The commodities that look bullish – use option spread and futures arbitrage techniques to gain with little risk
Sam Adelton
Jul. 15, 2007

A common misperception among common people is that commodities and futures are risky and is equivalent of gambling. To tell you honestly if proper hedging techniques are employed, it is least risky and far less risky that buying home on borrowed money.

Cocoa, Cotton, Crude oil, Sugar, Gold, and Live Cattle look bullish. Buying these futures and not hedging with some derivatives can be risky. The commodity futures brokers are normally people with little mathematical background. If you can find a good mathematically oriented CTA or follow this Website’s article to educate your self in the next several months you will understand that commodity futures and options represent far less risk that real estate and stock market and can provide ten time more profit.

Option spreads are techniques well used in hedging. Suppose you expect cotton to rise from the current price of 65, to 80 in the next twelve months. You can buy a Dec 2008 Cotton 60 call and sell a Dec 2008 Cotton 65 call for approximately $1500. If cotton stays above 63 in December 2008, you lose nothing. If cotton stays above that you gain. The maximum gain potential is limited to $1000 and maximum loss potential is limited to $1500.

Remember you expect cotton to go 80 in the next twelve months. That means there is very high probability that cotton will stay above 65 in December 2008 and you make your $1000 on a $750 margin – a whopping 133% profit in 15 months. If the cotton market goes south say to 60, you can actually become aggressive and buy your 65 call back for a much lower price than you sold it. After that if cotton rises back to 80 – your portfolio will gain close to $8000.

The commodities that look bullish – use option spread and futures arbitrage techniques to gain with little risk
Sam Adelton
To tell you honestly if proper hedging techniques are employed, it is least risky and far less risky that buying home on borrowed money.
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