Historic volatility and fund liquidation has forced an epic selloff that, simply put, has gone too far too fast. In the beginning of 2008, marked by my 2007 Year in Review and 2008 Forecast, I called for a monumental pullback in commodity prices during a dollar rally in 2008. I may have been a little early to the party but nevertheless this industry wide price plunge is the culmination of years of commodity price inflation coming to a head. The S&P 500 has seen one of the largest one year drawdowns in history. Crude oil is down over 50% in under 4 months. Cotton has come down from 90 to sub-50 prices in the same time frame. Silver is down to about $9 from $20 price highs seen just a few months ago! Do not get caught up by the fact that you did not ride this all the way down.

Traders have been looking for value entries into commodities for a couple of years but now everyone is so panicked by the 'global recession' that they are afraid to jump in. So you must ask yourself a simple question - is the commodity bull market over? The answer is simply.no. Prices do not move in a straight line, despite the last couple of years illustrating a reasonable counter argument. For the most part there are price retracements along the way. The likelihood of general commodity prices testing the relative highs set throughout 2008 some time next week or next month is not that good. However, there is value to be bought, and there is cash on the side waiting to buy it. The dollar rally has likely seen the main part of its 2008 rally and should offer a chance for the euro to bounce before year's end, thereby igniting a commodity price rally - one that could be epic in its own right.

However, with all this volatility is there a way to get in on the value without losing everything you have if your timing is off? For the options trader the answer is a resounding yes!

There are outrageous premium collection opportunities out there for the risk takers, and there are numerous value plays for upside rallies in key markets using long option strategies for the risk averse. The question is not whether this is a great time to participate in commodities, but rather how and whether you have the backbone to jump in when so many are running for the exits.

Instead of my normal Weekend Review format I think it is best to just readers a little peak into what my brokerage customers and subscribers to my Mound Trade Signals get on a regular basis (of course I will leave the strike prices and entry prices out - that I will save for my customers). Let's just focus on trade concepts this week and we can get back to fluff next week.

Energies

For much of 2007 and 2008 I have argued that there is probably about $50 or so in hype premium in crude oil, which has effectively evaporated with this recent plunge. The market should quickly test $100 and I believe there is money to be made on the upside with short term bull call spreads. The skew in crude has flipped to the put side and selling a put spread to pay for that call strategy is a great way to go. Natural gas should go along for the ride and has a lot of ground to make up, but is best traded with straight calls.

Financials

Premium collectors in the S&P are in mega-panic. This has inflated all option premium to epic levels. If you have the intestinal fortitude, sell premium over multiple time frames in this market and collect the excessive option premium being offered on second standard deviation options. Look at November strangles and March ratio credit spreads.



Bonds are all over the map and the downtrend could easily continue as the liquidation going on in that market takes it by storm. Avoid.

The dollar has reached my 2008 target and even pressed it a bit. The euro is likely to rebound and straight calls are the way to go. The Canadian has spiked in volatility to an historic level that is unlikely to continue. Leg into a short strangle, out in December options.

Grains

The beat down in grains seems like too much too fast, but these markets are falling from a very high cliff. While the gut says to jump in and buy up some bull call spreads, I can't help but think there are better plays out there than trying to time a harvest time turnaround in this sector. Rice plunged as anticipated and may have some more downside, despite lacking a clear way to take advantage of it.

Metals

The market to watch here is silver, but the options market is very expensive. Sell a put to pay for a call and make a synthetic long stab at this market that is way too oversold. Gold should make a move as well and I like selling a tight near the money put spread to pay for a wider bull call spread as a way to jump on this market.

Softs

The cocoa train has left the building and is heading south for the winter. There is more downside here, and the put premium spike is no where near pricing in what I see as the potential downside for this market. Wait for a bounce and then jump on some straight puts for a move down to the 1500 area. Coffee is a the value buy of the decade and long futures are the best way to capture that value, but straight calls and bull call spreads aren't bad either. OJ is way past my 105 downside target but remains a long term value and a short term rally play. Look at some March calls and wait for the volatility spike (ever since the 2004 hurricanes everyone forgets winter brings frost risk). Cotton is ready to run higher and I am a buyer down here with straight calls, despite Friday's volatility spike. There is more to come in this market. Sugar is choppy and not worthy of a play at the moment. Lumber remains a value buy with calls long term.

James Mound is the head analyst for www.MoundReport.com, and author of the commodity book 7 Secrets. For a free email subscription to James Mound's Weekend Commodities Review and Trade of the Month, click here.