Is Div Comm Swp Discussion Threads

[jdeltablues] 26/2/2003 08:55

Doesn't look quite so impressive this morning, trumpet :-)

Grains showing signs of life, but I haven't made any of the trades yet - the grain markets work short hours (3.30 to 7.15 our time) and I'm usually engrossed in the S&Ps then. Also, I was surprised at how expensive the calls are - I make the implied volatility over 100%, though I may have pressed the wrong button somewhere.

Example: July corn closed at 236.75 last night, the 230 calls are 1.50 and the 280 calls (that's 20% out of the money) are 0.26.

Wild gyrations in natural gas (though the bad tick in January rather spoils the impact):



Coffee galloping towards my target zone of around 60 - just waiting for it to stop and take a nap there, so I can sneak up on it. May coffee is almost there already, but it expires before the Brazilian frost season, which is when all the fun starts.

[trumpet] 24/2/2003 22:22

CRB - 251.20

The trend is your friend ;-)

[jdeltablues] 24/2/2003 22:04

Report on investing in corn (mainly fundamentals, with a bit of cycle analysis):

[jdeltablues] 24/2/2003 11:20

indalo, ADVFN sent me a junk email about GS covered warrants in oil and gold a couple of days after gold hit its peak! Retail investors don't usually get easy access to "hot stuff" till it's started going off the boil (look at the investment trust sector for a good example of this) - does this mean that we've seen an important top in those commodities?

seela, it's a bit confusing as the two charts are plotting different things. The daily chart plots the July 2003 contract since it started trading, while the weekly chart plots the front month at the time, moving on to the next front month when the current one rolls over. It has to do something like this as futures contracts have a finite lifetime and only trade for a few years at the most.

The weekly chart is probably using the July 2002 contract, which had a low of 198 on 6th May; the July 2003 contract in the daily chart had a low of 224. Why are these different?

Part of the price of futures contracts includes carrying costs; these include things like interest, transport, warehousing, insurance, boring stuff like that. Obviously, the longer to expiry, the higher the carrying cost; as July 2003 is a year later than July 2002, there will be another year's worth of carrying costs to pay. These aren't paid directly by the futures trader, but have to be included in the price, otherwise it would be possible to make risk-free money by arbitraging the cash market against the futures. (Similarly, stock market futures don't pay dividends, but if they didn't take them into account, it would be possible to short the futures, buy the underlying stocks and collect the dividends until the future expired).

Another element is uncertainty; in May 2002 it was close to the start of the harvest, so traders could make a reasonably intelligent guess about how much corn would be available for delivery in July 2002, while the crop for July 2003 delivery probably hadn't even been planted. Also, an extra year will give more time for unusual events to occur, so the 2003 contract will give a higher probability of a windfall gain (or thumping loss).

In a normal market, the nearest month will have the lowest price and the price will increase as the time to expiry increases. Looking at Friday's closing prices for corn, the Mar03 contract is 231.75, May is 234, July is 236.5, Sept is 236.75, Dec is 238 and Mar04 is 243.75.

Supply and demand imbalances can cause the market to invert, so the front month has the highest price and the price falls off as the time to expiry increases. This is because there is some sort of shortage (or anticipated shortage) which the market believes will be short-lived and expects things will return to normal in a few months. A good example is crude oil, where Apr is 35.58, May is 34.33, June is 32.92, July is 31.75, ...

[seela] 23/2/2003 18:32

Delta

Looking at those Corn charts on Futuresource:

In the daily chart the May 02 low looks to be about 23.

But in the weekly chart the same may 02 low looks to be about 19.

[indalo] 23/2/2003 17:00

Delta - The business today says that Goldman are now trading in covered warrants in oil and cocoa...Available to both institutions and private investors.

[jdeltablues] 23/2/2003 14:24

An interesting week in currencies as well; Au$ and C$ break out of their trading ranges, without taking out important resistances, Euro and Swissy stay in their ranges and pound has a nasty fall.

I expect the grains to successfully test support very soon, so I'll be looking to buy corn and wheat calls next week, and maybe oat futures, all with a tight stop.





These look much better on monthly charts:

[jdeltablues] 23/2/2003 14:02

I see the Weekend FT has had a slight change of format; currencies, commodities, bonds and interest rates now share a single page (page 16 in the main section) and the commodity futures prices have gone, leaving just the spot price changes. As compensation, the commodities column has moved to the top of the page and now has three columns. The futures prices aren't a great loss as they were often stale or inaccurate.

The main story is the propane barge explosion in New York. Heating oil stocks fell by 2.1m barrels amid freezing temperatures in the North Eastern United States and March heating oil made a high of $1.135 a gallon on Thursday, almost equalling the all-time high of $1.15 made in December 1979. It fell back to close at $1.0607 on Friday, up from 89.16c the previous week.

Cocoa fell steeply as the opposing forces in the Ivory Coast starting being more polite to each other and speculators closed long positions. A broker is quoted as saying that confectioners bought large quantities of cocoa beans, but not enough to stem the huge slide.

[jdeltablues] 23/2/2003 13:40

Oops! Got my Brent and Texas crude mixed up when I was discussing option trades in post 241 - I remember thinking "these puts look really cheap"!

A more sensible trade would be to buy the $35 puts, which are $1.15; as there seems to be quite a bit of support at $30, the $30 puts could be sold for 12c, which would bring the total order down to $1020, plus dealing costs.

I wonder if the Brent-Texas differential is worth trading? Under normal circumstances they seem to stay within $1 or so of each other but the differential is currently around $2.50 and has been as high as $4 recently if memory serves correctly.

If history is any guide, there's certainly potential for a large move - when the US invaded during the first Gulf War, the price of oil fell more than $10. The March 1991 WTI contract closed at $30.29 on 16/1/91; the next day it opened at $22.79 and closed at $20.63, followed by an opening price of $21.55 and a close of $18.99 on 18/1/91, which was a Friday. When the market opened on Monday, the excitement was over and crude traded in a narrow range between $20.00 and $20.85.

To add to the confusion, not only did all this happen during a contract rollover (the Feb contract ceased trading on 22/1/91), but the New York Mercantile Exchange raised the margin requirement on the crude oil contract to be equal to the underlying contract value!

[jdeltablues] 21/2/2003 20:32

Found this article, in which a Turtle describes some of his trades in coffee and explains how his experience and understanding of how the market works got him a far better exit than the mechanical system. A bit verbose, and I didn't understand the Market Profile stuff at all, but covers a lot of interesting material.

[jdeltablues] 21/2/2003 19:01

Indeed you can, indalo. The mystery trade in my account (now sadly cancelled - wish I'd kept my mouth shut!) was a put option on cocoa futures.




If I've understood these right, the $30 put for West Texas crude has a mid-price of 12c, based on last night's settlement price, so buying 1 put would cost you $120, plus the bid-offer spread, plus around $25 commission for a round trip. Say around $175?

The only problem with crude oil puts is that the implied volatility will be very high at the moment, meaning that you have to pay a high premium, which you will lose if the price doesn't fall before the option expires. Also, energy options expire very early - these April options will expire on the first trading day in March - so you may want to purchase options with a later date, which will cost more.

An alternative is to put on an option spread (eg buy $30 put, sell $27.5 put), which offers less risk but less reward than just buying the $30 put. You could even put on a spread in the underlying futures (eg sell April crude and buy May), which again is less risky than just shorting the April future - not to mention a much lower margin requirement.

[indalo] 21/2/2003 16:39

delta - Is there such a thing as options on commodities?

I'd love to buy oil puts, but selling the futures is far too risky without watching the trend reverse first, by which time much of the profit is lost.

Anyone know if I can trade options on oil rather than futures???

cheers

[jdeltablues] 20/2/2003 22:10

July wheat acting nicely (see chart in previous post). NB most New York futures markets were closed on Tuesday, hence the duplicate bars in cocoa and coffee.

A very strange thing happened today - I got an email from my futures broker showing that a put for NY June cocoa had appeared in my account, so I queried it. Almost fell off my chair when I checked the price this evening!

Let's hope they don't cancel the trade - I'm overdue for some trading luck.

[jdeltablues] 18/2/2003 11:02

Are these all LIFFE contracts? (I know robusta coffee is). Here are the charts for the US equivalents:





ADVFN now provide LIFFE commodity charts, but I couldn't get anything other than "unknown symbol" or a red line.

I have to admit I don't know much about LIFFE futures - I went straight for US futures assuming that the same considerations would apply as for US equities (more information, more choice, more liquidity, lower commissions, better service from brokers, more civilised trading hours, etc etc).

[nirvs] 18/2/2003 08:11

Robusta coffee looks an excellent sell.
Cocoa a decent buy

[indalo] 17/2/2003 16:45

My wheat bet is looking OK.....I see it breaking through 340 this time...chocks away!

[indalo] 13/2/2003 16:53

Hmmm....interesting stuff

[realale] 13/2/2003 11:21

Also worth mentioning a peculiar chemical property of palladium in that it can absorb many times its own volume of hydrogen. Dead useful in fuel cell technology!. Its also a great catalyst.
realale

[indalo] 12/2/2003 09:48

thanks Delta...

[jdeltablues] 11/2/2003 21:14

According to palladium's main use is in pollution control devices (eg catalytic converters), although like the other precious metals it is also used for electrical contacts.

looks quite a useful source of commodity fundamentals information, although the stats are four years out of date.

It's a good time to be looking at wheat and the other grains, as they often make their lows for the year in February. The July and December contracts are the ones to watch on the CBOT; the March contracts are rolling over and the May ones don't give time for weather scares and the like. September isn't traded very much. December is the first contract which is entirely new crop (most of the harvest is in during October), while July is late enough in the cycle for people to start worrying about the harvest, while early enough not to be sure what's going to happen!

[indalo] 11/2/2003 18:56

Deltablues -

Good comments, thanks....

Anyone else like the look of CBOT Wheat??....MA's all crossed up, RSI gave a nice signal right at the bottom ($315)....Failed at the first real test of 340, not suprising as there is strong resistance there. Retested the bottom of the trend, probed stops (shaking out weak bulls) and now ready to resume the uptrend and capture 340 which could see it surge to 360 fast IMO.

I've only traded commodities a few times, and been doing OK...I think RSI is by far the most useful indicator so far. Palladium gave a good bullish divergence at the low, as did wheat. Oil gave a bearish failure swing a month back at what looked like a double top forming, I went short and took $1.50ish, tried again on the way back up and was stopped out for - 0.50 cents just above the previous peak....

By the way Delta, you seem quite knowledgable...So what the hell is Palladium used for in the real world???......It's the only precious metal that's been in a solid bear market for two years....which makes me think it's probably connected to the chip industry...Is that right?

[trumpet] 08/2/2003 16:43

Deltablues,

Yes the commodities are interesting. Taking the whole of the market, there's this split that's quite unlike other markets - those that are in the market buying/selling/hedging actual production who are physically going to deliver or take the product + the active traders/investers. I think under normal circumstances the general trends in individual commodites show normal ebb and flow and seasonal variation / industrial requirements - for long periods of time it can pretty much act like a closed-loop system, with very little money (in the grand sceme of things) either flowing into or out of the arena.

However, as commodities have recently become more attractive as an investment class then this previous closed-loop system is being pumped up with more and more funds and as the amount of deliverable items cannot keep pace with new funds the prices rise. Trading with the general trend is always a good idea so picking good buying ops for trading in individual commodites and maybe a longer term holding trickled into the index is they way I'm looking to go.

[jdeltablues] 08/2/2003 14:44

Thanks trumpet. Maybe I should write a newsletter instead of trying to trade for myself :-)

I agree that the best use for the CRB/GSCI is as an indicator, in the way that many investors use the FTSE or the Dow Jones to judge how the stock market is doing. It can also be used as a leading indicator for retail price inflation (I believe the Fed pays very close attention to it), which may not be such good news for the future.

One of the things I like about the futures markets is that each commodity has its own personality and there's almost always something happening somewhere; what with tracker funds, computerised portfolio allocation, panic selling to meet solvency requirements, etc, the stock market seems to have lost this feature over the years and you seem to see the same few charts over and over again, regardless of which country, sector or company you look at.

Going back to China, I read yesterday that it now consumes more iron and copper than the US. Maybe mining companies that specialise in base metals would be another way to play the commodity markets?

Anyway, that's probably enough rambling for one day!

[trumpet] 08/2/2003 14:23

Deltablues,

Interesting comments on Gold/Silver. Nothing wrong with caution, standing aside and awaiting confirmation of your ability to analyse trends is good. I have been wathing the CRB for quite a while now - since around 217. I;m not look for short term trades but more of a longer term positioning as trends are confirmed, although dip entry points would be nice every time one commodity dips another seems to pop - hence the very steady and relentless rise in the CRB over the last 6 months. However, in the meantime, I have benefitted from shifting my share portfolio towards commodity based plays in the meantime, which is nearly all sheltered within ISA's now.

[jdeltablues] 08/2/2003 14:11

Thanks trumpet - my old account got closed when my debit card expired and ADVFN's software wouldn't accept the new one, hence the subtle change of name.

CRB is indeed pushing 249 on the cash (245 on the April future). Incidentally the CRB futures aren't very liquid and their GSCI counterparts are even worse.



I thought crude oil might be topping out last week, but then came a huge surge in heating oil which pulled it back up again.




According to today's FT,

"US fuel supplies were shown to have fallen steeply amid freezing temperatures.

"The US Energy Information Administration said this week that distillate stocks, including diesel and heating oil stocks, had plunged by 10.3m barrels in the week ending last Friday. This was the second largest drop on record.

"Distillate fuel demand was shown to have hit its highest weekly average ever. Heating oil suppliers in the north-east US were expected to ask the White House to release emergency stocks."

Friday's settlement price of $35.12 for West Texas crude was the highest since November 2000. IMHO it's not just "war fears" which are driving the oil market.