Welcome to the Third lesson from our
HOW TO PROFIT FROM COMMODITY OPTION TRADING course.Today we are going to discuss the stress-free FREE TRADE OPTION STRATEGY.
THE FREE TRADE OPTION STRATEGY: The free trade combines the best principles of money management and the advantage of “overvalued” and “undervalued” options; however, the most exciting aspect of the “free trade” is that it allows you to build a large position in a trending market without increasing your initial risk.
To initiate the free trade, first, purchase the best priced option. When (and if) the price and volatility (premium) rise, sell a farther out-of-the-money option at the same price or higher in the same expiration month. Of course, if the market does not move in your favor, you cannot complete the free trade. Another benefit of the free trade is that after it is completed, there is no margin capital necessary or potential loss (other than brokerage fees and costs). First, it keeps your account intact if the market turns around. Just as quickly as markets rise, they can also fall. The free trade position protects against loss in this situation.
Second, if the market moves in your favor, you can continue to add to your position on the next pullback. If the trend remains intact and the market pulls back, as it eventually does, you are then in a position to purchase another option to begin building a larger position. You can look to turn the second position into a “free trade” using the same method without increasing your initial risk. By doing this you can take advantage of normal swings in the market to purchase options when they are the cheapest and sell them when they are the most expensive, on rallies. Further, you will be purchasing closer-to-the-money options which are normally the most valued options and selling out-of-the-money options which are usually the most over priced options.
Also, the collateral benefits of the free trade include being able to look at other potential opportunities because this position is secure from loss and requires less monitoring, and the emotional security of having your equity protected- should not be overlooked.
Another benefit of the free trade is that it gives you time to unemotionally examine your position without the panic other traders experience as their profitable positions begin to nose dive. Since you are protected, you can wait for emotions to subside and the market to give you a better indication of its next move. You can then decide to hold your position and look for full profit potential (knowing you are fully protected from loss), or you can cash out and take your existing profits).
The final benefit of free trades is that, when they are completed, since your capital is protected, you can turn your attention elsewhere. You may find opportunities in other markets, or even in the market where you have completed the free trade to add more positions. This can be accomplished without increasing your original risk because your original positions are now risk-free! It is difficult to closely monitor more than two or three net positions, especially in volatile markets. The free trade allows you to concentrate more fully on other situations.
The free trade also allows you to meet your objective of getting a “trading edge” over the markets by using options. You are taking the advantage of volatility of the out-of-the-money options, which can be quite exaggerated on market rallies.
You may have heard that selling option premium is subject to unlimited losses. Well, it’s not if you first purchase an option. For instance, if you purchased a Dec. corn 3.00 call option, and when prices rallied enough to sell a farther out strike price of 3.50, your 3.00 will always be worth more than the 3.50 call you sold because it is a lower strike price. If a trader exercised his option against you, you simply exercise your option and your profit is the point difference between the strike prices. In this example it’s 50 points X $50 per point equals $2,500 in profits.
In short, none of the option strategies I teach will ever put you at risk of losing money if someone exercises the option against you!
Well, that’s it! It surprises me that anyone would want to subject their trading accounts to unlimited losses, and the horrible experiences pyramiding futures contracts, by trading futures. This simple strategy eliminates those problems completely and it’s so simple to learn!
Disclaimer - I am not a commodity trading advisor. The information on this site is for trading education only. There are no trading recommendations for any one individual made on this site and this information is paper trades for trading education. All trades are extemely risky and only risk capital should be used when trading.
U.S. Government Required Disclaimer - Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results.
CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.