by Michael Shulman 05/16/08
Without call and put options, and all the strategies you can utilize and create with them, you could only play stocks and sectors to the upside. And at a time when the market has a flair for making dramatic swings in either direction, can you imagine not having the options that, well, trading options can bring?
With the spikes in crude oil prices hitting record costs per barrel and retail prices for gasoline following in crude's lightning-fast footsteps (climbing to an average around $3.50 a gallon in many areas) and diesel chugging up to record highs too, I know a lot of people who would disagree with me that the commodities bubble is approaching a breaking point.
I don't mean to imply that commodities aren't valuable and won't keep going up. But what I am saying is that many of them cannot sustain this velocity and, as consumers are reining in their spending, something's got to give. And to put it mildly, all commodities are not created equal.
The Eye of the Commodities Storm
But if I can apply the conventional "wisdom," it goes a little something like this: "We can't possibly be in a commodities bubble that's ready to burst because prices are so high." With that line of thinking, you can understand why commodities trading has been on my radar not on the long side -- but instead on the short side.
And there are two big reasons why having certain commodities on your "short" list could be beneficial to you sooner rather than later. Why? Because the days ahead are scheduled to bring two events of particular interest to traders who deal with commodities ETFs, or Exchange-Traded Funds.
ETFs are baskets of assets (stocks, bonds or futures) that are similar to mutual funds but they let individual investors like you buy and sell them during the trading day just like you would any other stock.
Best of all, with new ETFs coming to market every week -- and many of them have options chains -- this allows you to easily play the short side of fundamentally challenged sectors. This is fantastic because, instead of buying puts on a bunch of individual names within a sector -- hoping that one or even some of them go down -- you need only make one trade!
What does this mean to you as a short side-trader?
Opportunity Knocks if Bubbles Pop
The Fed met again on April 30, cutting the rate by 25 basis points to 2 percent.
When it's time for the other shoe to drop, I'll be there to scoop up profits from the short side. And I hope you'll come along for the ride.
Profit from a Short-term Break in a Long-term Trend
I have no doubt that fundamental, long-term demand for commodities -- most commodities -- will grow. But that does not mean that in the short term -- and by that I mean one week to six months -- we are experiencing the end of a bubble driven not by demand, but by speculation.
In the past couple of years, hedge funds and other investors have poured money into commodities and commodity futures using extreme leverage -- as much, in some cases, as 99-to-1-- racking up some impressive returns. But this speculation was fueled by easy and available credit from money center and investment banks -- and this credit is drying up. We have already had one short, nasty downturn in commodities due in part to margin calls on hedge funds. Many more are in store.
Click here for a special offer on my ChangeWave Shorts service, where we buy put options to bet on stocks, sectors and commodities going down and watch our profits go up, up and away!
For more of my thoughts on the commodities conundrum, check out my article "Captializing on a Commodities Bubble."
What is a Short Stock or Option Position?
Did you know there are several ways you can go short? Well, if you didn't you're not alone. I'll help you count the ways to go short.
Do you think a stock is about to go up? You can buy call options or sell put options, as both indicate that you're making a bullish bet. But how you get from Point A to B is quite different.
Live Well, Thanks to Dying Companies
If you don't want to buy a company's products or services, you shouldn't buy its stocks.
What to Know When Making a Short Trade
Do you know what the trading issues are when shorting a stock? Don't get blindsided with shorting.
Going long, buying puts, selling shorts -- all of these can be confusing at first. But there's hope!
