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I thought I would give an update on Coffee as several people took trades on it. I have a Mar 1.20/2.00 strangle on at the moment.
My last post was around Point 1 where there was some evidence of bullish accumulation and price pushed up to the 1.59 area at Point 2. It then encountered some heavy selling which blew price right through the 1.55 support and proceeded to make a new leg down.
Note that at Point 3 there was still some evidence of buyers holding on, bullish divergence. Then comes more buying and the shorts at 2 are pushed out, but the buying can only reach 1.58 and has now created bearish divergence. More net selling over several days took us to Point 5 where we eventually pushed out the last of the buyers from 1. This Inventory Grab resulted in a dramatic turnaround which took price from 1.47 back to our breakdown level of 1.55 as sellers began a sharp short covering rally.
brit's trade is a good example of a strangle working well.
The value of the Mar KC 120 puts combined was at 1.27 (my system puts the decimal point two places to the right. So 2.00 quoted by brit is 200 on my system) on Nov 1st. Yesterday's settlement was 0.82. There were a few 0.14-0.15 days that went against the position but the general trend is down and profitable.
Futures during this time went from 158.40 on Nov 1st to 156.40 yesterday. There were some big up and down days in futures but the long term is what is important. So long term very flat. Just what a strangle seller wants to see.
Normally this is the trend the last 90 days if your positions are far out of the money and the futures aren't making a huge move.
I do find that my gut decision is better over the years.
Today the grains crashed. Seasonal trend is downward into the end of Sep grain reports. Traders taking profit before the report.
Also this year the Managed Money (specs) are very heavy on the long side. 94% long positions in Corn. 97% long in S. So when the longs start bailing it will be a big drop.
I knew when the US drought became as strong as it was that the futures would be extremely volatile. I had sold July grain puts and then decided that things were too volatile to do any thing else in grains the rest of the summer. That's the experience talking.
Ron,
How do you know where the big managed money is positioned?
New to the board and have been enjoying the conversation!
I have a question that has always intrigued me regarding trading regularily occurring seasonal dips and rallies. I have read many "infomercial" type trading systems over the years promoting how to trade commodity futures based on the predictable seasonal patterns that their charts tend to show.
My question is this: Since everyone can see these same charts and seasonal patterns, how is it posible to trade profitably using these dips and peaks? Since everybody knows about these in advance, shouldn't this patterns already be priced into the futures?
I will take a stab at answering you.
Seasonality, like most things in trading, is never as straight forward as it may appear at first glance.
If you look at a seasonnal chart, (MRCI is the principal supplier of these) it can be easy to see average annual highs and lows in certain products like the grains etc. But within the theoretical highs and lows there will be considerable variation, for example was the low early this year or late. You can never tell if a low is in place until after the event, sometimes a long time after, when in fact it becomes obvious a new uptrend is in place. Otherwise it would iindeed be too easy.
As option sellers though, a good idea of the high or low is all we need to place out of the money positions with a good deal of time value for us to earn while we wait for the transition to occur. Therefore we are less affected by the games that the market makers play, like fakeouts, stop runs etc all of which are done to attempt to fool the short term traders in to false positions.
brit gave an excellent answer. To add to that re patterns already priced into futures. For example Feb Hogs usually go up in Nov (6 out of the last 7 years) because the processors are supplying holiday hams. But when that demand is gone in early Dec the price drops. There is no way for the Feb futures to price in that drop during the rise in Nov.
But as you can see, summer hog contracts are higher than winter contracts. They are pricing in lower supply/higher demand during that time frame. That is an example of the seasonal pattern priced into futures.
In oil especially, if everybody thinks the seasonal movement is up, then by the fact that everybody is buying because of that seasonal movement, that can make futures be a self-fulfilling profitable trend. It does usually makes futures go too far and the reversal can be swift and strong.
Probably my best strategy is based on seasonals. 14 trades per year, 7 different markets. I buy in month X, sellshort in month X+6 (6 months later). No indicators or anything else. System has not changed since I developed it 5 or 6 years ago.
I have big profit targets and wide stops. Expectancy (avg trade / avg loss) is .564, which is pretty good.
The drawback to the strat is since losses are large, it is hard to use position sizing without taking on too much risk (largest loser was over $11,000 per contract - I got slammed on a gap move).
I got the idea from the radio commercials I used to hear in Fall about how now (Sep or Oct) was the time to buy heating oil, in preparation for winter, before everyone else.
As it turns out, early Fall is the best historical time to sell, and buy 6 months later in Spring, when heating oil demand is less. Go figure.
But don't think it is easy. I also have a spread strategy based on seasonals, it had done really well until the drought this year. Abnormal events will kill a seasonal approach.
Good Luck!
P.S. Regarding Ron's excellent observation above: My model had me short Hogs in November. I took heat for it in mid November, but am now in profit.
Hey everyone, thanks for all the replies! Very informative.
Anyone else besides Kevinkdog put on the Short November Hogs trade?
I reviewed that past decade's worth of Feb hogs charts on MRCI.com; it does seem that Feb hogs drop from the end of Nov to mid to late Dec, although the size of the move varies tremendously.
I am going to try and start investigating the news and market conditions for each of the last 10 years or so during that time and compare what was going on in the market vs the strength of the corresponding Nov sell-off.
Speaking of MRCI, does anyone have an opinion on using their seasonal-based strategies service to make trades?
One very important point about MRCI's seasonal charts. If you only look at the 5-year and 15-year lines you can be fooled at what actually happens. A few years up more than the few years down could show a trend on the 5-year chart but be an unreliable indicator of what is likely to happen in the future.
I don't look at the 30-year line because so many things have changed now from what happened during the 80-and 90s that I don't feel that is useful news.
You definitely need to look at each year's chart especially the last 5 years to see if in recent years the contract is following the chart consistently. Seasonal trends do change. What worked 5 years ago may not work now.
But these charts are very valuable for selling options by showing you where the futures are unlikely to go. If a chart shows up and you sell puts, the futures may drop, but if you are far enough OTM you still can make a profit. But of course you still need to look at current year fundamentals and the overall economic situation.
But even after all of that something unexpected may happen. Grain trends are usually down during June & July but last year was totally opposite. And of course 2008 didn't follow any charts.
Last year MRCI's suggested trades for futures were 45% wrong. For spreads they were 55% wrong. And that is without stops. With stops it is worse.
If they put on a trade and it goes $10,000 against them but recovers to show a profit, they count that as a winner. But who is going to keep they trade on when it goes against you that much? So look at the column Worst Equity Amount for each year of their suggested trades. If I see too many big negative numbers I reject that suggested trade.
It sounds like their trades have a much lower probability of success compared to what you are putting on. What are you doing that is different? Are their trades based solely on seasonal trends, where yours are a combination of technicals and fundamentals and seasonals? I would most likely use seasonal info as one of many (maybe 4 or 5) indicators in determining trend direction and trade quality.
Thoughts?
p.s. I am thinking about purchasing the 2013 Commodities Traders Almanac. Any thoughts?
