NEW YORK ( TheStreet) -- It seems as if holiday trading is already here. Declining volumes and choppy price action are good indications that many investors and traders have already called it a year.
Although I expect the markets to seesaw because of the fiscal cliff, many issues are likely to continue trading sideways going into the new year, with declining levels of volatility. This is the ideal scenario for options writers.
Sideways consolidation, with extra "free" days of time decay due to the additional time off -- this is how options writers make money. That being said, the question becomes: Which markets are currently offering good premium collection opportunities?
The opportunities right now are numerous. And one does not have to sell options in something "sexy" like oil or stock indices (though they both may present good opportunities). One of the greatest aspects of commodities trading and investing is diversification.Let me give you an example. Should a fiscal-cliff deal not be reached and panic ensues, we could certainly see some wild price action in stocks and other risk assets. However, one should also consider how this is likely to affect the price of corn, soybeans, live cattle or coffee. My belief is that the effects would be benign. Sure, large movements in the dollar can drive price action in commodities, but given the fundamentals in the grain market currently, I think any potential downside would be limited. Regardless of what happens in Washington, people will continue to drink coffee at the same rate as they do now. Now, don't get me wrong. I think if the cash VIX continues to rise, there may be some good options selling opportunities in the S&P 500. And should volatility pick up in gold and silver, there may be very good opportunities there as well. After all, precious metals have been trading sideways on the weekly charts, and I do not expect that to change over the next six weeks or so. Oil is another great example. It's been trading in a tight range and is looking like it wants to hold that range into the new year. My point in all this, though, is that an investor has the ability to pick and choose opportunities based on their current portfolio and their risk tolerance. Not only can investors diversify their investments and strategy in this manner, but they can also have the ability to diversify a premium collection portfolio itself. For example, let's say I am neutral to bearish on stocks. I may trade iron condors in the S&P 500 futures with a slightly bearish bias. Now, to attempt to counteract that a bit should my forecast be dead wrong, I would look to assets that typically have a negative correlation to stocks, e.g. Japanese yen futures. Here I might sell premium with a slightly bearish bias as well. If the S&P 500 goes up, and the yen goes down, my bearish biases may cancel each other out and help keep the overall portfolio and equity curve a lot smoother. These types of combinations are almost endless. One of my favorites is the S&P 500 and oil. If you watch these two markets, you will see they tend to have a very positive correlation, and thus one is able to diversify a short option portfolio by taking opposing positions in both. As I have written previously, I find the euro very useful as a "proxy" market for other risk assets, and it is an invaluable tool as well. The bottom line is this: I feel that many investors could benefit from diversification away from the standard stock-and-bond portfolio. I believe that diversified premium collection may provide one of the best opportunities to accomplish this. Watch how these markets behave over the next few weeks. This is potentially a great time to try to capitalize on the unstoppable power of time. In the coming days, I will be discussing some market-specific opportunities. As always, feel free to email me for more information or to discuss how commodities, and more specifically premium collection strategies, may have a place in your portfolio and investment strategy. Please note today is Dec. 4, and any trade data is based on the most recent information. Futures and options trading is inherently risky and unsuitable for all investors. Past performance is not necessarily indicative of future results. Stop-loss orders intended to limit losses to certain amounts may not be effective because market conditions may make it impossible to execute such orders. Commodity Futures Trading Commission disclosure for licensed brokers: This material is conveyed as a solicitation for entering into a derivatives transaction.