My Passive Income Journey Blog
In my previous post #1 First sale gone sour!!, I mentioned about two key lessons learnt.
After several weeks of reviewing and soul searching (:D), I came up with some additional points that I felt were important as well.
I will be using a method that Michael Hyatt mentioned in one of his podcast How to Benefit from Setbacks and Failures .
Acknowledge the failure
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I just bought back my first sale for $587.50 at approximately 10am CT (11.pm SGT). 
It was a loss of $337.50 ($587.50 – $250 [collected initially when I sold the put options]).
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My first corn sale happened on the 2 April 2012. 
It was a sale of a put option for July Corn as from past 4 years charts, it was observed that prices normally will tend to move up due to weather scare from January to May.
On 30 March 2012, the prospective plantings report was scheduled to be released.
From my observation of past years charts, it seems like price movement will be quite huge during the release of the prospective planting report.
With this in mind, I will wait for the price movement to ride out on 30 March 2012.
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In this post, I am going to share my risk management plan on how to protect my money.
It is not a foolproof plan and I believe it will be an ongoing process of slowly getting it right.
This plan is something that I feel will work for my style of trading. Please feel free to read through and change it to fit your style .
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After reading about options selling, I got pretty worried about assignment of the commodities (eg. corn get delivered to my home?).
First off you must understand that investing in futures involve leveraging.
For example corn is selling at roughly $6.50 per bushel and a standard futures contract is equivalent to 5,000 bushels of corn.
So one contract equal:
$6.50 * 5,000 = $32,500
However in order to buy or sell one corn futures contract, your broker (the company that help you to buy or sell from the futures exchange) will not require you to put up $32,500.
You will only require a margin of let say $1,000 (the margin amount is dependent on the broker) in order to buy or sell one futures contract.
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After several months of reading up and researching on my #1 passive income journey (#1 30% annual return?) and following how Pat Flynn (whom really inspired me to start writing this blog) from http://www.smartpassiveincome.com pen down his goals to make him more accountable for it, I decided it is time for me to list down what I wanted to achieve and strive towards it.
Based on my understanding of this strategy I am looking to use it more to generate monthly cashflow then hoping to build millions out of it due to my risk adverse character.
Therefore I am setting a goal of achieving SGD$1000 per month by the end of this year 2012.
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As I was asking my wife for comments on my previous posting, she mentioned that she still did not quite get the full picture.
Therefore I decided to craft out some imaginary example to illustrate the option selling strategy.
As a side note, selling option can be said to be writing an option.
However I must agree that my wife did not read up any material at all thus she is still confused.
That is why I do urge everyone to read up on the following books to get a better understanding:
- Getting Started in Options, 3rd Edition
Michael C. Thomsett
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This post will target mostly at explaining the few terms that you will come across while using this strategy.
I will try my best to present it as simple as possible. Just a side note if you come across anything that seems to be wrong, please feel free to point it out as I am learning along the way as well .
Thanks in advance for that.
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I guess an example will probably best illustrate how does this strategy works.
The chart below shows a fictitious example of Mar corn futures prices from Mar 2011 till Nov 2011.
Probably you might be wondering what does the Mar futures prices mean?
It actually meant that this futures contract will expire in Mar 2012. Based on the chart above, this contract will expire in another 4 months (Dec 2011 till Mar 2012).
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Is this for real? Is it a scam? But Wow I am so interested? :p
These were the first few thoughts that came to my mind when I was first told about a possible way to generate about 30% annual return.
First of all, I would like to put up some disclaimer that I am not a qualified financial adviser.
All the information found here are for information and sharing purposes only and it should not be taken as any form of personal investment advice.
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