February 7, 2014 - Issue #723

In This Issue

1. Writing/ Selling Options on Futures Premium
2. Hot Market Review - Coffee Market is Moving!
3. Economic Calendar

1. Futures Options Trading First Steps:

1. 100% of Futures Options lose all their 'time value'.
2. When Futures Options expire, they are worthless.
3. Many times, Futures Markets have no trend.

Futures Options Writing

Have you ever wondered who sells the futures options that most people buy? These people are known as the option writers/sellers. Their sole objective is to collect the premium paid by the option buyer. Option writing can also be used for hedging purposes and reducing risk. An option writer has the exact opposite to gain as the option buyer. The writer has unlimited risk and a limited profit potential, which is the premium of the option minus commissions. When writing naked futures options your risk is unlimited, without the use of stops. This is why we recommend exiting positions once a market trades through an area you perceived as strong support or resistance. So why would anyone want to write an option? Here are a few reasons:

1. Most futures options expire worthless and out of the money. Therefore, the option writer is collecting the premium the option buyer paid.
2. There are three ways to win as an option writer. A market can go in the direction you thought, it can trade sideways and in a channel, or it can even go slowly against you but not through your strike price. The advantage is time decay.
3. The writer believes the futures contract will not reach a certain strike price by the expiration date of the option. This is known as naked option selling.
4. To hedge against a futures position. For example: someone who goes long cocoa at 850 can write a 900 strike price call option with about one month of time until option expiration. This allows you to collect the premium of the call option if cocoa settles below 900, based on option expiration. It also allows you to make a profit on the actual futures contract between 851 and 900. This strategy also lowers your margin on the trade and should cocoa continue lower to 800, you at least collect some premium on the option you wrote. Risk lies if cocoa continues to decline because you only collect a certain amount of premium and the futures contract has unlimited risk the lower it goes.

Cannon Trading Company Inc. believes in writing options on futures, but advises against doing it without the advice and expertise of a knowledgeable broker or specialist. Be strict when choosing which futures options to write and don't believe in writing options on futures as your only strategy. Using the same strategy every month on a single market is bound to burn you one month, because you end up writing options on futures when you shouldn't. Cannon Trading Co. Inc. believes you should treat option writing just like futures trading. We believe you should stay with the major trend when writing futures options, with rare exceptions. Use market pullbacks to support or resistance as opportunities to enter with the trend, by writing futures options which best fit into your objectives.

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2. Coffee Market is Moving!

From our friend Jim Wyckoff

Jim has an excellent daily newsletter where he reviews different markets, alerts you for potential trades and much more. Included is his great bi-weekly newsletter with charts and a little longer term outlook. We recommend checking out his website, educational CDROM, and services at www.jimwyckoff.com click on image below to enlarge

ICE coffee futures this week hit a nine-month high as this market has come alive the past week. While the coffee market bulls have gained good upside technical momentum, other softs commodity markets are also making a move. Corn and wheat futures bulls are making some noise, too. There are early clues that the raw commodity sector, which had been in a general bear downtrend for many months, is bottoming out and now showing signs that the sector could begin to show a general bull uptrend in the coming months. Commodity market bulls have more work to do in the near term, but 2014 is starting out in good fashion for them.

3. Economic Calendar

Source: Moore Research Center, Inc.

* Please note that the information contained in this letter is intended for clients, prospective clients, and audiences who have a basic understanding, familiarity, and interest in the futures markets.

** The material contained in this letter is of opinion only and does not guarantee any profits. These are risky markets and only risk capital should be used. Past performances are not necessarily indicative of future results.

*** This is not a solicitation of any order to buy or sell, but a current market view provided by Cannon Trading Inc. Any statement of facts herein contained are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor they purport to be complete. No responsibility is assumed with respect to any such statement or with respect to any expression of opinion herein contained. Readers are urged to exercise their own judgment in trading!