Stock option sellers typically practice one or both of two basic strategies. Selling a “covered” call on a stock they already own, or selling “cash backed” puts on stocks they hope to own at a lower price. These are both solid strategies. But if you want to diversify into commodities, your objectives are going to be different.
In commodities options, unless you want to be a futures trader, which we would not recommend, you have no interest in owning the underlying futures contract. You are simply selling calls above the market and/or selling puts beneath the market. You are doing this for one reason: You do not think that prices are going to these levels and you are purely interested in getting the premiums. Period.
Since you have no interest in owning the futures contracts, you will want to sell deep out of the money strikes – strikes that will most likely never be reached, even in an adverse market event. Fortunately, unlike in stocks, strikes are available at these levels in commodities. Some of them offer large premiums. If you prefer steady time decay over “action”, these are the strikes on which you should focus your selling.
