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- Open interest: futures are a zero sum game. Each long position is balanced by a
short position. In order to be profitable, you must exit a winning position (which appears
obvious) leaving the loss to another party.
Total long positions plus the spreading equals total shorts positions plus the spreading
equals total open interest.
- Reportable positions: If, at the daily market close, a reporting firm has a
trader with a position at or above the Commission’s reporting level
in any single futures month
or option expiration, it reports that trader’s entire position in all futures and options
expiration months in that commodity, regardless of size. The aggregate of all traders’
positions reported to the Commission usually represents 70 to 90 percent of the total open
interest in any given market.
- Nonreportable positions: the CFTC
diffuses "nonreportable positions" as The long and short open interest shown as
"Nonreportable Positions" are derived by subtracting total long and short "Reportable
Positions" from the total open interest. Accordingly, for "Nonreportable Positions," the number
of traders involved and the commercial/non-commercial classification of each trader are
unknown.
Hence it is an error to see these "nonreportable positions" dubbed as "small specs"
as noreportable means: that a commercial did not have a reporting level in any single
futures month and Nonreportable Positions are
[arithmetically] derived
- Commercials vs. non-commercials: in the own words of the CFTC When an individual
reportable trader is identified to the Commission, the trader is classified either as
"commercial" or "non-commercial." All of a trader's reported futures positions in a commodity
are classified as commercial if the trader uses futures contracts in that particular commodity
for hedging as defined in the Commission's regulations (1.3(z)). A trading entity generally
gets classified as a "commercial" by filing a statement with the Commission (on
CFTC Form 40)
that it is commercially "…engaged in business activities hedged by the use of the futures or
option markets." In order to ensure that traders are classified with accuracy and consistency,
the Commission staff may exercise judgment in re-classifying a trader if it has additional
information about the trader’s use of the markets.
So, a commercial should be an entity trading a commodity or another entity as a bank or
broker engaged in business activities hedged by the use of the futures or option markets.
Who are the commercials? I don't know: producers, wholesalers, investment banks,
hedge funds, .... a small part of them are the counterparty and liquidity makers for the
non-commercials.
- Non-commercials: these are traders not reporting as commercials. These can be
producers, wholesalers, investment banks, hedge funds,... who are not filing the statement (or
not complying, or not wanting to), and other traders.
Since 2000 even commercials are not requested to report as such if their position is less than
a specified amount (varies with the commodities).
- Why is a category long (or short)? Mostly, in my opinion, because they want to
hedge a position on another market.
Sound hedging practice is the delta neutral hedging by which a long (short) position on
an underlaying is balanced with a short (long) position in the futures such as the resulting
position (underlaying plus future) remains neutral to the markets prices changes.
Profits are generally made on a third market. Example: a gold miner sells forward a certain
amount of gold. A bullion bank buys that gold (long underlaying) but will hedge against price
movements by selling (short) gold futures.
But the gold miner now can buy calls at a higher strike should the metal price go higher,
buying the futures the bullion bank just sold in the last sentence.
- Hence the need for the Financial Contract Netting
Improvement Act of 1999. The Office
of the Comptroller of the Currency publishes the results "as-if" netted positions in
his Quarterly Derivatives
Fact Sheet (Menu "subject index", then glossary, then D for derivatives).
In the case of a derivatives meltdown, ...well...in my sick mind, netting will allow the
BigBoyz to save their @$$e$ leaving "non-commercials" with the empty bag.
- The derivatives meltdown: usually the data used are the total of the notional. In
the own words of the Comptroller, The notional amount is a reference amount from which
contractual payments will be derived, but it is generally not an amount at risk. The risk in a
derivative contract is a function of a number of variables, such as whether counterparties
exchange notional principal, the volatility of the currencies or interest rates used as the
basis for determining contract payments, the maturity and liquidity of contracts, and the
credit worthiness of the counterparties in the transaction. Further,
the degree of increase or reduction in risk taking must be considered in the context of a
bank’s aggregate trading positions as well as its asset and liability structure. Data
describing fair values and credit risk exposures are more useful for analyzing point-in-time
risk exposure, while data on trading revenues and contractual maturities provide more
meaningful information on trends in risk exposure. (re: Quarterly Derivatives Fact Sheet)
I don't why the doom and gloom sites keep warning about an imminent meltdown. I do not
negate the risks, the positions are huge. But there are risks in any trade. Not to the extent
of what is prognosticated on those sites.
- How do I interpret CoT graphs? Simply.
A trend remains a trend util it bends and
the crowd is always right the trend but wrong at both ends. Given some definitions here above, I can't
analyze objectively this CoT information. I don't know who the crowd is.
All I can do is look at the charts, from both the underlaying and the CoTs - as in any chart,
analyze the price with corresponding volumes:
CoTs are volumes - confirm trends prices with
CoTs trends.
When the commercials were net short, the price of gold was high.
- Interpretation can be dramatically different from one commodity to the other due to the
definition of their respective: "commercials" and "noncommercials".
- Rem: CoTs are US data. For interest products (and for gold), about 20% are traded in
the USA, the rest worldwide.
- I am working on the use of aggregate open interest (sum of all contracts) - second chart
here below - which have more immediate relation with the commodity prices.
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Tips and Tricks of the Trade
- the Commitments of Traders report at 15:30 ET) are those of the close of the Tuesday
session.
- The futures industry reports the volumes and open-interest as those of the previous session
(day-1).
Simple?
Not quite!
Let's take an example:
At the open of the Friday session you would expect the data vendors (and the exchanges on their
site) to diffuse the Thursday session's data.
Wrong!
You must wait for the close of the Friday session to know the volume and open-interest data of
that Thursday.
In these 24/24 markets one can easily be confused, example: a Monday morning, day-1 still means
the Thursday.
Some services you might consult during the day would diffuse the previous session's volume (
the one of the Friday), but the open-interest as usual (the one of Thursday, the real
"day-1").
Only attentive observation can tell!
- Caveat!
As if you were playing cards and placing your bets, judging on the size of the pot two deals
ago.
- And though it is possible: the CBOE diffuses the volumes and open-interest on options the
same evening.
The Clearing Corporation is
testing same day
reporting on the futures.
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