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I have previously recommended the CYF web pages for those seeking
interesting analysis and commentary. I have also have 3 1/2 months of
first hand experience with CYF (Jay Gallemore) management of a low six
figure futures account. The post regarding the CYF page compels me to
offer a few comments and cautions:
a) Jay is among the most knowledgeable and interesting commodity
analysts I have found on the web, particularly with respect to
historical and seasonal patterns. His web pages and commentary are worth
periodic viewing, particularly his weekend work.
b) Impressive analysis does not equal impressive trading. CYF managed
the account from March 31 through the close on July 13 after which I
took control of the account. Eight trades were made in the account
through July 13, 5 trades had closed with losses ranging from $363 to
$3774 ($1831 average), and 3 trades were open with losses ranging from
$484 to $1038 ($700 average), none of the trades were profitable.
c) The CYF trades generally attempted to fish for a bottoms (beans,
cocoa, coffee, gold, silver) rather than trading the trend. For example,
the CYF commentary, while focused on finding the cyclical bottom in
grains, correctly predicted that the spring grain rallies were highly
prone to failure. Not one trade was put on to short the huge May/Jun
decline in the grains.
d) The so called "synthetic future" strategy which CYF employs is really
a hedged future e.g. long future hedged with long put. This can be a
low-risk strategy when employed judiciously and a high risk strategy
when used without adequate reference to primary trend and historical
option volatility. I will give an example. On 22Jun, CYF went long
August Beans at 4.995 and long August 500 puts at .20 expiring on July
21. At the time, beans had been in a strong downtrend, put option
premiums were very high and there was extremely strong overhead
resistance (including gap) in the 514-520 area and more overhead
resistance in the 537-542 area. For the trade to breakeven, the trend
had to reverse direction (there had been no bottom forming
consolidation) and price had to move above 520 and do so prior to
expiration within 30 days. Because of the high option premium, there
could be little doubt that the 0.195 in put premium (the 500 strike was
.005 in the money at 4.995) would collapse by 50% as soon as a bottom
was formed. Thus, at the time of opening the trade, the risk was 20, a
likely outcome was no better than breakeven (520) and a more favorable
outcome (540) offered no better than a 1:1 risk/reward. At option
expiration, August beans closed at 460 (a loss of $2000 before
commissions and fees) and the August 500 put closed at 40 (a gain of
$1000 before commissions and fees).
e) Use of hedged futures can offer protection in volatile weather
markets and can reduce the reliance on stops which can be easily picked
off. However a hedged position, because the risk premium is paid up
front, can also lull a trader into carrying a position which has moved
adversely or is not going anywhere rather than scratching the trade.
Most of the trades in the account were closed out when expiring in the
money put options were automatically exercised closing out the future.
This resulted in the loss of all put premium. When you are long option
premium, time is money!
f) There seems to be a general tendency on the CYF web pages for charts
with losing trades to disappear more quickly than charts with winning
trades. Also, posted profits do not appear to include substantial
commissions and fees. Note that a hedged future incurs roughly double
the commissions and fees of a standard future which, depending upon
size, affects the risk level of each trade. Thus, I would be cautious in
using posted profits and losses as a measure of trading success.
Earl
----- Original Message -----
From: "Terry Smith" <tesla@xxxxxxx>
To: <realtraders@xxxxxxxxxxxxxxx>
Sent: Saturday, July 22, 2000 2:47 PM
Subject: [RT] Re: A couple of Good books
> I agree with you on managing trades. The best trader I have ever seen
on
> managing the risk of trading is Mr. Gilmore. He does a great job
explaining
> this week how to manage risk trading the soybeans, if anyone is
interested
> they can check out his interactive web site at
www.chartingyourfutures.com
> happy trading.
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