Doubling your net worth with futures option spread – a slow and steady process of relatively low risk and high profit
Marla Guthrie
Jul. 22, 2007

It is a tug of war in the market place where the relative risk is measured all the time with the potential gains. The stock market is where professionals and rookies focus normally. But stock market is a place where you must know ‘the news’ and bet on that. On the long run, the stock market has provided an easy means of making money for long-term investors. That may be changing right now. Every twenty-five years the stock market makes investors lose money in real terms when inflation is taken into consideration. The difficult situation persists for fifteen years.

Between 1905 and 1929, the market was handsomely up. From 1929 to 1945 the market crashed and slowly came back taking the long-term investors go nowhere during those fifteen years although inflation created lower value for dollar.

During 1946 and 1970 the stock market advanced handsomely. But during 1971 and 1987 the market lost value in real terms after considering the effects of inflation. The eighties were an interesting time. If you consider the stock market performance just for the ten years in eighties, it was great without the crash of 1987 and below average with the crash. Between 1982 and 2007, the market created the biggest boom in performance. Now is the time again when the long-term investors will lose in real terms for the next fifteen years.

Smart investors are taking a long-term leave from the stock market. They are venturing into commodity futures with low risk option spreads. It can be used in your regular portfolio and also in your IRA, 401(k) or even in Roth IRA if you are able to self manage your funds.

Option spreads can be bull or bear. Suppose that cotton is treading at 61. You can buy March 2008 cotton 68 call option and sell the 73 call option for a debit of approximately $700. If cotton rises above 73 in the next several months, the option spread will rise in value. If in March cotton is close to 80 or anywhere above 73, the option spread is worth $2500 – a more than 350% profit. This is the aggressive side of option spread. There is another conservative way of playing option spreads. You may decide to buy a 55 call and sell a 60 call for $2000 or less. There is less probability that cotton will go lower than 58. Consequently you have a better chance of converting that $2000 to a higher value. If cotton does stay above 60 in March 2008, that $2000 is worth $3500 – a 75% profit. The risk is lower and the return is lower. You can adjust these spreads in such a away that the risk can be very low and you make 30 to 40% on your capital.

It is a great way to exit the stock market and at the same time keep making more money from your investments in the futures market.

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