
5 Concerns you may have about selling

commodities options
I know nothing about commodities. Id end up losing my shirt.

1.
This is, of course, is a valid concern. However, you knew nothing
26
about stock options until you started learning about them. In learning,
there is absolutely no downside and all of the upside in the world. In
addition, for the time challenged, there is a short cut you can take
with the help of professional option sellers. More about that later.
2. Commodities? That means margin calls. I dont like the sound of

that. Weve all heard the story of Uncle Joe lost the
house trading pork bellies. Has that really ever happened? Who
knows. The facts are these: Margin calls are possible in a commodities
account. But they are almost always the result of an under capitalized,
inexperienced, over positioned trader who does not understand how
leverage works. Even if you do get a margin call, its simply the
exchanges way of saying Hey, youre over-positioned. You need
to lighten up some or, if you prefer, add some funds to your
account. They are not to be feared. If you keep reasonable positions
and an adequate margin cushion in your account, youre unlikely
to see a margin call in your option selling account. (A simple formula
for keeping the right position size vs margin cushion is presented
in our full length McGraw-Hill book - The Complete Guide to
Option Selling available at www.OptionSellers.com/Book )
3. Ive heard it can be volatile and risky. My financial advisor

recommended I stay away from commodities. Despite the
misconception, commodities prices themselves are no more volatile
(in fact, some studies indicate less volatile) than stock prices.
However, commodities futures contracts (and commodities futures
options) have built in leverage. This leverage is what makes the
small margin requirements and higher return potential possible. But
leverage can also mean higher risk. Selling commodities options
(and some stock options) can entail unlimited risk. But that term
can also be misleading. Risk is only unlimited if you dont close
your position. How many of your stock option positions would you
allow a loss to continue running unchecked? Same concept here.
This is why a clear and defined risk management plan is such a
crucial component of an option selling portfolio. There are good,
solid ways to manage risk in your portfolio, including some that can
27
add a limited risk aspect to your trades. As for the financial

advisor, I know of very few who are registered to trade commodities
or commodities options. Money going out to a commodities account
means money going away from him. That could have something to
do with his recommendation.
4. Somebody will come and dump a load of corn on my lawn.

No they wont. Very few commodities futures contracts ever end up
in delivery. And the ones that do are to large commercial buyers
who want and depend on that delivery. The exchanges know this.
Thats why taking delivery of a commodities contract entails a
massive amount of paperwork for the person being delivered to.
And they have to approve it, make sure you have an adequate facility
for delivery and a way to pay for it. Sorry, but unless you really,
really want that load of hogs in your backyard and are willing to go
through the hassle of signing up for it, youre not getting it.
5. Ive heard commodities are going lower this year. It's probably
not a good time to be investing in commodities right now. If
you believe this, youre cheating yourself. For one, nobody
knows which way any market is going to go, ever. Secondly, and
more importantly, you are not investing in commodities. Youre not
buying a fund and hoping the value of a basket of commodities goes
up. Youre an option seller! Directionless strategy, remember? As an
option seller, you can potentially profit in up, down or sideways
markets. As professional account managers, weve had some of our
best years in bear markets.
Easy Money?
Does this mean you can just walk into the commodities markets and start
taking money off the table? Again, of course it doesnt. If you plan to
trade these on your own, it will take a bit of study and practice.
Heres the good news. It's been estimated that up to 80% of investors
who try commodities end up losing money.
28
Sugar will never go bankrupt. Silver will never be

declared too big to fail.
How could that possibly be good news? Because commodities are a

zero sum game. That means that for every winner, there is a loser. If that
statistic is accurate, it means that with 80% of the players losing money,
20% of the players are making ALL of the money.. That means for the
guys that know what theyre doing, there is a whole lot of money to be
made. After 30 years in the trenches and having personally traded over
a million futures and options contracts, it is my unwavering opinion that
selling options is a gargantuan step towards putting yourself in that 20%.
However, Ive also discovered there are three primary reasons for certain
investors losing money in the commodities markets: They are as follows:
3 Reasons People Fail at Commodities
#1 They Dont understand Margin/Leverage: As we discussed earlier,

commodities contracts are automatically leveraged. Commodities novices
often start out trying to trade contracts like shares of stock. This is a
mistake. Not understanding how the margin and leverage works can lead
to over positioning an account. Overpositioning can lead to all kinds of
problems not the least of which is losses. If youre going to invest in
commodities contracts, you should first understand how the margin and
leverage works (or be working with someone who does.) Doing so will
already put you a step ahead of much of the competition.
#2 They Dont Understand Fundamentals: Most commodities traders

I know come to the table armed with an arsenal of technical indicators,
charts and studies. These can be helpful. But in my experience, ultimate
price direction of commodities comes down to old fashioned Economics
101: Supply and Demand. A supply glut in the oil market or a weevil in
the Louisiana Cotton Crop isnt going to care much about what your Elliot
Wave chart says. Neither are the commercial traders counting the barrels
of oil and calculating yield per plant of US cotton farmers. They know
when they plant the stuff, they know where they plant it, how big the crop
29
is and when they harvest it. They also know that time of year can play
a big role in many commodities prices. If you want to get a leg up
on the amateurs, start where the commercial players do with the
fundamentals.
predicting the market over the short term is

nearly impossible.
#3 They Try to Trade Short Term: Have you ever tried to day trade
a stock? How about swing trade it over the course of 2-3 days? It's
tough, isnt it? It's tough because despite what sellers of books, courses
and day trading manuals will tell you, predicting the market over the short
term is nearly impossible. Why? Because over the short term, markets can
move about almost randomly (If you doubt this, I recommend re-reading
Malkiels A Random Walk Down Wall Street.)
In my opinion, short term trading is close to shooting craps I dont

care how good your charts are. This is a tough lesson I learned early in
my trading career. In addition, short term markets care little about long
term fundamentals making it that much harder. Yet many novices jump
right in every day trying to time the markets on a daily or weekly basis
(remember the 80% figure?)
As Dr. Elder told me in a recent interview for our newsletter, There is

nothing wrong with the commodities markets. There is everything wrong
with commodities traders.
Long term price direction? Thats another matter. Knowing the fundamentals
can have a big impact here. But how does one stay in position long enough
to benefit from fundamentally driven price moves? 2 ways.
a. Nerves of steel, very deep pockets, and a willingness to tie

up big chunks of capital for long periods of time.
b. Selling Options
30
We learned early in our trading careers that if we could position in a way

that would allow us to benefit from our long term fundamental analysis
without having to ride out long and potentially large drawdowns in the
meantime, wed have a powerful strategy on our hands. Thats when we
discovered selling deep out of the money options.
There is nothing wrong with the commodities

markets. There is everything wrong with
commodities traders.
Dr. Alexander Elder

(from interview in the Option Seller Newsletter, January 2016)
Of the three pitfalls covered on the previous pages, book learning can
help you avoid #1 and #2. Selling options will take care of number 3.
Avoid those three and you taken a huge step towards putting yourself in
the 20%.
But being a winner in the commodities markets isnt what this book is
really about. You need a consistent, less volatile, higher yielding, cash
producing, diversified addition to your portfolio.
Selling options in the Commodities Markets can potentially fit that bill.
But to make it a reality, you have to know what youre doing.
Youve learned what Option Selling on Steroids is and youve learned why
you should consider it.
But you may have never traded a commodities contract in your life. And
even if you did, selling options on them is a whole different ballgame.
Could you even do this if you wanted to?
Of course you can. You just have to know how.
So let's get started.
31
4
How to Sell an Option
on Steroids
With the Shale revolution in the US and Canada, oil and gas prices are
always in the news. Precious metals such as gold and silver are again
generating mountainous interest from the public due to interest rates on
the move. Many agricultural products such as corn, coffee, sugar and
soybeans are now becoming attractive to investors as uncorrelated hedges
against a schizophrenic stock market.
In an age of government distrust, Fed manipulation and corporate

malfeasance, many investors are taking comfort in investing in raw
materials and products one can touch and feel. The value of a stock
may move up and down on knee jerk reactions to government or Fed
announcements, the whims of a boardroom meeting, the poor judgment
of a CEO or the simple fluctuation of the index as a whole. Products like
sugar, corn, copper or gasoline will always have a value and are much
less subject to manipulation. Their price is determined by old fashioned
supply and demand.
Investing in commodities, however, is not for everyone. With the leverage

comes faster and sometimes sizable profits. But leverage can also result in
the opposite effect of faster and more significant loss.
32
Dont confuse option selling on commodities with trading high speed

futures contracts. That is not something I recommend unless you have a
lot of time and a lot of money set aside to pay in tuition. In fact, I would
not recommend trading futures contracts to anyone but professionals and
those willing to take big risks for big payoffs. (And I was a futures broker).
Option selling on futures, however, is another matter. I typically describe

selling commodities options (at least the way we do it) as taking a
conservative approach to an aggressive investment. By most stock traders
standards, its still fairly aggressive. By futures trading standards, it can be
viewed as somewhat conservative.
Nonetheless, to understand option selling on commodities, we must first

understand the nature of these markets and the most productive philosophy
for approaching them.
Picking Market Direction or Not
Selling commodities options shares many of the same features as selling

stock options with the added key advantages mentioned in the prior
chapter.
An added benefit is that unlike stocks, commodities prices can be much

less correlated to each other, as are the movement of stocks. For instance,
the price of natural gas has little to do with the price of silver. The price of
wheat has little to do with the price of coffee (they are grown in different
parts of the world).
Like stocks, in selling (or writing) commodities options, you do not have
to decide where the market is going to go. You simply have to project
where the market is not going to go. In my three decades of experience,
this is probably reason # 1 that I choose to be an option seller. Picking
market direction, especially short term market direction, is very difficult.
Whether were trading shares of Microsoft or contracts of corn, none of us
knows where the market is going.
33
That might be a problem in stocks, where short term fluctuations can have
outsized impacts on your option values. However, in commodities, you can
sell much deeper out of the money strikes for much larger premiums.
A seller of a commodities option, whether a put or a call, has to be way off
on his price projection for his option to go in the money.
In my trading for clients, I still make a price projection like any other
trader or portfolio manager. The difference is, I can be way off on my
projection and still make money.
Let me share with you what I mean. I spend well into 5 figures every year
on independent research for my firm. This is in addition to the countless
hours we spend every week doing our in house research, analysis and price
forecasting for the commodities markets. It takes up more hours of our
day than anything else. We do this because it gives us a general idea where
prices of wheat, cocoa or crude oil should go.
The problem is, the market doesnt always do what it should.
Therefore, I want a strategy in place that will make money if were right.
But I also want a strategy in place that will make money if we are
only partially right, not really right or even somewhat wrong. That is
Option Selling. The only way I lose is if we are drastically wrong.
That happens too. It happens to me and it will happen to you. But its all
in a days work. Youre wrong, you get out, you move on. The focus is on
the big picture the end of year return on capital. You get that by playing
your odds, day in, day out, over and over and over just like a casino. Just
like an insurance company. At the end of the day, the turtle beats the hare.
But you dont want to just beat the hare, you want to throttle it. Option
sellers want to beat the hare. Commodity option sellers want to throttle it.
34
Selling a Commodities Option Simplified
The mechanics of selling an option are not difficult. There are 3 basic
steps:
1. You select a price level above or below the market that you
believe the market will not reach within a certain time period
(for our purposes, generally 3-5 months).
2. You then sell an option at this price level and collect a premium
for doing so.
3. Wait. If the time period elapses and the market has not attained
this price, the option expires and you keep the premium you
collected as a profit.
A high probability trade in commodity options is selling puts or calls in a

trending market with fundamentals that support the trend. These can
be solid portfolio builders.
Lets do an example. In Strategy A below, a trader is bullish the market.

As an option seller, he would therefore want to sell puts. This is how he
would do it.
(The following illustrated trades are for instructional purposes only in order to
demonstrate how selling options ideally works. No representation is being made
that anyone actually participated in these particular trades.)
Strategy Example A
If Bullish, SELL PUTS
In the summer of 2014, Trader John is bullish on the cattle market (excuse
the pun). The longer term fundamentals are supportive and John feels they
will continue to support prices for the next several months. Cattle futures,
however, are subject to corrections, even in bull markets. So how does
John position to take advantage of the longer term fundamentals but not be
greatly affected by short term swings? He sells put options.
35
2014 Live Cattle (Daily Continuation)
1.40
Fundamental Outlook: Cattle traders in the summer of 2014 found live cattle
prices in a long term uptrend based on a core long term fundamental. The cattle
heard was at a 50 year low, beef supplies were tight and the peak summer
demand season had just begun. Rather than try to time the peaks and valleys of
cattle prices, an option seller can exploit this supporting fundamental by simply
selling put options far beneath the market. Note how the market corrects but
the low supply/high demand nature of the market prevents prices from falling
too far an ideal situation for a put seller.
Trade Date: July 10, 2014
Key Fundamental: Cattle Herd at 50 year low
Trade: Selling an October Live Cattle 140

(strike price) Put Option
Premium Collected: $450
Margin Requirement: $900
Option Expiration: October 3, 2014
36
Trade Successful if: Option expires with October Live Cattle

Futures ANYWHERE ABOVE 1.40 per
pound
Return on Investment: 50% if option expires worthless. ($450

premium/$900 margin)
**Transaction costs not included

***Losses are possible on all option sales. All profits in any examples used are hypothetical
and are not guaranteed to be accurate or to be mistaken for future recommendations.
In this particular trade, October Live Cattle Futures are the underlying
contract (40,000 pound of Live Cattle). 1.40 is the strike price. $450 is the
premium collected.
Upon execution of this trade in the open exchange, John collects the $450
premium from a buyer of that option. John puts up a deposit or margin
requirement of about $900 to hold this option from the short side.
Upon expiration of this option in October of 2014, if October Live Cattle

futures are trading anywhere above $1.40 per pound, the option will
expire worthless and John will keep all premium collected as profit (it did
and he did).
The approach, in and of itself, is similar to the one used by insurance

companies across the globe. John is betting, for lack of a better word,
that cattle prices will not collapse below $1.40 per pound within the given
time period. A buyer pays John a premium to insure him against this
unlikely event. (The option buyer looks at it more like playing the slots).
A particular factor to note in this example is that while cattle prices did
continue to trend higher, they had several substantial corrections during
that time. These likely would have driven a futures trader mad. But Johns
strike price remained comfortably below the fray, right where you want to
be when selling commodities options.
37
Strategy Example B
If Bearish, SELL CALLS
It's late Spring of 2015 and Crude Oil prices are making a
comeback. But Trader Tom smells trouble. Inventories are building and
commercial players are heavily selling at current price levels. Tom
knows all of this information because he knows where to look to find it.
In addition, Tom knows that crude oil has a strong seasonal tendency
to trade lower into the later summer months. Because of this, he is
longer term bearish crude. However, he cant be sure crude prices have
topped out yet. They might still trade higher before they finally begin
descending. Tom doesnt want to risk getting stopped out of a futures
contract. So what is he to do? He sells call options, of course.
Crude Oil (Daily Continuation)
95.00
Fundamental Outlook: Crude Oil prices remained firm during the Spring of 2015
as distributors accumulated supplies in anticipation of summer driving season.
As this peak demand season approached, stockpiles hit a peak and reached
a level deemed adequate by suppliers to meet anticipated demand. Once this
level was attained, the risk premium came out of the market and crude prices
38
declined throughout the summer. A trader aware of this supply/demand cycle

could have sold crude oil calls in June.
Trade Date: June 15, 2015
Key Fundamental: End of Inventory Accumulation Season,

Record Supply
Trade: November Crude Oil 95.00 Call Options
Premium Collected: $600 per option
Margin Requirement: $1465 per option
Expiration: October 15, 2015
Trade Successful If: Options Expire with Crude Oil prices

ANYWHERE below $95 per barrel
Return on Investment
at worthless expiration: 40.9%
**Transaction costs not included ***Losses are possible on all option sales. All profits,
losses, premiums, et.. in any examples used are hypothetical and are not guaranteed or to
be mistaken for current or future recommendations.
Trader Tom thinks oil has had its rally and that prices could reverse over
the next several months. At the very least, he does not believe they will
rally much further. However, instead of making the mistake many traders
make and trying to pick a top, Tom chooses to take advantage of the
outrageous volatility available to him in the crude oil market (as a result
of recent price moves) and sells a November Crude Oil 95.00 Call Option
for a $600 premium. Like John, Tom too would have had a winning trade
at expiration time.
It is important to note here that in both of these trades, nobody had to

get the direction absolutely right and nobody had to try to pick a top or
39
bottom. And that is how you build an option selling portfolio all year long
in commodities - not only in cattle and oil, but in many other uncorrelated
commodities markets like corn, soybeans, wheat, coffee, sugar and natural
gas, to name a few. By positioning against one, specific scenario, you put
yourself in position to profit from all of the other scenarios
The Key Lessons of These Examples
While the examples illustrated above are two possible situations where
options could be written effectively, there are many other market conditions
where different option selling strategies can be deployed.
As we learned above, with option selling, the market does not necessarily
have to move in your desired direction for you to make money. This is
a key point and one that cannot be emphasized enough. When you sell
an option, you can be wrong the market and still make money. This is
because the option will expire worthless even if the underlying price of
the commodity moves against it. As long as it does not surpass the strike
price, the option still expires worthless. This is why so many of options
held through expiration will expire worthless. It is also why we believe
that options sold deep out of the money have an even higher rate of
expiring worthless - much higher.
Deep out of the money options

tend to stay out of the money, if not deep
out of the money. -
Investorglossary.com
An options life has often been compared to that of an ice cube left out in
the sun. It gradually melts a little at a time, until all that is left is water. As
an option seller, your only objective is to collect the water.
40
An options value is often compared to that of a melting ice cube, decaying

gradually with the passage of time.
In our book, The Complete Guide to Option Selling (3nd Edition, McGraw-
Hill 2015) we present two metaphors that even better illustrate the concept
of premium collection. I recommend reading the fishing analogy and the
later example involving an NFL football game. To summarize the latter,
selling options is like starting the game with a large lead and a certain
amount of time on the clock (how much is your choice the more time, the
bigger the lead you get). You dont have to score. You only have to protect
the lead for the amount of time left on the clock.
When everyone else is trying to throw touchdown passes the whole game,
this can make sense to investors who are only concerned about the final
outcome, not the glory and excitement (not to mention lower odds) of
getting there.
Is there risk in this strategy? Of course. But in many cases, less than trading
the futures contracts. Just like an insurance company (or slot machine),
you will have to pay out from time to time. But remember, insurance
companies make hefty profits by collecting many premiums, but only
paying out on a few. If you begin selling options, you would be operating
this way too. Unlike an insurance company however, an option seller has
the ability to cut his losses and run at any time.
41
Are you investing for fun or profit?
I once had a trader ridiculously argue with me that selling options

takes all the fun out of trading commodities. Maybe so. But if you
are like me, you are not investing for fun. You are investing for profits:
Return on equity, period. If you are after fun, I suggest boating or golf.
If you are serious about growing your wealth, investing is not where you
should seek your fun.
This gentlemans argument was offset by another conversation I had

a few months later with an elderly gentleman who called in to inquire
about working with us. After exchanging some initial information, he
told me he wanted to work with us because he liked selling options and
that was the only strategy he used. I asked him why he only sold options.
His response was one Ill never forget. It captures the entire rationale for
selling premium.
His response was Because Im not a very good trader. Selling options is
the only way I can make money in the market.
This quote has stuck with me through the years and I liked it so much I
put it in our all inclusive McGraw-Hill book. However, this in no way
should suggest that option selling is the holy grail of trading or that the
strategy is a sure way to fast returns. Selling option premium in the futures
markets is still a highly leveraged endeavor. While the odds will now be
in your favor, losses can and do still occur. Selling puts or calls in the
futures market is not for the ultra-conservative investor and you should be
sure that before investing, you have a good idea of the risks involved, the
markets you are trading, and how they work. You may want to consider
working with somebody that is familiar with these concepts. It is a good
idea to commit only the more aggressive portion of your portfolio to this
type of investment.
That being said, the rewards for a properly executed option selling portfolio
can be substantial. That is why so many funds utilize the approach.
42
How do I Manage the Risk?
That sounds too easy. What is the catch?
If that is the case, why isnt everybody selling options?
But who would ever buy on option like that?
These are good questions that do have answers. First of all, there is no
catch.
However, as we discussed earlier, option selling does have a downside.

For as we all know, there is no free lunch. While the oil options discussed
earlier will indeed expire worthless if the price of crude oil has not reached
the strike price by expiration, the value of that option can increase if the
market moves toward the strike price in the interim. If this premium
increase is substantial, it can become uncomfortable for the investor
holding the call from the short side. If he decides to hold the option, it
could require more margin capital from the investors account. He also
would assume the risk that the market keeps moving higher until his call
option goes in the money. This could mean a larger loss.
There is a simple remedy to this problem, however.
You can buy back the option and close out the position at any time.
This can be done sometimes at a profit. But if the value is higher when you
buy it back, you can take a loss just like any other type of investment. Like
your other investments you should have a realistic risk management plan
in place before embarking on an option selling campaign. Unfortunately,
most investors do not have the facts on properly managing risk on short
options. Instead, most investors remain ignorant not only of the concept
of selling options, but that there are excellent ways of managing risk and
curtailing losses in such a portfolio. That is why everybody is not
selling options.
43
Short options can be bought back at any time prior to expiration to close the
position, thereby realizing either a profit or a loss on that position
As to who buys deep out of the money options, it can be a variety of

people or institutions for a variety of reasons. Of course, there are the
individual investors looking to get rich overnight. But there are also traders
or institutions that could be using long options to hedge positions, as part
of complex spreads, or as protection for long or short futures positions.
Whatever the reasons, they provide the liquidity for option sellers to
operate.
Professional traders generally consider buying straight options to be a

legitimized form of gambling in which the option buyer will probably lose
his investment, sooner or later. The professional knows that by utilizing
some basic fundamental research, he can potentially profit 80-90% of the
time by selling options. The key to long term success is managing the risk
on the smaller percentage of options that do not expire worthless.
Granted, this booklet is merely an introduction to the concept of selling
44
options for commodities and/or option neophytes. One should do a careful

undertaking of the risks involved in option selling before deciding if the
strategy is right for him. However, with a little fundamental knowledge
and some common sense risk management, option selling can provide you
with a potentially high probability, high yielding portfolio that only a tiny
fraction of investors know how to employ.
Professionals play the percentages. By selling options in your portfolio,

you can too.
Youve learned the whys of selling commodities options earlier in this

book. This chapter introduced you to the mechanics of actually doing it.
The final chapter of this book will explain how to pull it all together into
a cohesive, long term investment plan that can potentially provide a high
yielding, uncorrelated asset for life.
45
5
Option Selling as Life-
Long Asset
Building Real Financial Security Means
Option Selling With a Plan
At this point in this book, you have merely learned how to use a strategy
already familiar to you but employed in a different asset class.
While this is a valuable concept to learn, it really doesnt do you any good
unless you can apply it. And by apply it, I do not mean try one here and
there. I mean apply it on a broad scale as a core component of your overall
portfolio.
The purpose of this book is not to simply present a neat little niche in the
investment world that you can learn about, ponder its merits and go back
to the old way of investing. The purpose of this book is to free you
from the chains of traditional investments. It's to relieve you of the
worries of having a major part of your nest egg, your future comfort, and
the security of you and your family reliant on the direction of the stock
market.
Investment advisors will tell you to buy it and hold on forever because in
the end it always goes up. Maybe it does, in the end. What happens in
46
between is another matter.
And what if the always go up rule isnt valid anymore? Our country is
in uncharted waters. Were $20 trillion in debt a staggering figure that
could have untold consequences for the US and world in the years ahead.
The global economy sputters, The Middle East burns, the far east rumbles
with Chinese and North Korean aggression and terrorism has become a
global menace.
This is not a doomsayer buy gold because the world is going to end kind
of book. However, an American stock market that will always be a reliable
vehicle for growing wealth and security is no longer a given.
Simply parking money in equities and hoping it goes up still has its
place in financial planning for now. But it also puts you at the mercy of
many forces outside of your control.
Real security means taking matters into your own hands. It means putting
money to work in ways that can benefit from up, down or sideways markets
and give you the power to adjust accordingly.
In the coming years, alternative investments will be in high demand.

Learning the concept of option selling on steroids is not enough. Turning
it into a consistent wealth growing tool, in bull markets and bear, up
economies and down requires a plan for implementing it. And a plan starts
with good systems.
By a system, I do not mean a software program or some pre-packaged

course you have to buy. I simply mean a pre-determined way to handle
certain aspects of your option selling.
This chapter will give an outline for some time tested systems you can
put in place for turning your commodities option selling strategy into a
long term asset that can potentially provide you with consistent annual
cashflow and lifelong security.
47
System 1
The FUDOM System of Selling Options
Like many things in life, success in option selling boils down to discovering
a basic formula that can be repeated over and over and over again. You
could spend years developing such a formula of your own. But you dont
have to do that. Im going to give you mine right here to use as you wish.
This formula took me 15 years to learn and another 15 years to perfect.
It may seem simple, but that is its beauty. The mistake too many option
sellers make is that they make it too complicated.
In my experience, (and I have likely traded every kind of option strategy

known to man losing money on many of them) the KISS principle is
most applicable here. The simpler the better. You sell the option, you take
the premium, the thing historically expires worthless 80% of the time (or
higher if youre doing it right). Why make it more difficult than that?
Therefore, below find the formula I recommend. The Greek geeks may
chuckle at its simplicity. But Ive used this system for years to write banks
of options for the million and multi-million dollar accounts I manage. I
doubt many of them have done that.
We call this formula the FUDOM Formula for Option Selling Success.
FUDOM is an acronym for FUndamental analysis combined with selling
Deep Out of the Money Options. The formula has three steps:
3 Steps of the FUDOM Method
1. Form a longer term, fundamental bias of the commodity you

are trading (Right Market)
2. Sell Deep out of the Money Options against that fundamental
bias (Right Strategy)
3. Then Manage risk based on Premium Value (Right Exit)
48
This formula is illustrated in the form of a triangle diagram below:
FUDOM Explained
I recommend using a combination of fundamental, seasonal, and technical
analysis to project general price direction over a 3-5 month period (with
a focus on the former). Remember, you dont necessarily have to project
what price is going to do only what it is not going to do.
You then select deep out of the money options with 3-6 months time
remaining until expiration. You want to sell options at price levels that
could only be achieved through a radical change in fundamentals.
The object is to select the options with highest probability of expiring
worthless, even if you have to wait a few months for them to do so.
Exiting right entails either letting the option expire, buying it back early,
or exiting at a pre-determined risk parameter.
For a full tutorial on FUDOM, including a 15 minute video lesson on the

concept, visit www.OptionSellers.com/FUDOM.
System 2
The Half n Half System of Margin Management
Concerned about margin calls? Worried about over positioning? Pros dont
worry about such things. Why? Because they know how to manage their
margin in a commodities account. You can too.
49
Here is a very basic, very effective way of managing your margin in a

commodities option selling account:
50% 50%
CASH SHORT OPTION
POSITIONS
It's called the half n half system because you keep 50% of your
account funds in positions and the other 50% in cash. This allows
for wide swings in margin requirements and wide swings in your
position values. Use it and youll virtually eliminate most of the margin
problems a novice might experience.
System 3
The Submarine System of Portfolio Building
If you are keeping 50% of your capital as back up cash, the question then
becomes, what do you do with the other 50%? Portfolio building begins
with risk management. And risk management begins with your initial
structure. The structure you should remember is this: Small positions
spread across many markets.
If youve ever seen the movie Crimson Tide, youll remember the
scene where, having wrestled command from Gene Hackman, Denzel
Washington fi nds himself in charge of a nuclear submarine that takes a
torpedo hit from an enemy sub. A pipe is severed and the sub starts to
fl ood. After several unsuccessful attempts to fi x the leak, he issues an
order to seal the compartment.
50
The compartment is sealed off. The damage is contained. The ship stays
afloat.
The crew of the USS Alabama keeps

their nuclear submarine aoat after
sustaining a torpedo hit in Crimson
Tide. Learning to do the same with
your option selling portfolio can keep
your ship sailing smoothly.
A nuclear submarine is divided into many different compartments, each

capable of being sealed off from the rest of the ship. In the event of a
torpedo hit, the damaged compartment can be sealed off, containing the
flooding to one small area and keeping the ship itself intact.
This strategy of risk containment is an excellent example to follow for your

option selling portfolio. Instead of taking large positions concentrated in a
few markets and focusing on a where Ill get out tactic (that means you
S&P traders), it can be infinitely more effective to spread your risk into
a series of small positions spread across many diversified commodities
markets.
The Submarine System of Portfolio Building

SECTOR 1
SECTOR 2
SECTOR 3
BACK UP CASH SECTOR 4
50% SECTOR 5
SECTOR 6
SECTOR 7
SECTOR 8
The Submarine system of portfolio building calls for small positions

spread across many different uncorrelated markets. Positions can be
51
further diversified by selling puts and calls in different markets. Unlike

stocks, commodities markets are less correlated to each other (ie: the price
of natural gas has little to do with the price of coffee.) This means a black
swan event can be better contained to one or few compartments of your
portfolio. Dont forget your large cash cushion which helps keep position
size in check.
If and when a market does move against a position, the loss represents
only a small portion of your overall portfolio. It can be sealed off. The
ship floats on. Compare that to the S&P trader who goes all in on those
puts or calls that cant miss.
It will never go there, they reason, so why not load up?
Because just when you think it will never go there, it does. And when it
does, your ship sinks. There is no perfect trade. No sure thing. Anything
can happen in the market. Better to expect losing trades as part of the plan
and have a system ready to handle them when they do occur.
Proper and effective risk management begins with a good overall strategy.
The Submarine blueprint is an excellent starting point for any new option
seller.
System 4
Option Selling on Auto Pilot
New markets, crop fundamentals, margin management, submarines.it

all sounds great, you might think to yourself, but where would I ever find
the time to learn all this, let alone implement it effectively every month?
It is a fair question and one you should be honest with yourself in answering.
That being said, there are two answers to that question that can speed up
your implementation curve, either gradually or dramatically.
52
The first is having a trusted resource that guides you step by step. Using
that resource, you start slow, learn as you go, and gradually build to where
you want to be. If youre a do it yourselfer, enjoy the trading process, and
like to learn, there are several good resources on this subject that you can
consult. The best and most relevant, in my opinion, is the one presented
in the back of this booklet. However, the important part is to start with a
guide, begin small, and build as you get better.
Making a Quantum Leap
Perhaps you read this and you had an ahamoment, the light bulb clicked
on and you immediately saw the potential in this investment avenue. But
then reality sunk in. Im way too busy in my business, career or family
life. You reason, Id like to get allocated here but Ill never have the time
or patience to learn all this myself, let alone implement it.
This is a common concern amongst high net worth investors. Fortunately,

if you have the capital allocation, you could qualify for professional
management. You can hire a professional option seller to work on your
behalf.
Hiring a professional to assist and/or manage your option selling portfolio

is a personal decision and may not be appropriate for everyone. For one,
a good portfolio manager typically doesnt come cheap (most of the time,
bad ones dont either) so it pays to do your homework here. Secondly,
finding a person that can be trusted to manage and optimize your account
in your best interest can be challenging.
However, hiring a top gun option seller is a way to make a quantum leap
from novice option selling to expert option selling from your portfolios
perspective.
Even hiring the right professional, however, can still have its drawbacks.
In exchange for expert knowledge and trading expertise, you give up a
certain amount of control at least in day to day trading decisions. For
some, professional help may not be desired. If you have the time and the
53
dedication to devote to learning the different aspects of options and option

selling, study the fundamentals of the underlying commodities, select
optimum strategy and balance your option selling portfolio, then you can
eventually learn how to do it yourself.
Furthermore, if you really enjoy digging into data, price forcasting, et..
as a bona fide past time, then you may have a reason for going it alone.*
(* The resource at the end of this book can help with that.)
However, if youre simply looking to make as much money as possible

through an option selling approach, and dont have the time and/or
expertise to do it yourself, a professional can make a lot of sense.
In his classic work Rich Dad, Poor Dad, Robert Kiyosaki states a key
difference between the rich and middle class is in hiring expertise. The
rich tend to see their time as best spent finding and hiring the best
expertise money can buy in handling their affairs.
The middle class, alternatively, chooses more of a do it yourself

approach. Kiyosaki maintains this is one reason the rich remain rich.
He also notes that this phenomenon holds true in any area outside of the
affluent individuals chosen area of expertise, whether it be law, medicine,
business and in particular, financial affairs.
If you do elect to hire a professional to assist you in an option selling

approach, I recommend you seek out a specialist.
Option Selling is not brain surgery. That being said, if you do need an
operation inside your cranial cavity, you typically would not go to a knee
surgeon. Nor would you go to your family doctor.
You would select a brain surgeon. More than likely, you would seek out a
specialist for the particular type of brain surgery you require.
This is exactly how you should select the professional you will use to help
you implement your option selling portfolio.
54
There are many brokers and traders that try or dabble in selling
options. There are many that will tell you that they know a little about it
or Sure, we can do that.
This is how you know they know nothing about it.
To give yourself the best chance at long term, consistent results, you will
want to find an option selling expert.
To qualify your selections, I recommend looking for some or all of the

characteristics for your new option selling broker or account manager:
1. Fully registered with and regulated by either the SEC (for

stocks) or the NFA (for commodities).
2. Has published work in the option writing field in the form of
books, white papers or published articles
3. Has worked in the industry for at least 10 years preferably
longer.
4. Is cited as an expert and used extensively as an information
source within his or her industry as well as the national
media
For the investors I work with, I typically recommend an allocation of

$1 million or higher to properly diversify and balance an option selling
portfolio. However, we do work with accounts as small as $250,000.
For those not in that investor class, there are brokers and managers out there
that are willing to work with substantially less. There is talent there if you
are willing to find it. Professional stock pickers, portfolio managers and
traders have gotten a bad rap as of late and that could be for good reason.
But in option selling, especially in commodities, a legitimate pro can make
a real difference for you. Find a good one and he can be your financial
ally for years or decades. Should you chose to hire a professional, running
them through the 4 steps above will go a long way towards insuring you
get a real expert and not a pretender.
55
Putting it all together
Learning how to sell options on steroids can be a valuable step forward for
any serious investor. However, implementing it in a way that can make a
substantial difference in your cashflow, wealth, and longer term security
takes a plan. A plan takes systems.
FUDOM, the half nhalf margin system and the submarine system of
portfolio building are all major systems you can use to organize and
optimize your option selling portfolio.
For those that want to automate their option selling without the time and
hassles of doing it themselves, hiring a professional to sell options on their
behalf can make sense. This can be especially true in a specialized asset
class such as commodities.
56
6.
Conclusion
In todays unpredictable investment climate, fighting for every percentage
point gain in the market seems to get harder and harder. As a result,
sophisticated investors are expanding into both alternative strategies and
asset classes in an effort to grow both wealth and security.
But security takes consistency. And many no longer feel traditional

investments such as stocks and bonds can provide that kind of consistent
result.
Thus, once exclusive domain of professionals, stock option selling has

expanded its ranks to the savvy individual investor. These investors have
learned the same secret used by casinos: before you play, make sure the
odds are in your favor.
But stock option selling has drawbacks. These include low premiums,
high margin requirements and most importantly, lack of diversification
from equities themselves.
Option Selling on Steroids allows high net worth investors a brand new
arena for applying the high odds strategy of option selling. This arena
offers deep out of the money options at high premiums, low margins and
most importantly, markets that are 100% uncorrelated to equities.
These are the commodities markets. Commodities are physical products

used by everyone physical products that will always have a value.
57
Option Selling on Steroids does have drawbacks which can include

potentially higher risks and a margin system that may be initially unfamiliar
to stock traders. However, for those who learn how to employ it, the long
term benefits can potentially outweigh the shorter term risks.
Selling commodities options is most effective at providing longer term

consistency and security if proven systems are employed. If you plan to
make it a part of your overall portfolio, 3 key systems for getting started
are featured in chapter 5.
As you may have deduced, this book is only an introductory text into the
world of Option Selling of Steroids. If you have found it to be of interest
and would like to learn how you can start putting the strategy to work in
your portfolio, you have access to a complete resource that can give you
an A to Z blueprint for getting started. I recommend this resource whether
you are ready to jump into commodities option selling now, or only if your
interest has been piqued and you want to learn more. The resource is our
full length book entitled The Complete Guide to Option Selling. It has
recently been published by McGraw-Hill in its fully updated, 3rd Edition.
Sorry, we cant give this one away for free. However, the knowledge
contained in this book is the culmination of my 30 years in the option
trading trenches. The guidelines and concepts presented in its pages are
the same ones used in our managed option selling portfolios for high net
worth investors. To my knowledge, it is the only book of its kind. If youd
like a copy, ordering information is presented on page 61.
Lastly, for those with the resources, but not the time or expertise, hiring a
professional to sell options on your behalf can be a way to make a quantum
leap in putting expertise to work on your behalf.
We advise seeking out not just a registered professional but an expert.

Guidelines for starting this search are presented on page 44.
Those that meet capital requirements might qualify to hire my team. You
will find more information about this on page 62.
58
At the beginning of this book, I promised your reading of it would make

you a better investor. I hope that that is the least that it has accomplished.
It's been said that knowledge is power. Maybe so, but knowledge
applied is where the real power is. You now have the initial
knowledge of a potentially powerful new weapon to add to your
portfolio arsenal.
Should you choose to start applying it, consistent growth, financial

security and freedom from stock market worries are all potentially in
your grasp.
Happy returns!
-JC
59
Additional Resource
Take the Next Step in Option Selling on Steroids
Acquire The Complete Blueprint for

Selling Commodities Options A to Z!
NEWEST EDITION NOW AVAILABLE: The Complete Guide to Option
Selling, 3rd Edition by: James Cordier, Michael Gross (McGraw-Hill 2015)
The Classic Book

that Started it All!
* Target Stellar Returns in Any Market or Economic Condition

* Get Real Diversification From Stocks and Target Monthly
Cashflow
* A Step by Step How to Guide for accounts of $100,000
to $1,000,000+
Now you can get the definitive guide to effectively selling commodities
options for cashflow and growth, regardless of market direction. This
is the new, expanded, fully updated 3rd edition of our flagship book
(originally published in 2004.) Now you can own the book that awakened
the mainstream investment community to commodities option selling as a
60
desired portion of any investment portfolio.
Featured by CNBCs Squawk Box, Bloomberg Television, Fox Business

News, Yahoo Finance and Morningstar Advisors, The Complete Guide
to Option Selling will show you how to:
Select the best commodities options for selling (even if

youve never traded a commodities contract in your life)
Maximize your odds of success on every trade
Structure your Option Selling Portfolio for optimal results
Manage risk like a Professional (low maintenance)
Gear your Portfolio for annual growth or monthly cash flow
If you like mathematical equations and textbook explanations, this book

is not for you. But if you prefer entertaining, information packed pages
with no fluff, this resource belongs in your hands. The knowledge youll
acquire here is based on 45+ years of combined, in the trenches options
trading experience from professional portfolio managers James Cordier
and Michael Gross. If youre serious about selling options on commodities,
this book is your definitive one stop guide.
Get Your Copy NOW at

www.OptionSellers.com/Book
A must-read. Cordier and Gross have covered all the bases in this book
about the (arguably) best option strategy writing options.
Lawrence McMillan
Bestselling author of Options as a Strategic
Investment and Editor of The Options Strategist
Newsletter
The Complete Guide to Option Selling offers investors a truly unique,

practical, and valuable prospective into another dimension of option
strategy. A very cool book and interesting angle!
Jared A. Levy
Author of Your Options Handbook and
The Bloomberg Visual Guide to Options
61
About the Authors
James Cordier,
Founder and Principal, OptionSellers.com
James Cordier is the founder and head trader of

OptionSellers.com, a private wealth management
company offering managed commodities option
selling portfolios for high net worth investors. With
over 30 years of option trading experience, James is
a featured expert on the futures and options markets,
regularly appearing on/in CNBC, Fox News, The Wall
Street Journal, MarketWatch, Forbes, and Barrons.
James published articles on option writing have
appeared in Yahoo Finance (US), Forbes.com (US), Futures Magazine (US), Energy
Risk (UK), Your Trading Edge (Australia) and MoneyWorks Magazine (Dubai).
He is the coauthor of the book The Complete Guide to Option Selling 1st,2nd
and 3rd Edition, (McGraw Hill 2015).
Despite a heavy media schedule, James continues to head the day to day
management of client portfolios. He works directly with most client equity and
never underestimates the importance of staying in close contact with his clientele
on an individual basis.
James resides in Tampa, Florida and keeps a second residence in Chicago near
the Chicago Board of Trade.
For a free information/discovery pack on managed option selling accounts with

James and his firm, visit www.OptionSellers.com/Discovery. or call 800-346-1949
Michael Gross,
Director of Research, OptionSellers.com
Michael Gross is a portfolio manager and commodity

market analyst at OptionSellers.com in Tampa,
Florida. He is coauthor of the book The Complete
Guide to Option Selling 1st, 2nd and 3rd Editions
(McGraw-Hill 2015).
Michaels published articles on option selling in

the commodities markets have appeared in Yahoo
62
Finance, Forbes.com, Businessweek.com, Seeking Alpha, Trader Planet, Futures

Magazine and Technical Analysis of Stocks and Commodities. His market
comments and analysis have been featured by Barrons, The Wall Street Journal
and Reuters World News.
He resides in the Tampa Bay area with his wife and two daughters.
For a free information/discovery pack on managed option selling accounts with

OptionSellers.com, visit www.OptionSellers.com/Discovery. or call 800-346-1949
OptionSellers.com
401 East Jackson Street
Suite 2310
Tampa, FL 33602
813-472-5760
www.OptionSellers.com
800-346-1949
63
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HIGH NET WORTH INVESTOR SERIES

James Cordier, with Michael Gross

Copyright 2016 by OptionSellers.com

Introduction: James Cordier.......................................................... 5

Chapter 1 The Casinos Worst Kept Secret................................. 8

Chapter 2 Where Stock Option Sellers Come up Short............ 17

Chapter 3 Selling Optionson Steroids................................... 23

Chapter 4 How to Sell an Option on Steroids........................... 32

Chapter 5 Creating a Life-Long Asset....................................... 46

Option Selling Like Youve Never Seen it Before

How do I know? Because as founder and head portfolio manager of

Welcome to the club.

The Casino operates in a gambling environment. But the Casino doesnt

Buying Options: A Game of Hope and Losing

Buying options is often a favorite strategy of small, individual investors

As my friend Dr. Alexander Elder, author of two of the most famous

on average, about 80% of all options held through

Why is it so Difficult to Make Money Buying Options?

Option buyers generally want the market to move towards or eclipse a

Thus, an option buyer must

Options are a hope business. You can buy hope or

As you can see, the reason it is so difficult to make money as an option

The Option Selling Solution

If buying options is a losing game, a smarter way of investing would seem

Mr. Gekko only bet on sure things.

Selling options, however, is not without its drawbacks. It takes a fair

Yet, selling options is a strategy that has been practiced by professionals

Why do so many professional investors choose option selling over other

Advantages of Selling Options over other

1. You Invest with High Odds of Success in your favor on Every

It Can Excel in Bull, Bear or Neutral markets Regardless of

4. An option selling portfolio can be uncorrelated to anything else,

5. You do Not have to pick Price Direction anymore

Consistency Targets small, consistent gains over and over

7. Potential for Outsized Returns

Tax Advantages for High Net Worth Investors

Drawbacks of Selling Options

1. Potential for unlimited risk on each trade if you allow losses to

2. Profits tend to accrue gradually instead of suddenly, meaning it

3. Your profit potential on each trade is limited to the premium

Becoming an Option Seller

I dont buy options. Buying options is another

Not only is Asset Appreciation not required, no movement at all is

You, the Option Seller

Were getting to that.

But before we discuss putting your option selling on Steroids, we have to

Thats the subject of the next, very important chapter.

I mention this because Options as a Strategic Investment was where I

(* Lawrence was recently a featured guest columnist)

A second common strategy stock option sellers employ is selling cash

But its not perfect.

The Drawbacks of Stock Option Selling

In fact, it has some substantial drawbacks. Among the biggest complaints

Some, however, believe they can solve this dilemma by graduating to a

Is Selling Index Options the Solution?

Selling index options is a wildly popular strategy amongst semi-

Then he blew up.

The Millionaires Biggest Investing Mistake

CNBC recently ran an article on their website entitled Millionaires Top 5

The most widespread mistake according to the survey?