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Pompatis and Kevin,
Fair enough.
Current Positions in Markets:
Dec Cotton -- Long ATM option straddles
Dec Coffee -- Long ATM option straddles
Nov Soybeans -- Long Calls
Jan Soybeans -- Long ATM option straddles
In the case of each commodity listed, these trades all have a high
probability of profit given market circumstances. I use an indicator
that combines psychology and mathematics to determine when an option
is underpriced, when people will be ready to buy and sell, and when
the likelyhood of volatility "spikes" are present. Good tools in the
public domain for tracking such opportunities are low ADX readings
and historical vol ratios of 6 days and 10 days compared to 100 days.
In addition, I pay particular attention to patterns that are condusive
to sharp breakouts (Triangles mostly).
December Cotton now provides the best opportunity for long and short
term gains, followed by January Beans, Coffee and for aggressive vol
traders, November Beans.
In the case of both Cotton and Coffee the volatility situation
coupled with triangular formations in these markets indicates a
strong likelyhood of price moves exceeding 8 cents in Cotton and
15 to 20 cents in Coffee. Soybeans are at a "decision" point as
well.
The purpose of the strategies used highlights markets that exhibit
one or both of the following traits:
1. Greater directionality.
2. Higher volatility
In covering both sides of the market with a non-directional trade we
can expect the following results:
1. The vol stays level but the market becomes more directional. We win.
2. The market does not gain significant directional bias but gains in
volatlity. We win.
3. The market gains in both direction and vol. We win big.
4. The market remains in a small trading range for an extended period.
(20 or more trading days) We lose.
Under scenario 1, I'll peel out of the profitable side of the spread
and hold the losing side . Peel to occur at 15 cents in coffee and
6 to 8 cents in cotton. These markets display strong tendencies to
retrace. Therefore it is likely that we will earn back some of the
money on the losing side of the spread for more final profit.
Under scenario2 all positions are liquidated, and we take the volatility
money. Time frame for this is about 15 trading days.
Under Scenario 3. Coffee is short term here, so Take all profit at
15 cents over a short time frame or 10 cents if the market hasn't
pulled 15 in 10 trading days. Cotton is longer term. I'll take take
profit on 6 cents and higher volatility. By then a directional bias
may have developed. Given the long term aspects involved, I'll take
1/4 to half of the profit madde on the original trade and buy multiple
OTM Dec Cotton calls or puts based on the markets direction.
Scenario 4. No movement in 15-20 days? Due to High Gamma in Coffee and
Cotton, you will want to be out of there before the vol implodes on
you. Exit and take the loss. In cases such as this, you will lose
roughly .19 to .25 the value of the spread plus your commision costs.
November Beans are for "turn and burn" vol traders only. We have a vol
spike coming, but I don't know if it will be sufficient to overcome
the decay of the Nov options. I'm only carrying calls here because
they were "free" <g> (See previous posts)
Jan Beans are an *excellent* trading opportunity. If the market finally
cracks the upside, we will easilly pull prices 50 to 75 cents higher.
If the market breaks to the downside again. take profit when the value
of the put exceeds the total value of the initial cost of the spread
plus commisions. Ergo a small winner which allows you to hold and build
on a multiple call position.
In addition, we may see a counter-seasonal move here in September for
Beans. Farmers normally sell Beans out of the fields in Sept, and the
price drops, but with prices so low, would *you* sell?? Also, the
uncertainty seen in the bean market is bound to spill over into
Cotton. Remember that these commodities vie for the same field space.
As a final caveat, given the technical formation of Jan Beans, If we
pull some sort of rabid weather scare, or South America sinks, Beans
will trade 1.50 to 2.00 higher in the space of a month and a half.
These "wedge type stair step" formations can cause some inpressive
blow offs if the ball starts rolling...
As a final note on these types of spreads in Coffee and Cotton. These
are thin markets and you need to make sure you have been filled on
*both* sides of the spread. So, this isn't a trade you call in to
your broker before the open and before you leave for work. <g> you
have to wait until the options have traded, and there is a lull in the
action that gives you a chance to get your prices.
Walt Downs
CIS Trading
http://cistrader.com
POMPATIS@xxxxxxx wrote:
>
> In a message dated 98-09-09 22:24:24 EDT, kmorgan@xxxxxxxxxx writes:
>
> All I'm interested in related to trading is trading. So where are
> your trades? Trades are the be all and the end all. Behind a trade is the
> why and wherefor.
> So, I am much more interested in hearing what you are
> buying or selling, and how, and THEN why, and how you are managing your
> trade over time...
> =================================================================
>
> Dear Morgan and fellow RT's:
>
> I think this would be a great new focus. I am sure that this is an excellent
> way to share all sorts of invaluable information regarding entries, exits,
> adding postitions, placing stops, managing trades, managing emotions,
> supportive belief systems, supportive behaviors and metaphors, generaly
> appropriate phsycology, proven methods for ironing out internal blockages and
> unsupportive behavior patterns and belief structures.
>
> We all know that much of the success in trading comes from a general self
> mastery. True self mastery is no small task as I am sure most of you know.
>
> Like Morgan (from the above post) I too would like to get see some good juices
> flowing regarding the real essence of what trading is about and what it takes
> to succeed. We are all full of such valuable insights and philosophies,
> techniques and practices. How about we all do our part to take this forum to
> the next level. You all know what I mean here. I will do my best.
>
> I look forward to your input, all of you.
>
> Sincerely,
>
> Pompatis
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