Senior Commodity Market Strategist and Broker at DeCarley Trading, STOCKS & COMMODITIES Magazine Columnist, TheStreet.com, Contributor to Bloomberg Television, RFD-TV, CNBC’s Mad Money, and the Author of several books

Carley Garner is a futures and options broker with DeCarley Trading, a division of Zaner Financial Services, in Las Vegas, Nevada. With nearly two decades of experience, her commodity market analysis is often referenced on Jim Cramer’s Mad Money on CNBC, and she is a regular guest on Bloomberg Television’s Options Insight segment with Abigail Doolittle. You might also see her on the Cow Guy Close hosted by Scott Shellady on RFD-TV and “Futures” aired on TD Ameritrade Network. Garner is a regular contributor to TheStreet.com and its Real Money Pro service and is also a regular on the speaking circuit and can be found at TradersEXPOs and MoneyShows throughout the country.

Garner is also an award-winning commodity futures and options trading book author. In addition to Trading Commodity Options with Creativity, Garner has authored Higher Probability Commodity Trading; A Trader's First Book on Commodities (three editions); Currency Trading in the Forex and Futures Markets; and Commodity Options. She pens a monthly column for the long-running Technical Analysis of Stocks & Commodities Magazine. Her e-newsletters, The DeCarley Perspective, and The Financial Futures Report, have garnered a loyal following; she is also proactive in providing free trading education at www.DeCarleyTrading.com.

Carley is a magna cum laude graduate of the University of Nevada Las Vegas, from which she earned dual bachelor’s degrees in finance and accounting. Carley jumped into the options and futures industry with both feet in early 2004 and has become one of the most recognized names in the business.

Visit Carley at www.DeCarleyTrading.com.

Click here to see the latest press coverage, commodity educational articles, and trading videos by Carley Garner. 

In line with our commitment to providing free commodity trading education, we've put together a handful of options trading educational articles.  

Whether your strategy involves selling options on futures, buying options, or even a combination of both, we believe the articles in this section will be useful to you.  If you would like to expand on these options trading strategy ideas, we encourage you to read "Trading Commodity Options with Creativity", which covers several options strategies in detail.  

For more information, visit www.TradingCommodityOptions.com 

North Korea tensions haven't broken the Teflon S&P

We've noticed that (assuming today closes in negative territory), 10 of the last 14 e-mini S&P 500 sessions have closed in negative territory, yet the index hasn't budged in value. In fact, it is a few handles from where it started the "red" streak. Normally, if the market had such a high rate of negative closes it would be a disaster for the value of the major indices. Is this sideways action the new bear market?

Consumer Confidence is at an all time high while stock market complacency is at an all time high. We have to wonder if this will eventually prove to be a dangerous combination; the world is simply too comfortable.

Market participants are high on the benefits of an easy money policy, but where will the next fix come from? Earnings are good but the market is "richly" priced at current levels. It hasn't paid to be a bear, but the risk of being "long and wrong" is growing rapidly.

1. As a futures option seller, it takes money to make money...leave plenty of excess margin in your commodity trading account

Short option traders must be properly funded to be capable of riding out any storm that might materialize. During times of excessive commodity market volatility, many traders turn to the limited risk of option buying. This has a tendency to artificially inflate commodity option prices, due to the increase in demand for the securities. Also, in a more volatile market environment, commodity traders often believe it is more likely that a long option strategy will have an opportunity to pay off. I argue this is a false perception because options on futures buyers must overcome their cost of entry before turning a profit; the higher the price of the option on the way in, the bigger the obstacle to being profitable will be. Nevertheless, in all of the excitement traders often behave emotionally rather than logically; as a result, they exuberantly bid up the prices of low probability options to shocking levels.

Short-Option position sizing

In most options and futures markets, you would want about $10,000 in a trading
account for one, or two, commodity options sold. In some of the higher margined markets such as gold, it would likely be in your best interest to have much more. Another way to determine the appropriate account and position size is excess margin. Generally speaking, it is a good idea to utilize 50% of less of your account when trading short options. Simply put, if your account size is $10,000 you should aim for trades that will require a margin of $3,000 to $5,000. On the flip side, the excess margin listed on the bottom of your statement should be between $7,000 and $5,000.

Some might look at the funds not being used toward margin as a missed opportunity, or a waste of risk capital. However, nothing could be further from the truth. Undercapitalized commodity option sellers will almost undoubtedly get into trouble. Without plenty of excess margin in a commodity trading account, it can be difficult to survive the normal ebb and flow of the futures markets. In addition, a lack of capital dramatically increases the odds of a margin call, which can result in pre-mature liquidation of an option trade. If the situation is dire enough, the liquidation might be at the hand of your commodity broker; which is an unpleasant experience for all parties. With that said, not all commodity option brokers are created equal (see the next talking point).

2. The commodity broker you choose for your option selling account DOES matter!

Unfortunately, many beginning option sellers overlook the impact their choice of commodity broker has on the bottom line of a trading account. Even worse, they assume the only affect their option broker will have on their trading results is the per contract commission charge. As a long-time futures broker I can assure you, there is much more to the relationship between a trader and his commodity brokerage than transaction costs.

Regardless of whether a commodity option trader is placing orders online though a futures trading platform, or by phone or email with a broker, the choice of a brokerage firm will eventually play a big part in the success or failure of a commodity option trading strategy. This is because many futures brokers are averse to allowing their clients sell options on futures; even those brokers that allow it often take other actions to reduce risk exposure to the brokerage such as restricting the commodity option contracts available to trade, increasing short option margin requirements (above and beyond the exchange minimum SPAN margin), and even force liquidating client positions at the first sign of trouble. Futures brokers with heavy handed risk managers can wreak havoc on an option selling account. Imagine your option broker liquidating your trades at a highly inopportune time, before a margin call is triggered, and without notifying you. Such an event can be a costly and frustrating experience; but it can also be avoided by ensuring your commodity option broker is willing and capable of servicing your account type.

My commodity brokerage service, DeCarley Trading, specializes in handling option selling accounts.

Click here for information on how we service clients selling options on futures.

3. Most futures and options traders lose money!

Whether trading futures or options, a common mistake commodity traders make is to blindly follow the lead of random trading books, business news stations, popular financial newspapers, and magazines. The ugly truth is most commodity traders lose money. Knowing this, why in the world would you want to do what "everyone else" is doing? In light of the success rate of the masses, you probably don’t want to join them.  Most traders are buying options, and or employing futures trading strategies; a much smaller percentage of traders are selling commodity options.  Perhaps option selling is the prime “contrarian” strategy, and should be considered by all market participants for the simple reason that it is unpopular…and historically speaking, unpopular ideas in trading sometimes turn out to be the gems.

4. Sell Commodity Options on the contrary

As opposed to simple premium collection without a purpose, such as carelessly selling calls and hoping nothing happens, I feel like the best odds of success is to patiently wait for market panic or excitement of the masses and to play the other side of the trade. Warren Buffet said it simply, "Be fearful when others are greedy, and greedy when others are fearful"; he wasn’t referring to option trading but the concept can certainly be applied. For instance, some of the best option selling opportunities occur following massive price spikes in a particular direction. When such a price extension occurs most speculators are busy buying options in the direction of the trend at obscenely high prices, when the best trade is often to be a seller of those over-priced options. Of course, this type of approach is equivalent to catching the proverbial “falling knife”. If what you believe to be the exhaustion of a trend, turns out to be the early stages of a much larger move the trade could be in danger of substantial losses.

Selling options as a contrarian isn't easy money, but I do believe it might be advantageous from an odds perspective. After all, times of directional volatility and emotion often involve excessive option premium and this makes it a great time to be an options on futures seller. If you were a store owner, you would prefer to sell hot products at high prices, as opposed to items on the discount rack. Option selling is no different.

Of course, the trick is to be patient enough to improve the probability of your entry being at the peak of volatility; this is easier said than done. However, completely disregarding commodity market volatility when implementing a short option strategy could lead to painfully large losses regardless of whether the futures price ever touches the strike price of the short option.

5. Who are candidates to sell commodity options?

Before choosing to implement an option selling strategy in the futures markets, you must first honestly assess your ability to accept the prospects of unlimited risk and margin calls. Not everyone is capable of managing the emotions that come with these two characteristics of the strategy; and even those who are, will have moments of weakness. As a seasoned commodity option broker, I can attest the markets are capable of making a grown man cry. Failure to keep trading emotions in check could mean letting losers get out of hand, or panicked liquidation at unfortunate prices. Either scenario could be psychologically and financially devastating to an option selling strategy.

Holiday futures markets are around the corner

Perhaps the most valuable lesson I've learned in my decade (plus) time as a commodity broker is that holiday markets are not to be reckoned with. Volume is light and trading desks are filled with the second, and third, string staff. As a result, the markets can make dramatic and uncharacteristic moves. An example of this that still stings, is last year's Thanksgiving day crude oil futures collapse. The market was technically closed for the holiday, but the CME decided to let futures trade for an abbreviated session on the morning of Thanksgiving day. As a result of the light volume, and an ill-timed OPEC meeting, crude oil fell roughly $7.00 in single clip. In a nutshell, this is the time of year to keep trading light.

In regards to the S&P and Treasuries, the holidays have an interesting influence on trade. Nearly every year (I'm not exaggerating), we see an end of the year melt-up. It is often a very slow moving grind, but it eventually adds up to a significant move.

More pertinent to the current market; the week of Thanksgiving is statistically highly bullish. In fact, the Stock Trader's Almanac suggests that it might be a good idea to look for weakness prior to Thanksgiving to enter bullish trades, and strength after the holiday to exit. In fact, in the Dow, netting the day before and after Thanksgiving day has combined for only 13 losses in 62 years.

Before calling your commodity broker, or a futures trading desk, you should have a good idea of what you would like to do.

Naturally, if you are paying for her service you will be able to ask questions and request opinions in regards to the strategy and market speculation. You are paying for her expertise so you should be utilizing the services to the fullest. However, you also need to have an opinion and a plan of your own; after all it is your money not your broker's. 

You should also be aware of where the futures market is currently trading. Often times, commodity traders will place orders that are already "through their price", this either results in the equivalent of a market order, which is executed immediately; or it simply gets rejected by the exchange. It is also important to realize that if you are placing futures orders during times in which the market is closed you are at risk of being exposed to gapping prices on the re-open of trade.

Mis-communication causes confusion and can create costly errors for you and your futures broker. While your broker will be able to clarify your intentions and coach you along the way, it is a good idea to be aware of the proper procedures in an attempt to avoid negative consequences for both parties involved.

Calling Your Futures Broker to place a trade:

1. State your name and commodity account number
2. Specify whether you are buying or selling the futures contract, or option, and whether or not it is a spread
3. State the quantity of contracts you wish to trade
4. Specify the commodity market
5. Specify the month and, if applicable, the strike price (option order)
6. Specify the price and or order type (i.e. Limit, Stop, GTC, etc.)
7. Specify any contingency orders such as a stop loss once filled, limit orders once filled or OCO orders

* Not all commodity broker, or futures trading desks, accept contingency orders. This is something you should work out prior to the time you would like to enter the futures market.

Commodity Trade Placement Examples:

Hi this is John B. Good

"For account 36612, I would like to place an order to buy 1 September T-Bond at the market. Once filled, place a stop loss at 112'15"

"For account 36612, I would like to place an order to buy 5 July Corn 410 puts for 4 cents or better GTC"

"For account 36612, I would like to place an order to sell 3 December Live Cattle at 135.00 on a stop. Day only."

"For account 36612, I would like to place an order to sell 2 March Orange Juice at 110.00 GTC"

Tips and Tricks to Placing Futures Orders by Phone with a Commodity Broker

1. All futures, and options on futures, orders are assumed to be “day” orders unless otherwise specified as GTC (Good ‘Til Canceled).

2. Whether you are entering a futures contract, or exiting the position, the order is placed in the exact same manner. Nevertheless, a good commodity broker will recognize your current position to help ensure you are placing the order correctly relative to your open futures and options trades, but this type of service would be a bonus, not a guarantee, so make sure you are fully aware of your current holdings, intentions and commodity market prices.

3. Before entering a futures order with a commodity broker, it is a good idea to confirm there will be enough margin in the account to cover the desired position. Because futures markets move quickly and timely order entry is necessary to avoid unnecessary slippage or missing a trade altogether, commodity brokers will typically execute an order placed by a trader first, and assess margin later. In the case of a margin shortage, it might be necessary to offset some or all of the positions executed prior to the close of trade. Obviously, this is inefficient and potentially costly to ill-prepared commodity traders.