My entry into options trading goes back to 1979 when I was working for a healthcare company in the Chicago suburbs as a financial analyst, and one of the other financial analysts at the company had some friends who were market makers on the CBOE, the Chicago Board options exchange, they were looking to hire somebody as a clerk, to help them out and to learn the business. And I thought it was a great opportunity. My background had been in finance and I thought that I would broaden it by seeing what it was all about. So I did take that clerk's position, work my way into becoming a market maker on the CBO II and subsequent to that moved over to the Board of Trade and traded options. T bond futures with the CLM the commodity options membership. So it goes back all the way to that point in time subsequently, I've been a broker in the business.

And right now I'm an options strategist. What is it that makes options and attractive trading instruments to my way of thinking options are very attractive because they provide the user the ability to spread his risk or allocate his risk among variables that stock and futures traders don't really have. And what I'm really referring to is a person who trades options can earn positive time decay. In other words, they can earn potentially earn profits just from holding a position and letting time go by. They can also allocate their risk to changes in sentiment or changes in what's known as implied volatility. And they can, of course, structure their positions to benefit from specific moves in the underlying instrument as well.

But there really are those three variables market movement, implied volatility and time decay that allow an options trader to allocate his risk in the ways that he seems most appropriate. I think that options trading has changed over the years. For two reasons. Number one, retail traders are now starting to use options in ways that they have not previously. Historically, retail traders have used them to basically hedge their equity portfolios. But now, what they're able to do is to use options in creative ways by creating spreads, and trading those options spreads as instruments in and of themselves.

That's one way that options have changed over the years and the other way is electronic trading. electronic trading is becoming increasingly popular. And it really has, in many respects, leveled the playing field so that off the floor retail traders can now compete directly with market makers. They can access the bids and offers and the size of the various markets on their own personal computers and place orders directly with with that trading platform. So those are the two ways I'd say it's changed over the years. I think retail customers are becoming more sophisticated in the strategies that they are using to trade in the market.

And one of the reasons is the electronic plating trading platforms that exist offer the clients an opportunity to input their orders not on an option by option basis, but they can input their orders as a spread. And the CME has been good in implementing exchange defined spreads and user defined spreads on several platforms that people can take advantage of. A joke. So a client can put in a calendar spread, they can put in a butterfly spread, they can put in vertical spreads with put some calls, they can put in strangles and straddles. And it's great to be able to put in spreads, as opposed to individual options because it eliminates a lot of risks that would normally be assumed if somebody is putting on one leg at a time. How can a retail trader sort through all of the various strategies that are available and make some decisions?

Well, that's a good question because I actually have created what I call a template that helps with that process. And I make that template available through my personal website, which is www dot v Ace program calm. And the term Ace program sort of describes what it's about. It's an acronym where A stands for assess C stands for choose, and E stands for execute. So what I've done is I've taken that middle step of choose choosing a strategy and broken it down in such a way that a trader can take a look and say if they are bullish on the market, and they expect implied volatility to, for example, increase, what are the relevant strategies give them a theoretical trading edge. Likewise, if they are bearish on the market and they expect implied volatility to decrease, what would be the appropriate strategies to give them a trading edge?

So, this template gives those strategies and breaks them down in a very fine way so that a retail trader can understand what are the characteristics of these spreads? How do they behave? How do they work? Now the CME also has a template in that regard, and it's available for free on the CME website. So there are there's a lot of educational material that's available to people People that they can take advantage of and you know use for choosing the right strategy given the environment that they expect to unfold. Well, for the markets that are hot, which means they're really getting a lot of attention, and they're moving quite a bit on a day by day and week by week basis.

I would say that a trader would be best working with a spread that is not extremely sensitive to market movements. Because when you have a hot market, you have a lot of volatile up and down moves that are impossible to predict on a short term basis. So if you can use an option strategy that will instead be able to take advantage of, for example, the high implied volatility on that hot markets, they can put on a spread that would benefit if that implied volatility comes back down to a more normal level. And they can also if they're interested in Taking advantage of the wild swings in the market without predicting direction, they can put on positions, such as strangle swaps, or long straddles or long strangles to take advantage of the big move in the markets. If they really want to commit to short term market direction, they could always put on a diagonal calendar spread with calls if they're bullish, or a diagonal calendar spread with puts if they're bearish.

But the one thing I would advise new traders to get to stay away from would simply be buying a call if they think the market is going to go up or buying a put if they think it's going to go down. because by definition, a hot market is going to have probably highly priced options, which means implied volatility is high, and they're putting the odds against themselves. If all they're doing is buying a put or a call in that kind of an environment, then it's going to be very difficult to make money. Risk Management with options trading is much different than risk management for a futures trader. Because most futures traders will establish $1 amount or a number of ticks, that they will have a protective stop order on their futures to exit for a loss so that they don't lose too much money. You can't really do the same thing with options spreads.

So what you really need to do is you need to have the ability to understand how far away does the underlying market need to move before I'm going to incur a specific dollar loss. And you can have an alarm set in your system that identifies that when I call trigger level to exit your spread, but it's a little bit more complicated than that because your options spread may also be affected unfavorably because of an unfavorable change in implied volatility, or perhaps because the passage of time might mean your position will incur negative time decay. So you do need to monitor the prices of your options in your Spread at least on a day by day basis so that if that spread does incur a specific dollar amount that reaches your maximum loss level or your trigger level to close, then you know you have to take action.

So with respect to options spreads, the best way to understand what is the risk and versus what is the reward is to be able to see the option spread with an analytical software program. That clearly gives you a graphic analysis of where the profits lie and where the losses can be. The program that I use is option view software. But there's other software programs that will also provide the ability to see a graphic analysis which is really a time lapse view of how a specific options spread will perform over a range of prices as well as with the passage of time. And the software programs should also have the ability to model increases and decreases in implied volatility. So when you have that tool available, you're working not just with numbers, but you're working with pictures.

And it's a whole lot easier to see with a picture where the risks lie and where the opportunities lie. So that's really I think an important aspect to being an options trader is having that graphic analysis capability with an options software tool. Yeah, from a money management as opposed to a risk management perspective. I look at money management more from a global perspective. And what I used to tell my clients is that when you're dealing with an account that has X dollars of equity, it's probably a good idea when you're putting on spreads in various markets to make sure that the margin requirements on spreads in their entirety. Do not exceed, say 35 to 40% of the equity in your account.

And what that does is it gives you It gives you a leg room so to speak, to handle any increases in margin that might occur. It gives you the ability to withstand unfavorable market movement. So you can sustain some draw downs on your position and not be in a situation where you have to put up additional margin. Yes, options have complete flexibility in the sense that the person who buys or sells an option can close their position. They can sell what they've purchased before or they can buy back to close what they've sold previously, anytime prior to expiration date. And as a matter of fact, I generally advise people to make sure they close their options before the expiration date.

The reason being, think of it this way, if you're short, an option And the closer and closer you get to expiration date, if that option is anywhere close to being at the money, the the changes in the price of that option can be quite dramatic based upon movement in the underlying commodity. So if you're short a call and the market really goes up, and the option is close to expiration, you're going to have a significant spike in price and possibly a significant loss. Likewise, if you are long an option, and it's very close to being at the money and close to expiring, the time value decay on that option is very significant. And whereas it may have a value of $500 right now, it could easily go and down to $100 with an unfavorable move down in the market. So you might be able to get a windfall profit if there's a sharp rally and your longer call close to expiration, but it's a high stakes game, whether you're long or short options close to x expiration with options that are close to being in the money.

So what some people will say as an argument is they'll say, well, then what I want to really do is only sell options that are far out of the money, put some calls and sell them close to expiration, they won't be very expensive, but chances are, they're going to expire worthless, and I can make that money. It's a very dangerous game. If you're going to short options and have short straddles or strangles it's better to sell them in deferred months so that you're not as affected by short term movement in the underlying commodity. Yeah, when it comes to trading options spreads, working with options that are say 60 to 120 days from expiration is in my way of thinking the sweet spot because you're not going to hold the options for 60 to 90 days or 60 to 120 days. You're going to put them on with that amount of time prior to expiration but you're going to close them out probably 30 to 45 days prior to their expiration date.

Itself. So you're really working with the benefit that you can gain on the initial holding period. But avoiding all of the extra risk associated with options that are going to expire. Every every spread or every option trade that a person does, must have an associated trading plan and that trading plan should address all contingencies. If everything goes as expected, the plan should address when you exit the trade. The plan should also address when you may need to modify or adjust the trade if if that's appropriate based upon changing characteristics in the market.

So it is important to have a plan both with target profit and target loss so that you can basically go on what I call automatic pilot, you don't want to have a position in place and then wonder what you should do. On a day by day and week by week basis. You should know in advance what that plan is. And I do have a weekly options report that I put out each Tuesday. And that weekly options report has a trading plan for each and every option spread that is there. So it's a complete, you know, from beginning to end explanation as to what you need to look for when you need to close the trade, when possibly you need to the concept of scaling into positions as one that would be appropriate for traders that are working with a larger amount of capital and are not simply putting on specific spreads in a variety of markets but want to build a position in one particular market over time.

So they may put on a diagonal calendar spread that is bullish, for example, in the markets, the market starts to go up, and they're making money. They may decide now I want to put on a short butterfly in order to build my position but build it with different risk reward parameters, so they can scale into different types of positions. As time goes By and as the market unfolds in order to wind up with a position that might end and you know, might have eight to 10 different options, maybe five different strike prices. And, and basically that new position is one that is being created because of the additional spreads that are being added. Nevertheless, whatever that position consists of, it can always be reduced down to the what are called the Greek variables that Delta Gamma theta and the risk and every position can have its own graphic analysis.

So, that would be the only reason to scale into positions is that you are basically building a position over time and trying to eliminate additional risk based upon market movements. The markets that I look at are basically all of the futures and commodity markets. So there's basically about 34 of the I would say most actively traded and most acknowledged futures Options markets. So, those are the ones that I look at to begin with. And what I will do is look at a bar chart of what the market has been doing, I will also look at a implied and statistical volatility charts. So, I get a feeling for how are the option premiums, are they expensive or are they cheap.

And then what I will do is I will make a decision as to whether I want to trade a particular market in a directional way and put on perhaps a vertical spread with puts or calls. Perhaps I may want to trade that market in a non directional way that takes advantage of either extremely high or low implied volatility. And that would be what I would consider to be a perhaps Delta neutral trade or a volatility based trade. I kind of call those trades, adaptive options trades, so that when I put those on, I'm not really committing cerned about which way the market moves, but I'm really concerned about whether implied volatility is expanding or contracting. And then there's also trades that I might decide to do, where I'm trying to identify a range over which I feel the underlying commodity is going to reside in a given period of time.

And those would be what I call statistical volatility trades. There are markets where I may decide to do for example, an iron butterfly or an iron condor. If I feel that I can identify a range that I believe the underlying commodity will reside within, in a given period of time. So depending on how I feel, how strongly I feel about my underlying directional bias in the market, as well as whether the options are expensive or cheap, that will determine the type of strategy that I want to employ for the for the weekly options report and And then of course, as I mentioned before, there will be a trading plan for each and every, every trade. Most of these trades will last anywhere from three weeks to maybe three months in duration. So these are relatively short term trades.

The concept of diversification is one that I think is important for a couple of reasons. You can diversify across markets that are non correlated. So that's one way of diversifying. Another way to diversify is to have on options spreads of different character, you can have on some directional options positions, and you may have other positions that are neutral that are based upon expectations for changes in implied volatility. So if you have a portfolio of different positions, it's good to diversify among spread options, spread types as well as across different markets. I don't think it's a good idea to be too concentrated.

In any one or two markets, simply because anything can happen at any point in time. And if you are banking on a directional move in a specific market and it moves the wrong way, you don't want to be too heavily in you know, heavily biased on that alone. It Well, it could be as many as five or six different markets. But of course, a lot of that is dependent upon also how liquid are these markets. When you look at all of the 34 major commodity futures and futures, commodity futures contracts, and you start looking at them from the standpoint of liquidity. One of the ways of measuring liquidity is what's called dollar value of options traded.

Another way to look at liquidity is the normal bid offer differential between the you know the bid and the offer on each of the various options that you're interested in trading so it's best to concentrate only on the most Liquid markets because otherwise, you're going to be giving up quite a bit to enter trades and to exit trades. Yeah, the concept of whether options in a specific specific market are fairly priced or under overvalued is quite a big topic. But I guess at this point, suffice it to say that the concept of under or over valuation comes down to a comparison of price versus perceived value. So you can look at any specific option, and you can see what the price is based upon words trading on the exchange, but then you have to make a judgment as to is that price high or low? Is that greater or less than my perceived value of that option?

Well, the way you come up with perceived value is by using an options software program that allows you to identify what is known as implied volatility. Because what makes up the price of an option? The price of an option is determined by where is the underlying commodity in relation to the strike price of the option? How much time does this option have before it expires? And what is the implied volatility of that option, which is something you can only arrive at by using an option software program. And implied volatility is a number.

That is a function of how the market makers perceive the volatility of the underlying futures. If they think the underlying commodity is going to be making big moves on a day by day basis, they're going to price those options more expensively than the not. And that means implied volatility is going to be a higher number. So when you start tracking implied volatility on these options, for the commodity in its entirety, of compound As a reading for implied volatility, then you can get a feeling for Where is implied volatility now, where has it been in the past, and you can also say options are overpriced if the current reading of implied volatility is significantly higher than where it's been in the past. So there's that's one measure of under or over valuation. Another way of determining under and over valuation is by comparing the implied volatility number that you come up with from the program with the what is known as statistical volatility, which is a measure of how volatile the underlying futures contract has been.

So if the market makers are expecting the commodity to be more volatile in the future than it has been presently or currently, they're going to price the options in such a way that you would perceive the options as being overpriced. So looking at over and under pricing of options is really the way to decide what type of an option spread you want to employ to take advantage. Have that, yes, I do have some favorite options strategies and the ones that I favor are the ones that are based upon or the ones that will be affected primarily by changes in implied volatility. So what I'm really referring to there is things like calendar or diagonal calendar spreads, because those can either be neutral or they can be biased, bullish or bearish. But they primarily will expand or contract in value based upon an expansion or contraction of implied volatility.

So I do like those trades quite a bit, because you can temporary the degree to which you are affected by market movement. So if you're bullish, and you put on a spread, that is, for example, 10, deltas long and the market goes down, you're not going to really get hurt that much. And if the market goes against you, price wise, but implied volatility expands as the market is decreasing. That expansion of IV can more than compensate for For the loss based on the unfavorable market move, so I do like diagonal calendar spreads. I also like what I call calendar swap trades. Sounds pretty complicated, but it's really nothing more than a four legged spread, where you have a calendar spread or a diagonal calendar spread for positive time decay.

And then I have a reverse calendar spread in different months for acquisition of cash. And more importantly, for a negation, it negates the impact of implied volatility on the entire position. So really, what you can do is you can create positions that will earn positive time decay, which those spreads do over a wide range of prices. And you don't have to be concerned about whether implied volatility expands or contracts. So those are really my two favorite strategies. The diagonal calendar spreads for when I have a directional bias and then These calendar swapped positions for when I'm really not biasing the trade necessarily one way or the other.

I can if I wish I could be neutral, bullish or bearish. But I want to take implied volatility out of the equation and still earn positive time decay. And actually, that's a good question. There's several things that I would say number one, they must make sure that they have a very good risk and money management plan. That's number one. Number two, I would advise them to be very, very careful when selling options.

Make sure that when they sell options, they always have another option that is long to hedge it. So at least they're taking limited risk, no matter what takes place. I would also advise as we had mentioned earlier, diversify their positions among different markets, and also among different types of options spreads. It's very important for Somebody who's new to options to get familiar with some of the basic terminology, understand terms like at the money in the money out of the money, and understand how options behave as the market moves and as implied volatility changes. So it's very important for an options trader to understand whether the premium levels are overvalued or undervalued. So this is where the whole concept of implied volatility comes into play.

And you really do need an option software program to be able to see that kind of stuff. See, lastly, I'd say don't trade options just on the basis of trying to make positive time decay close to expiration. It's too dangerous. If you want to make positive time decay. There are other strategies other than naked options, flows to expiration that allow you to do that. Whether it be butterflies, iron butterflies, calendar spreads, diagonal calendar spreads, things of that sort.

Well, the book that I wrote trading options visually uses the option view software to display these graphic analyses that give you that time lapse view of how a spread will perform over a range of prices and over the passage of time, and I would say that the graphic analysis for options trades is really nothing new. It's it's just something that has become easier for most people to get their get their arms around because of the availability of options and analytical software. You know, when you're a futures trader, all you really need to look at if you're going to trade from a technical standpoint is a bar chart of historical prices. But when you're an options trader, you really do need the ability to see a picture of something. And that picture is really how you're trading can perform as this dynamic environment is unfolding. So I think that the visual aspect is important because it allows you to really see things very quickly, that it might take you a long time to figure out just with numbers and pencil and paper.

I think the high leverage that's inherent in working with the commodity options market is attractive to a lot of the equity options traders, the high leverage and the relatively low margins. I mean, that's the other thing that is pretty significant. You can get incredibly good bang for your buck. Because of the low margins that are established on spreads with options in the commodity field. It's relatively higher with the spreads in the equity options, field, equity options versus futures and commodities options. It's an interesting subject because if somebody is an equity options trader, the transition is not going to be that difficult, because all of the same principles apply.

The main difference, the thing they have to become familiar with is the unique characteristics of each commodity. Because unlike equity options where everything is based on 100 shares of stock when you're dealing in commodities, every commodity is so different that you mean you have crude oil, which is, you know, 1000 barrels of oil. You've got treasury bonds, which is $100,000 of T bonds, you've got corn, which is 5000 bushels of corn. And of course, when you start doing the math, and multiplying out the contract value on each commodity, you get to see that there's a huge difference. I mean, you have commodities with underlying contract value as low as maybe $25,000, like perhaps sugar, and then you have them as high as over $330,000 like the s&p. So an equity options trader when they're dealing in stocks.

100 Shares of stock is not going to have that wide of a range of Underlying contract value. So the benefit for a futures options trader is the fact that you have a wide number of strike prices that you can work with when you're creating spreads, you can go pretty far out of the money and still find options that have additional have adequate value to, to sell against other ones that you're going to buy. But the transition is not that difficult once they become familiar with the specific terms of each of the different commodities. Another difference though, of course, is equity options generally have quarterly expirations and serial expirations the each of the commodities might have its own unique kind of expiration dates. It's not always the third Friday of the month or the third Friday of every quarter. It could be something entirely different.

So you have to be familiar with the different contract specifications with expirations as well. But otherwise, they're all American style options where they basically are x exercisable prior to expiration date exercisable at any time. And so there's really no difference there. The other the other difference I would say is you have to be familiar with the implied volatility characteristics of each of the different markets. They're so different from one another. And, you know, it's important to be aware of that when they move into the commodity fields.