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Glenn Crumpley wrote:
>
> I'm trying to determine a good strategy for selecting which
> contract month/months to trade.
>
> Until now I assumed that most contracts for a given
> commodity exhibited similar price characteristics.
> I noticed on my Sugar trade, however, that the May
> and July contracts traded at significantly different
> prices and price movements. Assuming that several
> different months generate similar trading signals, among the approaches
> I've considered are:
>
> 1. Pick the nearest month and apply all of my trading capital there.
> 2. Pick the next nearest month and apply all of my trading capital there.
> 3. Spread my capital among several months.
>
> Any advice?
>
> Regards,
> Glenn Crumpley
Go with the largest open interest in general unless there's a reason to
otherwise.
1. If the open interests are fairly similar and the first contract is
due to have first notice day soon, you might go to the next *active
month. This avoids having to "roll over" to the next month very soon
after entry. (depends how long term a trader you are to some degree).
OI is available in Wall St. Journal, Inv. Bus. Dly, and on some data
vendors and I assume also on the exchange websites. You want to avoid
low OI contract when you can, because you are likely to get worse fills
in them.
2. There might be a fundamental reason to take a later month. For
example, you might be bearish soybeans and more so the new crop than
old. In this case you might want to do Nov beans for a short.
3. In certain cases the charts may suggest one over the other if you
have two contracts with similar OI. For ex. i remember looking at May,
Jul, and oct sugar recently and thinking one or two of them looked a bit
more like a continued downtrend than the other one or two. The OI in
cocoa and sugar seem to spread out so you might have a choice of one or
two.
4. Note that the "spot month" may have higher margins and/or larger/no
limits. (Occassionally that's the front 2 months in some of the NY
mkts, i think for limits.) I think the spot month refers to the first
month, particularly after FND (first notice day).
5. Skip "in between" months in certain commodities. For example,
copper has almost all months available, but only Mar, May Jul, Sept.,
Dec are active. Silver is the same way.
6. The FND or equivilent can vary considerably from commodity to comm.
relative to the contract month. Sometimes it's as early as maybe the
20th of the month before, other times its well into the contract month.
LFG has a good table on their website. Some comm. will really
concentrate their OI in one month, others will spread out.
7. If you are getting 2 sugar contracts you could consider two
different months. Advantages: occasionally a stop will be just missed
in one and grazed in the other. I actually saw this in the big collapse
of copper: my stop in Jul. which i was in, was hit for a breakeven; I
would have stayed in the Sept for something like a $4K profit! All
because Jul retraced slightly farther. (didn't have a re-entry plan at
that time)
I'm pretty new at this but these are my suggestions.
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