Mastering Option Strategies: Profit from Backwardation with Real-World Examples

How can I use option strategies to take advantage of backwardation situations? Please provide 3-5 specific examples based on historic reality.

Using options strategies in backwardation situations can be an effective way to profit from different market conditions. Here are three historically based examples of how option strategies can be employed during backwardation:

1. Natural Gas - 2006 (Covered Call Strategy)

In 2006, natural gas prices were experiencing backwardation, and forward prices were lower than spot prices. An investor holding natural gas futures or shares of an ETF tracking natural gas prices could have written (sold) call options on those holdings. By selling the call options, the investor would receive a premium, regardless of whether the option was exercised or not. If natural gas prices dropped as expected, the options would remain unexercised, and the investor would keep the premiums while gaining the opportunity to sell the asset, if desired, at the lower future price.

2. Crude Oil - 2008 (Protective Put Strategy)

The crude oil market experienced a significant backwardation in 2008, with future prices lower than the spot prices. If an investor anticipated a further decline in oil prices and wanted to protect their investments in oil-related assets, they could have purchased put options on those assets. The put options would give the investor the right, but not the obligation, to sell their oil assets at a predetermined strike price before the options' expiration. If the prices fell below the strike price, the investor could exercise the put option, selling the asset at the higher strike price, and profiting from the difference.

3. Gold - 2018 (Calendar Spread Strategy)

There have been instances, such as in 2018, where future gold prices were lower than spot prices due to market concerns, such as interest rate increases. An investor looking to take advantage of this could have initiated a calendar spread strategy by selling an option with a near expiration date and purchasing a similar option with a longer expiration date on the same asset. This would potentially benefit from any increase in gold prices in the short term and enable the investor to sell at that higher price, while the longer-dated option would provide the ability to benefit from any longer-term price decline indicated in the backwardation.

Keep in mind that these examples are based on historical market conditions, and every market environment is different. Option strategies involve risks and may not always yield the expected results. It's essential to research and evaluate the markets and your risk tolerance before implementing any strategies.