Well now that the US mid-term elections are out of the way, there is now no compelling and urgent reason for the price of crude oil down be under $60..........oops! Did I insinuate something there? Nah! I'm sure it was just normal market forces :)
Anyway, Oil has broken out of its downtrending channel (with Unleaded and Heating Oil looking similar) as indicated on the chart.
IV is rock bottom of its two year range at 26% and with Statistical Volatility at 31%, options look cheap here. Any long vega, long delta strategies look good to me.
18 comments:
Hiya Howard,
Thanks, and thanks for linking. I will do likewise.
I think oil will be a good long... just a matter of being on it when it fires I reckon.
Cheers
Neat! Got here from Howard's site. Good to see some futures action every once in a while as opposed to the stock market or options market, keeps my reading "diversified."
Curious: What is your linkup on the charts for expiration? And how do you roll over (or decide to) at expiration?
Bill,
Wow this is really cool. I never thought anyone would ever read this...and finding great blogs for me to read in the process. I'll blogroll you :)
Just want to clarify your question; Are you refering to the charts on the site, or if if in a trade, when to role the trade out to the next contract?
Cheers
Oil lifting after the election? Coincidence is right, lol.
Best of luck.
I'm familiar with the concepts of LTTF applied to futures contracts from studying the Turtles. I'm aware that charts of futures prices are "adjusted" for expirations, but I am NOT aware of (1) the methods used or (2) the pros and cons of the various methods. That was question one.
Question two was how you decide to roll over (or not) and how you transition it.
From the research I've done, semi-automated futures trading seems like a good deal, if one has both enough capital to simultaneously trade many markets and enough huevos to ride the drawdowns. But, I'm still a newbie at the futures markets and will probably stay that way until I feel entirely comfortable with stock …
Yep, lots of good blogs out there. Check out my links page and you may find more that you like …
I like this one Adam -
Coincidence is the word we use when we can't see the levers and pulleys.
Emma Bull
Hmmmmmm
Bill
Question 1: For any short term analysis for minor swing trades one can just stick to the actual contract traded.
For more long term analysis spanning the life of several contracts, there are two basic methods, both with advantages and drawbacks.
1/ Spliced: The contracts are just tacked together without adjustment. This often means there can be a gap (sometimes substantial) where one expires and the subsequent contract picked up.
This method is useless for backtesting with software. But it is the best method for looking at long term support and resistance levels
2/ Back adjusted: This takes the current contract as the basis for price and adjusts all expired contracts to remove the gaps at rollover, so there is a continuous chart.
This is good for backtesting trading systems with software, but is useless for long term support and resistance. As an example, with some commodities, there will be negative prices way back in the adjusted contracts.
There are other methods of handling this but these are the main two.
Question two: Well there are two types of contract which will affect how i handle this.
1/ Physical Delivery Contracts. Contracts such as gold, oil, grains , softs, are physical delivery and as such, you need to be mindful of not ending up with several silos worth of corn dumped on your front lawn. lol (That's not how it works, but it sounds dramatic)
Some time before expiry (about a month). A "notice" period commences where delivery is to be organised between you and your broker. You DO NOT want to be holding physical delivery going into notice period. So logically you flip it out to the next contract before then.
You will know this is approaching (even if you don't know the exact date)by watching the open interest. OI will taper off dramatically in the few days before notice. You will see in the Dec Oil chart I posted, the OI is starting to drop off. It is getting close to the notice period and traders are starting to roll out.
2/ Cash settled contracts. Contracts such as Lean Hogs, currencies, treasuries, indecies etc are cash settled and there is no delivery involved. These can be safely held till expiry or flipped out any time before.
Not withstanding that, I want to be in the most liquid contract, so if OI starts to peter out, and I think I'll be holding the position past expiry, I'll roll.
Hope that answers.
Cheers
Hmm. Since stocks gap all the time, and indicators and regressions and trendlines work on them just fine, I don't see how the gaps would impact a spliced futures graph. Maybe I'm dense on that.
OK, so (hypothetically) if you always splice the data without adjustment at some arbitrary point where OI usually starts to fade, say ___ days out from notice and/or expiry, you could run models on that data and then trade based on that, if you managed your change over according to the pattern you used to splice.
Sorry to monopolize these comments, but trying to work this out in my head.
No problems Bill, :)
The gaps in a stock will have some sort of value basis revealed by news, earnings etc, and as such, a huge gap down, for example, could be viewed as an over-reaction or oversold.. or the start of a new downtrend or whatever, but it will have a logical reason.
The rollover gaps in a continuous futures chart however, are more to do with issues such as carrying costs, old crop-new crop, or issues affecting back month contracts and not front month contracts. (or visa-versa) For all intents and purposes, these gaps do not really exist in the same sense as stock gaps.
Personally, I *try to keep my analysis to the contract being traded, and only refering to the continuous spliced contracts for longer term support and resistance. But that may not be suitable for a systems trader.
As far as testing systems goes; well if you have the programming ability, you could create an adjusted chart based on open interest and volume, that could be tailored to the individuals trading style, but this is well past me.
There is another adjustment method called a "perpetual" chart which gives a mathematical weighting according to open interest. But I have no experience with these, so can't really give an opinion.
It does create issues for systems traders and I don't think there is any perfect solution, but an ordinary spiced chart would seriously mess up your backtesting.
Cheers
I dont get what the election has to do with it? Do you actually think W,reps,or oil companies control the price of crude? Maybe I misunderstood ya.
soonenough,
I guess there are two schools of thought on that.
Certainly sub $60 oil would be seen as useful to the GOP cause, and the coincidence is striking.
As to whether W and co. could have actually manipulated it? Who knows! Just a bit of whimsy really.
There is a coherent proposal as to how it could have been done, but I haven't researched it myself.
If Goldman Sachs were to have reweighted their commodities index, to reduce the weighting of oil, then that would imply a selling of oil contracts. GS wouldn't actually lose any money doing this: they would be playing with OPM and the suckers in that scenario would be holders of the GS commodities products.
Why would GS do that? Go figure!
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