1009 futures magazine crude oil correlations

8/13/2019 1009 Futures Magazine Crude Oil Correlations

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futuresmag.com October 2009

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Interactive Brokers LLC is a member of NYSE, FINRA, SIPC Supporting documentation for any claims and statistical information will be provided upon request. [1] E-Trade - 150-1,499 trades perquarter. [2] Fidelity Gold Account - $1 million or more in assets or $25,000 in assets and 120 trades per year. [3] IB - Accounts generating commissions less than $10 per month (with account equityof $2,000 or more) will be assessed the difference as a monthly activity fee. [4] optionsXpress - minimum 9 stock trades per quarter. [5] optionsXpress - minimum 35 option trades per quarter. [6]optionsXpress - eMini between 1 - 40 contracts per month. [7] Schwab - 120 trades+ per year or more than $1 million in household balance. [A] Net $ Improvement per Share Definition: ((# of PriceImproved Shares * Price Improvement Amount) - (# of Price Dis-improved Shares*Price Dis-improvement Amount)) Total Number of Executed Shares. [B] According to TAG for US stocks (42 cents per100 shares better), the analysis included all market orders of 100 shares or more, up to 10,000 shares from July - December 2008. The analysis for US options (60 cents per contract better) includedall market orders with order sizes of 1 to 50 contracts from July- December 2008.

US Margin Loan Rates Comparison

Margin Rate Comparison as of 09/01/2009. Services vary by firm. **Negotiable

$25K

7.49%

7.575%

1.64%

6.25%8.00%

8.50%

7.70%

$200K

5.99%

6.575%

1.14%

5.00%6.875%

7.25%

7.70%**

$1.5M

3.74%

3.750%

0.64%

4.00%6.25%

6.25%

7.70%**

E-Trade

Fidelity

Interactive Brokers

optionsXpress Schwab

TD Ameritrade

thinkorswim

Commission Comparison as of 09/01/2009. Services vary by firm.Data is for U.S. equities, stock options and futures.

E-Trade

Fidelity

Interactive Brokers*

optionsXpress

Schwab

TD Ameritrade

thinkorswim

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1 E-miniS&P 500

Future

$2.99

N/A

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N/A

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$3.50

1 StockOption

$8.74

$8.75

$1.00

$12.95

$9.70

$10.74

$2.95

100Shares

$7.99

$8.00

$1.00

$9.95

$8.95

$9.99

$5.00

1

2

3

4

7

US Commission Rates Comparison

*Lower commission rates for larger volumes and comparable rates worldwide.

Interactive BrokersThe Professionals Gateway to the Worlds Markets

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Source: Transaction Auditing Group, Inc. (TAG),a third-party provider of transaction analysis

All Brokers are NotCreated Equal

Consider ways tominimize your trading costs

Net Dollar Price Improvement[A]

vs. National Best Bid/Offer

Significantly better than the industry

as a whole [B] for second half 2008.

InteractiveBrokers Industry

IBAdvantage

US Stocks(cents per100 shares)

US Options(cents percontract)

31

125 65

-11 42

60

09IB09-209

1

2

3

5

3

6

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I I O I I ,

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In the past five years, the VIXIndex has moved opposite of the

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To take advantage of this market dynamic, trade futures on the VIX,

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asset class like no other. Visit www.cboe.com/cfe to learn more.

*CBOE data and Bloomberg, cboe.com.

CBOE, Chicago Board Options E xchange, CBOE Volatility Index and VIXare registered trademarks of Chicago Board Options Exchange, Incorpo-

rated (CBOE). CFEis a registered trademark and CBOE Futures Exchange is a servicemark of CBOE Futures E xchange, LLC (CFE). S&P 500is a

trademark of The McGraw-Hill Companies, Inc. and has been licensed for use by CBOE. Copyright 2009 CBOE Futures Exchange, LLC. All rights reserved.


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EQUITY TRADING TECHNIQUES30Short volatility trading in

extreme marketsBy Sergey Izraylevich and

Vadim Tsudikman

We examine volatility selling

strategies with a discussion

of the criteria that work.

TRADING TECHNIQUES33 Getting your fill: Option spreads

By Paul Brittain and Rich Roscelli

Here are some ways to enter

spread orders that can shave ticks

on execution and give you

an edge.

36 Learning to trade:

Its academicBy Leslie K. McNew and Tup Ingram

We discuss a program that teachesthe girth model and how the

model can be used to manage

a currency portfolio.

F E A T U R E S

Contents Continued, page 6

Energy outlook:Crude correlations andwhat comes nextBy Christine Birkner

Crude oil is back on the move and traders

should look to equity markets and the U.S.

dollar to determine where its headed next.

Heres a look at where crude and metals are

headed through the end of 2009.

24

For additional information,visit futuresmag.com.

ContentsOCTOBER 2009 VOLUME XXXVI I I NUMBER 10

4 FUTURES | October 2009

O N T H E W E B T H I S M O N T H

TRADING TECHNIQUES:Strangling money out of metals

FUTURES 101:Using momentum analysis to predict price change

BOOK REVIEWS:

Forex Patterns and Probabilities: Trading Strategies for Trending and

Range-Bound Markets

By Ed PonsiAuthor Brandon Jones reviews a guide to trading strategies

for the beginning forex trader.

The Daily Trading Coach: 101 Lessons for Becoming Your Own

Trading Psychologist

By Brett N. Steenbarger Brandon Jones reviews a book on the

importance of how traders act and react to the markets.

MARKET WATCH: Daily analysis on all the sectors you trade

Exclusively on futuresmag.com

Want to know more? Go online andcheck out our web-exclusive articles,

resources, charts and e-newslettersat futuresmag.com today.

Letters To The Editor Dateline Quarterly Funds Review New For Traders Software & Book Reviews Hedge Fund Listing

Hedge Fund Listing Latest hedge fund performance numbers

Dateline Calendar Trading dates and economic reports

Coming Events Industry conferences for October and November

New for Traders Exchange offerings, software, forex and

options products, educational resources, and more

BuyTheRumorSellTheFact.com Futures editorial blog

Resource Investor.com News for investors in metals and

commodity products and businesses

cov

erstory

EnergyOutlook:Crude correlationsand what comes next


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ITS COMPLICATED

Regulators hold handsTo prevent what one exchangeleader said was change that coulddo more harm than good, industryleaders testified before commission-ers of the Commodity Futures TradingCommission (CFTC) and Securitiesand Exchange Commission (SEC)their views on how the financial regu-latory landscape should be altered. BySept. 30, the agencies must completea blueprint for harmonization. If thisdoesnt happen, the Financial Services

Oversight Commission will take over.Industry leaders, trying to prevent adraconian regulatory overhaul, werevigorous in what should and shouldnot be done.

In his testimony, CME Group CEOCraig Donohue warned that mergerof the existing regulatory structuresinto a single set of one-size-fits-all rulesadministered by separate agencies willdo substantially more harm than good.

Exchange heads called for a focus

towards the CFTCs principles-basedapproach vs. the SECs rules-basedapproach to regulation. We believe

that the harmonization discussion musttake account of the basic fact that thesemarkets are highly dissimilar in many

critical aspects and that the regula-tory framework, by necessity, should bedifferent, Donohue said, adding thatharmonization may be interpreted tomean abandoning the principles-basedregulation of the Commodity FuturesModernization Act. He also reiteratedthe point that inappropriate levels ofregulation could push derivative mar-ket participants overseas.

Chicago Board Options ExchangeChairman and CEO Bill Brodsky in

his testimony said we support theAdministrations proposal that theSEC give serious consideration toshifting closer to a principles-basedapproach for exchanges and clearingorganizations under its jurisdiction.He mentioned that inconsistenciesin regulation have led to conflictsbetween the agencies over new prod-ucts, clearing and portfolio margin-ing. Options Clearing CorporationChairman Wayne Luthringshausen

called for combining the functions ofthe SEC and CFTC under a new prin-ciples-based statute to ensure holistic

oversight of all derivatives products.Several panelists cited past regulato-

ry stalemates that resulted in delays for

the introduction of new products suchas credit default options and optionson gold and silver ETFs.

A more flexible principles-basedapproach will allow innovation in newproducts. The delays associated withthe lengthy review process inherent ina rules-based approach inhibit innova-tion, says Andy Nybo, head of deriva-tives at Tabb Group.

Paul Zubulake, senior analyst atAite Group, says futures exchanges will

retain principles-based regulation. TheSEC doesnt want to be in a situationwhere theyre jumping in and makingthe new regulatory world look more intheir favor, he says, adding that theagencies need to sort out the uncertain-ties that still exist in over the counter(OTC) market regulation. Theyreheaded in the right direction but theOTC market situation is still up in theair, he says, noting that the agencieswill add efficiencies in the product

approval process.Nybo says that the biggest obsta-cles to the harmonization process arepolitical. Melding the two organiza-tions and creating an efficient man-agement structure are one challengebut the bigger challenge is sorting outthe various committee oversight issuesthat will certainly become part of thedebate over harmonization. He notesthat regulatory change will force firmsto remain vigilant with respect to

how they can operate in a new envi-ronment, and legal and complianceexpenses will expand as firms adapt tothe evolving regulatory environment.

Listening to the two heads of theprospective regulators and those push-ing a merger of the agencies, you mightthink that the agencies have very simi-lar missions, but others would point outserious differences.

The securities and futures mar-kets provide radically different servicesand that fact must never be forgotten,says former CFTC Chairman Philip

TrendlinesNews, trends and insights for traders

CHARTVIEW: SAME DATA, NEW OUTLOOKThe CFTC began providing more detail in its Commitment of Traders report this September.The report for the first week of September shows a stark difference from the traditional reportin open interest levels. The old commercial category is now producer/merchant/processor/user, and swap dealers, managed money and other reportables are broken out in separatecategories. Many swap dealers that represent speculative non-commercial interest would windup in the commercial category of the old report because they are technically hedgers.

Nymex WTI ICE WTI

700

600

500

400

300

200

100

0

Thousands

Week of Sept 4

Nymex WTI

Long

Short

Long

Short

Long

Short

Long

Short

Long

Short

Long

Short

Long

Short

ICE WTI

New COT

Swapdealers

prod/mer/proc/user

Managedmoney

Otherreportables

Commercial Non-commercial

Nonreportables

Old COTSource: CFTC


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McBride Johnson, adding that under-standing how different the two agen-cies missions are will be the biggest

challenge in the harmonization process.They should remain separate, pursuingtheir own statutory missions. The SECmust give everyone comparable infor-mation to maintain a level investmentfield, while the CFTC must not preventpeople from hedging, he says.

By Christine Birkner

BREAKING IT DOWN

CFTC changes COT reportIn what it called an effort to increasetransparency and promote marketintegrity, the CFTC began disaggre-gating data in its weekly Commitmentsof Traders (COT) reports on Sept. 4and announced it would begin releas-ing additional data on swap dealers andindex traders in the futures markets ona quarterly basis.

While the old COT reports broketraders into two categories, commercialand noncommercial, the new reports

break the data into four categories: pro-ducer/merchant/processor/user, swapdealers, managed money and otherreportables (see Chartview). In 2007,the CFTC began supplying additionaldata, breaking out index traders in itssupplemental CIT report, but that onlycovered 12 agricultural commoditiesand did not include energies.

The agency will publish additionalCOT data for 22 contract markets,including major agriculture, energy

and metals markets and is working tocreate a new COT for all of the finan-cial markets. The CFTC will producethe same disaggregated data on all ofthe remaining commodity markets thatthey currently publish COT data for.The CFTC will continue to release thetraditional COT reports and supple-mental CIT reports for a transitionperiod until the end of 2009.

The new index investment reportswill update data from the CFTCsSeptember 2008 report on swap dealersand index traders. The index invest-

ment data details the notional valuesand the equivalent number of futurescontracts for all U.S. markets with

more than $500 million of reportednet notional value in any one quarter.

Using quarter-ending dates, the datashows the gross long, gross short, andnet notional values with the corre-

sponding equivalent number of futurescontracts held across all contract

TAKE THAT

No more maker taker?In late August, the Boston Options Exchange (BOX) pulled the plug on its maker

taker pricing on all Penny Pilot options classes a few weeks after bowing to con-

vention albeit in a non-conventional way by creating a payment for order

flow model in the form of a taker maker model. (In the maker taker model, an

exchange will pay a credit to the provider of liquidity and charge the taker ofliquidity.)

Maker taker, all the rage a few years ago, may have reached a plateau, accord-

ing to Mark Long of the OptionsInsider. Maker taker was the way to go. People

were saying this is what was going to take over. BOX never really gained traction

with it, Longo says. We have seen a lot of pushback on the maker taker model.

A lot of order routing firms have decided to configure their order router so that

maker taker exchanges get it last. Brokerage firms didnt like taker fees. They

were used to being paid, not paying [based on payment for order flow].

Alan Grigoletto, SVP-business development & marketing at BOX, says, It

didnt work because in the maker taker model you are giving the market maker

a credit of 30 but he is giving up a dollar on the edge so you dont have a

whole lot of people willing to do that.

Grigoletto says the practice of flashing orders (allowing an exchanges market

makers to match an order before routing it to another exchange) may have hurt

the maker taker model. If flash was eliminated, perhaps there would be a better

chance for getting an order from an outbound linkage because the way exposure is

set up on most exchanges is, if they dont have the best price, they give the market

a chance to match the away price. But if exposure was eliminated, if they werent

there to begin with, they would have to route to the other market immediately.

It just didnt work for us. It appears to be working on Arca. But of course

Arca also has a payment for order flow model. We thought market makers

would be incented to make better prices and that customers would get better

prices. In reality it didnt happen as well as we though it would, Grigoletto says.

Of the taker maker model, he says it is too early to tell after only one month.

We have been fighting payment for order flow for years but it seems to have

the tacit blessing of the SEC, so it stands, Grigoletto says. [Taker maker] is a

form of payment for order flow. We would never try and hide that fact, [but] it

is transparent in that it is available for everyone and it is instantaneous. There

is not a collection process there is no pool like the exchanges have set up, no

star chamber deciding who gets paid.

Of maker taker, Longo says, I dont think it is dead but I think it has pla-

teaued for now. I dont see it growing.

Whether taker/maker will become the new maker/taker is unknown, but

in the options world it is easy to know if something is successful the other

exchanges will copy it.

By Daniel P. Collins

futuresmag.com | October 2009 11


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months on the relevant dates.The reports will help police the mar-

ket better and help create a better play-

ing field, says Floyd Upperman, indi-vidual trader and trading advisor. Anyincreased insight into whos doing busi-ness on the futures exchanges is goingto be good for small speculators. If every-body has access to the data, then it wontbe as easy for people to [manipulate it].

Upperman says that evolutions intrading, such as the introduction ofETFs and the participation of pensionfunds in commodities trading, havemade changes to the COT report nec-

essary. You have new kinds of tradersthat didnt exist before that [have] reallychanged the fingerprint of the data andbreaking those out from the regular pro-ducers and keeping that commercial cat-egory in tact will let us continue to trackthe markets. The old data will still be

relevant since well have clean commer-cial data, but now well be able to trackthese new players that have emerged in

the last 10 years the index tradersand spread dealers, he says.Larry Williams, a private trader and

expert on using COT data, calls thereports a godsend to traders as theyallow for a deeper analysis of marketplayers. We should be able to see somuch more, but we probably will haveto come up with new measurementtools and new approaches to handlethis new data, he says.

By Christine Birkner

REGULATORY SENSITIVITY?

Swift action onno-action lettersLess than three weeks after holding

hearings on energy position limitsand hedge exemptions, the CFTCwithdrew two no-action letters that

provided relief from Federal agricul-tural speculative position limits forDB Commodity Services LLC andGresham Investment Management(GIM) whose founder , Henry

Jarecki, part icipated in the CFTChearings and argued against the ideathat index funds unduly influencedmarket prices.

CFTC Chairman Gary Genslerstated in the release, I believe thatposition limits should be consistently

applied and vigorously enforced.The release noted that the with-drawal of these no-action positions isvery specific and limited and does notaffect any other no-action or regula-tory positions taken by the CFTC.

By Daniel P. Collins

Trendlines continued


ResourceInvestor.com

VisitResourceInvestor.com

fo

rthelatestcommod

ityproducers

news,analysisandopinion.


13/71

Trading Places

OConnor named CTO at DTCCBY CHRISTINE BIRKNER

Bridget E. OConnor was

named managing direc-tor and chief technol-

ogy officer at the DepositoryTrust & Clearing Corporation(DTCC). Previously she waschief information officer forLehman Brothers Holding,Inc. Bridgets leadership in develop-ing and maintaining high-quality infra-structure systems and business continu-ity programs on Wall Street is both wellknown and highly regarded. Bridget

brings the global experience and recordof success that we believe will continueto differentiate DTCC in the future,said William Aimetti, COO and presi-dent of DTCC, in a statement.

Timothy Andriesen was namedmanaging director, agricultural com-modities at CME Group. Previously heserved as managing director, agribusi-ness for National Australia Bank/nab-Capital. Laurent Paulhacwas namedmanaging director, over-the-counter

products & services at CME Group.He previously served as chief executiveofficer of CMA.

Jennifer Wenthenwas promoted tochief financial officer at Horizon CashManagement. Before joining Horizon,she was a controller at PCS, Inc. andnPhase, LCC.

Demetrios N. Skalkotos was pro-moted to senior vice president of globalcorporate services at Nasdaq OMX.

Neal Bradyjoined the board of direc-

tors at OptionsCity.Ted Huang was named director in

commodities marketing and origina-tion in Asia for Citi. Previously heworked in energy marketing for JPMorgan in Singapore.

Joe Bernier was named director ofmargin at Scottrade.

Sherry Isenberg joined TwoFour asmanaging director of North American

sales. Previously she was vice

president for North Americansales & client relation-ship management at FiservCorporation.

Deanna L. Newcombjoined McDermott Will &Emery LLP as an energy and

derivatives markets analyst. Previously

she was first vice president, compli-ance, for Bank of America/MerrillLynch Commodities, Inc.

Heather Halloran joined ACTIVFinancial as a senior sales executive.Previously she was with InteractiveData Corporation.BRIDGET E. OCONNOR

Send news of personnel moves to:

Futures,222 S. Riverside Plaza, Suite 620Chicago, Ill. 60606, Fax: (312) 846-4638

Attn: Christine Birkner

E-mail: [email protected]

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14/71

BY DANIEL P. COLLINS

Comparing index returns

Julys top CTAs

July YTDS&P 500 Total Return Index +7.56% +10.97%

Lehman Brothers Treasury Index +0.65% -12.25%Morgan Stanley EAFE Index +9.05% +7.56%FuturesPublic Funds (July) -1.60% -7.20%

July YTDBarclay CTA Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0.23%. . . . -1.27%Barclay Sub-Indexes:Agr icu l tu ra l Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0 .26%.. . .+2.61%C u r ren cy T rade rs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0 .04%. . . .+ 0 .31%Diversified Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1.17%. . . . -4.55%Financials and Metals Traders . . . . . . . . . . . . . . . . . . . . +0.60%. . . .+0.43%Discret ionary Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1 .17%.. . .+1.51%

Systematic Traders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-0.36%. . . . -3.78%

More than $10 million under management

1. Di Tomasso Group (Equilibrium) . . . . . . . . . . . . . . . . 14.80%. . . . 28.45%2. Friedberg Comm. Mgmt. (Curr.). . . . . . . . . . . . . . . . . . 9.73%. . . -47.18%3. Abbey Global LP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.52% . . . . 11.56%4. PRIM Kappastocks. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.50%. . . . . 6.70%5. Broadmark Futures Fund Ltd . . . . . . . . . . . . . . . . . . . . 8.66%. . . . 15.74%

Less than $10 million under management

1. EuroCapital Mgmt (Eurofin Client). . . . . . . . . . . . . . . 12.70%. . . . 32.91%2. Persistent Cap Mgmt (Perseverance 2X) . . . . . . . . . . 11.89%. . . . . 2.27%3. CKP Finance Associates (Masters) .. . . . . . . . . . . . . . 11.87%. . . 136.80%4. Altru id Systems (Glorius) . . . . . . . . . . . . . . . . . . . . . . 11.83%. . . . 13.75%5. Valu-Trac Invest. Mgmt (Strat. 2.5) .. . . . . . . . . . . . . 10.72%. . . . . 4.92%

Based on estimates of the composite of all accounts under management;does not reflect the performance of any single account.

Source: Barclay Trading Group Ltd., Fairfield, Iowa; (641) 472-3456

Managed Money Review

Top performers in 2009

Fund Trading advisor(s) August Return YTDTriad Trading Fund LP..................TMS Capital Management..................8.28% ......56.19%SB Bristol Energy Fund LP...............SandRidge Capital Management.............2.03% ......16.03%SB Warrington Fund .. . . . . . . . . . . . . . . . . .Multiple managers . . . . . . . . . . . . . . . . . . . . . . . .0.06% .. . . . . 10.83%SB AAA Energy Fund LP . . . . . . . . . . . . . . . .AAA Capital Management. . . . . . . . . . . . . . . . . .0.59% . . . . . . . 9.03%Citigroup AAA Energy Fund L.P. II . . . . . . . .AAA Capital Management.. . . . . . . . . . . . . . . . .0.56% .. . . . . . 8.75%

Worst performers in 2009

Quadriga Superfund, L.P. Series A .. . . . . . .Superfund Capital Mgmt . . . . . . . . . . . . . . . . .-89.66% . . . . . -92.53%Quadriga Superfund, L.P. Series B .. . . . . . .Superfund Capital Mgmt.. . . . . . . . . . . . . . . . . . .6.09% .. . . . -37.22%SB Westport Futures Fund LP. .. . . . . . . . . .J .W. Henry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -3.45% .. . . . -19.66%Morgan Stanley Charter Aspect.. . . . . . . . .Multiple Advisors . . . . . . . . . . . . . . . . . . . . . . . . .3.39% .. . . . -15.97%

Athena Guaranteed Futures (Series3) . . . . .Man Investments . . . . . . . . . . . . . . . . . . . . . . . .-1.27% .. . . . -14.87%

public funds summaryNumber reporting: 41Average performance for the month: -1.60%Funds up: 19 Down: 22 Unchanged: 0

August 2009

Number reporting: 40

Average performance for the year: -7.20%Funds up: 7 Down: 33 Unchanged:02009 results(through August 31)

Note: Listed return may not be fully attributable to listed advisor(s). * Offshore fund.

Top performers in August

Fund Trading advisor(s) August Return YTDTriad Trading Fund LP........................TMS Capital Management............8.28% ......56.19%FTC Futures Fund Dynamic*.. . . . . . . . . . . . . . . . . . FTC Asset Mgmt. . . . . . . . . . . . . . . . . . . .8.03% .. . . . . -7.06%SB Tidewater Futures Fund LP . . . . . . . . . . . . . . . . .Chesapeake Capital Corp. .. . . . . . . . . . .6.30% . . . . . . -9.24%Quadriga Superfund, L.P. Series B .. . . . . . . . . . . . .Superfund Capital Mgmt... . . . . . . . . . . .6.09% .. . . . -37.22%FTC Futures Fund Classic* .. . . . . . . . . . . . . . . . . . .FTC Asset Mgmt.; Pomeranz & Prtnr... .5.66% . . . . . . -7.22%

Worst performers in August

Quadriga Superfund, L.P. Series A .. . . . . . . . . . . . .Superfund Capital Mgmt .. . . . . . . . . .-89.66% . . . . . -92.53%SB Westport Futures Fund LP. . . . . . . . . . . . . . . . . . J.W. Henry.. . . . . . . . . . . . . . . . . . . . . . .-3.45% .. . . . -19.66%Marathon Currency & Financials (CFE) Portfolio. . .Multiple Advisors . . . . . . . . . . . . . . . . . .-3.06% . . . . . . -6.28%Marathon System Financial Portfolio.. . . . . . . . . . .Multiple Advisors . . . . . . . . . . . . . . . . . .-2.82% . . . . . . -4.69%Marathon Plus Portfolio . . . . . . . . . . . . . . . . . . . . . .Multiple Advisors . . . . . . . . . . . . . . . . . . -2.43% . .. . . . -1.58%

Futures

John W. Henry Inc. and VisionFinancial Markets LLC haveteamed up to offer a new concept

in managed futures with the launch ofthe JWH Vision Program. It is a typi-cal managed account managed futuresprogram with a more accessible mini-mum investment level offered exclu-sively through Vision and its network ofintroducing brokers. The program tradesCME Group products exclusively.

The program trades 12 diverse futures

contracts based on one of JWHslong-term trend following models andincludes an equity index overlay. Thetrend following model trades six sectors:grains, interest rates, metals, energies,stock indexes and currencies, and theequity overlay trades the S&P 500 in a

short-term countertrend model.We took a model that had been

trading for some time in one of ourprograms and we overlaid a stock indexprogram that is not trend following,says Ken Webster president of JWH.

The program has a minimum invest-ment of $250,000, considerably lowerthan many high-end CTAs like JWH.

There is a whole market segmentthat wants to invest in a managedaccount approach instead of investing

in a fund, Webster says. We are seeinga lot of interest so far and we are veryhopeful this product actually providesaccess to a fairly large market segmentthat is looking for a product like this.

JWH will get its standard 2% man-agement fee and 20% incentive fee and

Vision will cap commissions at $50 perroundturn including all fees. HowardRothman, president of Vision, saysbased on an estimate of 800 roundturnsper million, commissions should comein around 4% per year. We wanted tomake sure that fee structure on commis-sion came in under 5%, Rothman says.

Webster says that program has pro-duced a compound annual return of18% with an annualized standard devi-ation of about 17.5% since 1995 with

no negative years based on its backtestresults. It is up 1% through Augusttrading proprietary accounts. We arevery excited about [that] because thefirst seven months have not been thefriendliest time for trend followers,Rothman says.


JWH offers new Vision FuturesMag.comFor hedge fund performance andlow minimum CTAs go to


15/71

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Claim based on internal E*TRADE Securities metrics for average daily gross new brokerage accounts between 9/1/088/31/09. New net brokerage accounts were in excess of140,000 over the same period. Visit etrade.com/1000 for updates.1. The new account holder will be charged 99 (per side, per contract, plus exchange fees) futures commissions for each futures trade executed once a qualified account is opened andfunded and deposited funds have cleared. After the 90 day offer period, each futures trade is $2.99 (per side, per contract, plus exchange fees). This offer is not valid for IRAs, otherretirement, business, trust or E*TRADE Bank accounts. Excludes current E*TRADE Securities customers, E*TRADE FINANCIAL Corp. associates and non-U.S. residents. Offer only appliesto new E*TRADE Futures Accounts opened with a $10,000 minimum deposit. Account holders must maintain minimum funding in all accounts ($10,000 minus any trading losses) forat least six months or credit may be surrendered. Limit one new E*TRADE Futures account per customer. We reserve the right to terminate this offer at any time. In addition to the $2.99per contract per side commission, futures customers will be assessed certain fees including applicable futures exchange and NFA fees, as well as MF Global floor brokerage charges forexecution of non-electronically traded futures and futures options contracts. These fees are not established by E*TRADE Securities and will vary by exchange.E*TRADE Securities LLC and Trading Technologies are separate and unaffiliated companies.CME Group does not offer or provide any investment advice or opinion regarding the nature, potential, value, suitability or profitability of any product or investment strategy. The GlobeLogo, CME Group and Forex E-micros are trademarks of Chicago Mercantile Exchange Inc.Securities products and services are offered by E*TRADE Securities LLC, Member FINRA/SIPC/NFA.

Futures accounts are carried by MF Global, an unaffiliated company.System response and account access times may vary due to a variety of factors, including trading volumes, market conditions, system performance and other factors.2009 E*TRADE FINANCIAL Corp. All rights reserved.

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16/71

Cracked cornCorn was slammed at the beginning

of September, and the outlook isbearish through the end of the year.

If we can avoid frost, it looks likewe will have a tremendous crop.If we do get a frost, it should helpfutures rally. Weve got no risk pre-mium in this market whatsoever,says John Sanow, analyst for DTN.Sanow says futures spreads show bearish underlying fundamentals, an indicationthat commercial traders arent concerned one way or the other unless there is amajor widespread frost. Sanow expects corn to trade in a sideways range.

Joe Victor, vice president at Allendale, says U.S. economic growth and a heal-

ing global economy would help create better demand for corn. Once we get about10% or 25% of the harvest, were going to start transitioning away from the pro-duction phase and the markets going to be very sensitive going into the demandphase, he says. Victor expects pre-harvest lows for the December futures to be at$2.85-$2.90 per bushel.

The weakness in the U.S. dollar is helping to support prices, but we believethe market longer-term is headed lower and could be headed a lot lower [because]theres no shortage of corn, says Richard Brock, president of Brock Associates.Brock expects the market to make its annual low before the end of October andsays December futures could be as low as $2.75 per bushel.

Hot CommoditiesBY CHRISTINE BIRKNER

Nasdaq 100 soarsSince its March lows, the E-mini

Nasdaq 100 has climbed more than600 points, reaching nearly 1700 inearly September. The index tested,but did not take out, the lows fromthe previous November unlike othermajor indexes. More importantly,the Nasdaq 100 has led this yearsequity resurgence, not only outper-forming other indexes but proving to be the best indicator for equities in general.

Analysts are watching revenues of components in the index closely. A portionof the tech companies do have good cash reserves but there are concerns regardingfinancing, says Richard Roscelli, a broker at Whitehall Investment Management.There are concerns regarding the default rate on higher yielding corporate bonds.Theyre up over 300% from last year. That could put pressure on a lot of the com-panies in this index.

In early September the index crossed the technically important 50% retrace-ment level of the move from the 2007 high to last years lows, while the Dow andS&P crossed the 38% retracement level. Its looking pretty overbought, Roscellisays. We should pull back to 1630 by mid-October. It doesnt have the violentdownward pressure of the S&P because of all of the financials in it, but there aresome definite headwinds.

Wherever those headwinds blow, the NQ probably will be reacting to them first,so it should be watched closely.


Euro tripThe euro had a strong run in Septemberbut analysts attribute the move more to

U.S. dollar weakness than euro strengthand expect the dollar to continue todictate where it will go next.

Theres not really a euro story goingon right now, its very much a dol-lar story that is manifesting itself instrength in the euro, says Brian Dolan,chief currency strategist at Forex.com. The markets overall are bet-ting on a recovery into 2010 and therisk appetites are staying firm. Stocksare at highs for the year, commodities

are strong, the dollar is very weak andinterest rates are testing the downside,which is a problem for the dollar.

Dolan expects the euro to top outat $1.47-$1.48 around last Decembershigh.

Seventy percent of the time,the way the Eurodollar performs inSeptember sets the tone for tradingthe rest of the year, says Kathy Lien,director of currency research at GFT.

Lien says if the Eurodollar ends

September on a positive note, it willcontinue to rise through Octoberand November. It looks like theEurodollar will extend its gains andthere will be some resistance at $1.48-$1.50, she adds.

Dolan says this years fiscal stimu-lus has had its biggest impact in theEurozone, Australia and the UK. In theU.S., its going to [take] more time tofilter into the economy. He expects thedollar to come back at the end of the

year and the euro to move a bit lower.

Source: eSignal

E-mini Nasdaq (continuous) weekly

225000

200000

175000

150000

125000

100000

1.000 (225625)

0.618 (178448)

0.500 (163875)

0.382 (149302)

0.250 (133000)

0.000 (102125)

Source: eSignal

Corn (Dec. 09) daily

Nov Dec 2009 Feb Mar Apr May Jun Jul Aug Sep

Source: eSignal

Euro FX (Spot) daily

1.4500

1.4000

1.3500

1.3000

1.2500

4.80

4.60

4.40

4.20

4.00

3.80

3.60

3.40

3.20

3.00

$ per bu.

Dec 2009 Feb Mar Apr May Jun Jul Aug Sep

Sep Nov 08 MarMay Jul Sep Nov 09 MarMay Jul Sep


17/71

The futures here

With over 670 million barrels traded and over 70 members, the Dubai Mercantile

Exchange is the premier international energy futures and commodities exchange in

the Middle East, providing a financially secure, well-regulated and transparent trading

environment. The Exchange has developed the DME Oman Crude Oil Futures Contract,

addressing the growing market need for price discovery of sour crude oil destined for

East of Suez markets, which now trades on CME Globex. In the years to come, we will

continue to take great strides and identify tomorrows trends. We mean business.

www.dubaimerc.com


18/71


19/71

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20/71

Currency movements reflect multiple dimensions ofthe world economy. Technical forex traders make deci-sions based on charts. The justification of these char-

tists is that the price reflects all known information, so its thebest indicator for shaping trading strategies. But if price weresuch a good indicator, then there would be few surprises inthe market. By focusing on technical analysis alone, they riskmissing leading fundamental indicators of currency direction.

Fundamentals, however, are multidimensional. In math-ematics, a dimension is the number of coordinates needed todescribe the state of any object. A line is one-dimensional.Length and width have two dimensions. We can move into

the third dimension which has length, width and depth. Timeadds another dimension. Now lets move this analysis into theworld of economics. When we try to accurately describe thestate of the global economy or that of any country, it requiresthousands of dimensions such as productivity, consumer senti-ment, interest rates and politics. No one knows how to do itwith sufficient accuracy to avoid surprises.

Short of the impossible task of constructing input-outputmatrix that takes all of the factors as inputs, and then produc-ing projected prices ranges, there are several dimensions a trad-er can use to judge the state of the currency market and thento select an appropriate trading strategy. Dimensions of forex

(below) itemizes 15 key dimensions that affect currency pricemovements. It is by no means exhaustive, but each one rep-resents a main input or force that influences market direction.There also is a domino effect where one dimension is activatedby a preceding dimension. The list can be used to determinewhat fundamentals are moving a market. From this a trader

can determine what to look for and what to look at next.The first dimension listed is the deflation-inflation dimen-

sion. As inflation increases currency prices tend to increasebecause of expectations of tightening by central banks. Arelated dimension is commodity prices. Commodity prices indi-cate global demand. Global demand for commodities reflectsanticipation of growth. The next dimension maps the econom-ic cycle stage. Is the economy in a recession or growth mode?If growth is expected, then risk appetite becomes favored overrisk aversion and the inflation dimension is affected, whichmakes the interest rate expectation more important to consider.This leads to the housing dimensions. A growing housing mar-

ket fuels expectation of increases in interest rates. The creditdimension represents the ease of credit. This dimension totallycollapsed in September 2008 and led to a large shift in the riskaversion-risk appetite dimension.

China is a dimension of increasing importance. Chinesegrowth impacts the world economy because 35% of theChinese economy is based on consumption. IncreasedChinese growth requires increased imports of resources.Countries that supply China will benefit greatly from growthin China. This landscape is complex but it is not incompre-hensible. A market will tell us what dimension it is currentlyfollowing and we can learn what other dimensions should be

watched based on this. Lets derive some specific strategiesfor the coming months using our roughly constructed list.

1) The interest rate recovery strategy: Global interestrates have been in a stage of decline. One strategy wouldbe to buy currencies of countries expected to be the firstto tighten interest rates and sell currencies which will lagin tightening. Israel was the first country to increase rates.Who will be next? Current speculation focuses on Norwayand New Zealand. Long euro and short sterling is a commonplay based on the expectation that the eurozone will recoverbefore Great Britain.

2) China growth strategy: Those playing the China

growth dimension have a direct link to buying or selling theAustralian dollar, which has displayed an 86-93% correlationto the Shanghai Index and can even consider the Brazilian realbecause it is highly correlated to the import needs of China.

3) Commodity complex: If the commodity complex hasbottomed out, the Canadian and Australian dollars will havestrengthening potential.

Forex is an irregular landscape, reflecting more closelythe fractal properties of nature. Dont be trapped into a one-dimensional definition of fundamental. Learn them all andunderstand how they play off of each other and you will bebetter prepared to act on them.

Abe Cofnas is the author of The Forex Trading Course and The ForexOptions Trading Course (Wiley). Reach him at [email protected].


Forex Trader

DIMENSIONS OF FOREXFundamentals have multiple dimensions, any of which may bedriving a market at a particular time.

1 Hyperinflation / Inflation / Disinflation / Deflation

2 Growth / Stagflation / Recession / Depression

3 Zero Rate / High Rates

4 Account Deficit / Account Surplus

5 Equity Bear Market / Equity Bull Market

6 Risk Aversion / Risk Appetitie

7 Consumer Confidence

8 Producer Confidence

9 Low Volatility / High Volatiity

10 Easy Bank Lending / Tight Bank Lending

11 Commodity Price Trend

12 Housing Growth Rates

13 China Growth Rate

14 Dollar Reserve Percentage in Central Banks

15 Foreign Ownership of U.S. Treasuries

Forex fundamentals are multidimensional

by ABE COFNAS


21/71

Speak directly with our staff, 24 hrs/day More than 120 global currency pairs Trade day or night


22/71


How aggressively will the Fed tighten?

BY STEVEN K. BECKNER

Now that the economy is limpingout of recession and the financialsystem seems to be stabilizing,

the inevitable question is, when will theFederal Reserve start to tighten credit?

The Feds policymaking FederalOpen Market Committee has oftenstated its expectation that the Federalfunds rate, targeted at 0-0.25% sincelast December, will be kept exception-ally low...for an extended period. Thecrucial question is, just how far will this

extended period extend? The otherimponderable is, at what pace will theFed tighten once it gets started?

There is a body of thought, basedon woeful experience, that the Fedshould be preemptive. If it waits untilthe economy is in full-blown recov-ery, some argue, then its too late toforestall higher inflation or some sortof asset bubble. That would seem tobe the lesson of the Feds last extend-ed period of easy money in 2003-04,

which helped cause the housing boom-bust and financial crisis.

But preemption does not seem to bethe prevailing mood. Ben Bernankehas made clear the Fed will not starttightening until recovery is establishedand gaining strength. His view seemsto be widely shared, although there aredivergences of opinion, which couldgrow as a recovery proceeds.

Atlanta Federal Reserve BankPresident Dennis Lockhart, an FOMC

voter, said in late August that it wouldbe advisable to be patient. Its tooearly to be contemplating a rise in theFederal funds target.

But Richmond Fed President JeffreyLacker, also an FOMC voter, was lessreticent about early tightening. Iam certainly aware of the danger ofaborting a weak, uneven recovery ifwe tighten too soon. But there can bea strong temptation to hesitate whenemerging from a recession, awaiting

conclusive signs of robust growth.Keeping inflation well-contained

may require action before a vigorousrecovery has had time to establishitself, said Lacker. Were going tohave to move before the unemploy-ment rate falls a lot.

Splitting the difference, St. LouisFed President James Bullard, one ofnext years voters, told me rate hikesmay be quite a ways away, but saidthe FOMC must be more preparedthan earlier in the decade to renor-malize interest rates. However, San

Francisco Fed President Janet Yellensaid in July that the funds rate mayneed to stay at zero for several years.

The cautious consensus is borne of afeeling that this has been a peculiarlysevere economic situation that has yetto be resolved, and risks remain. One iscommercial real estate. Another, ironi-cally, is that in the name of fiscal stim-ulus unprecedented federal borrowingto finance deficits estimated at a cumu-lative $9 trillion over 10 years, could

drive up long-term interest rates andstunt business and household spending.

Growth is expected to be too slug-gish to bring the unemployment ratedown rapidly. And the majority view,from which some dissent, is thatresource slack will keep inflationsafely subdued for the next few years.

As for the pace of tightening, thereis some sentiment for moving rates upswiftly once it starts. But others willbe inclined to move incrementally,

though perhaps not at quite so mea-sured a pace as in 2004-06, when theFOMC raised the funds rate by 25 basispoints at 17 consecutive meetings.

If and when the economy gainsstrength, the FOMC must decide whenand by how much to move, hopefullywithout undue political pressure. Threatsto the Feds independence could fuelfears of debt monetization, increasinginflation expectations and counterpro-ductively pushing up long rates.

The instrumentalities of tighteningwill be different this time. In past cred-

it cycles, the Fed has been able to pushup the funds rate and in turn otherrates pretty much at will to regulatecredit flows. It wont be quite so sim-ple this time, because the Feds mas-sive lending and asset purchases havemore than doubled its balance sheetto over $2 trillion. Commensuratereserve growth has ballooned the mon-etary base, creating a looming inflationthreat should increased lending expandthe broader money supply.

In that environment, simply rais-ing the funds rate target would likelybe thwarted by the sheer volume ofreserves. There would be a tendencyfor the effective funds rate to tradebelow target but for one thing: theFeds ability to pay interest on reserves.It hopes that tool will incentivizebanks to keep holding large amounts ofexcess reserves at the Fed, rather thanlending them into the economy.

By paying interest on reserves and

theoretically setting a floor under thefunds rate, the Fed can tighten creditby raising the funds rate and, at thesame time, discourage a certain amountof lending, even while continuing tomaintain a large balance sheet.

But, as Bullard observes, we cant justrely on interest on reserves to do every-thing for us going forward not withthe size of the balance sheet. Payinginterest on all those reserves will becomemore and more costly as the Fed ratchets

rates up, and Congress may not like mas-sive transfers of funds to the banks.

Nor will the Fed be able to just sit backand wait for assets to mature and run offnaturally. The Fed likely will have to sellassets to absorb reserves, shrink the mon-etary base and avoid inflation. Theres noquestion the Fed has the tools for the job.Finding the will and wisdom to use themappropriately will be the real challenge.

Steve Beckner is senior correspondent for MarketNews International, which sponsors his Web siteThe Beckner Report. He is regularly heard onNPR and is the author of Back From The Brink:The Greenspan Years (Wiley).

Market Watch


23/71

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24/71

MARKETS


Crude oil is back on the move and experts say that to determine

where its headed next traders should look to equity markets

and the U.S. dollar. The dollar also is impacting the metals

sector. Heres a look at where both markets are headed

through the end of 2009.

Energy outlook:Crude correlationsand what comes next

BY CHRISTINE BIRKNER


25/71


Want to know where crude oil is headed?

Look no further than George Washington,Dow Jones and the S&P 500. In this newworld of economic chaos, supply/demand

factors and geopolitics have shifted to the back burneras crude becomes more heavily linked to the U.S. dol-lar and the stock market. At the end of August 2009,crude was in the $70 range, twice its February 2009 levels.

Crude has a positive correlation to equities and an inverserelationship to the dollar when the dollar is weak, crudetends to go higher (see Its not that complicated, page 28).Analysts say current dollar weakness and stronger equitymarkets have contributed to higher crude prices and shouldbe the main movers of crude through the end of 2009.

The overriding factor right now [for crude oil] is the stateof the global economy, says Linda Rafield, senior oil ana-

lyst at Platts. Throughout 2009, the oil markets have beenlooking at the price of equity markets and the U.S. dollar,taking their cue from the financial sector rather than fromsupply/demand balances in the oil markets. Dollar weaknesshas fed into the rebound in oil prices.

Dominick Chirichella, founder of the Energy ManagementInstitute, says that equities and currencies have put oil in anuptrend going back to mid-March of 2009. He expects thedollar to remain weak the rest of the year and equities tostay firm, which will put a floor under the price of oil.

Dave Chatterton, vice president at RJO Financial, saysthe dollar and crude will continue to show an inverse corre-

lation. The question is, is the dollar going to bottom out atany point soon and become bearish to the energy complex?I think it will. Between now and the end of the year, crudeprices are going to be sideways to lower. In the dollar, itsgoing to find a bottom and come off of those lows, he says.

Heavy stockpiles of crude show that supply is not a hugeconcern right now. In the U.S., our stockpiles are wellabove the five-year average and were close to 18-year highsin our supplies of crude oil. The driving factor is the outlookfor growth and the falling value of the U.S. dollar, saysThomas Hartmann, analyst at Altavest Worldwide Trading.

For now, the fundamental supply and demand factors of

the underlying complex are taking a backseat to views onthe economy or what economic activity is going to be inthe third and fourth quarter of the year and the first half of2010, Chatterton says. Stocks are at near-record levels.Even if we had a hurricane, weve got so much gas that itsnot an issue at this point. You could make the argumentthat by this time next year we could be in a tighter [supply]situation, but to make that argument you have to believethat the economy is going to recover and actually grow nextyear, and thats a pretty dangerous assumption.

Rice Universitys James Baker III Institute for Public Policyhas a different take on the clear negative correlation of crude

and the dollar. A study they conducted suggests that theincrease in long non-commercial interest in crude oil fueled


26/71

Markets continued

Much like the energy markets, the weak dollar is also ahuge driver for metals markets, especially gold. For cop-per, the main factors are the weaker dollar, industrial demandand demand coming from China.

The dollars going to affect all of the metals. Market par-ticipants should keep an eye on open interest. With risk appe-

tite increasing, weve seen investors wanting to gain moreexposure to metals that track economic recovery, especially

as we move to the end of the year, says Catherine Virga, ananalyst at CPM Group.

Many analysts expect gold to go higher as the dollar getsweaker. However, David Abramson, managing editor of the

commodity and energy service at BCA Research, says eco-nomic stimulus plans could change that longer-term. The

conditions that are normally negative for the dollar andpositive for gold are there for the next six to nine months,

but beyond that, its a very tough call. If

the dollar falls, that tends to benefit gold,but [a new factor is] a systemic concern

that the authorities will have to undertakepolicy measures that are different than

anything theyve had to do since the 1930s.

That allows the dollar/gold correlation tobreak down. If the [policymakers] start totake risks, it wont be just a dollar story.

You could have a situation where theres aflight to quality and emerging market cur-

rencies and commodity currencies dont dowell but gold does just fine, he says.

Abramson expects gold to go to $1,200-$1,300 per ounce, a 20-35% gain, by the

end of the year. Its a traditional cyclicalbull market. Were not looking for a blow-

up in the banking system. Weaker dollar,stronger gold, he says, adding that gold

will appreciate in euro and yen terms aswell. Its a plentiful liquidity story. Goldwill go up in dollar terms because the dol-

lar is weak, but also because theres a lot ofliquidity out there.

Growth in China was the story for cop-per for most of 2009 and recovery in the

United States, Japan and Europe should playan important role in copper markets through

the end of the year. China is a third of globaldemand, and theyre going to pick up a fair

amount of slack in the Western world. We

have seen Chinese demand offset some of theweakness this year and from this point, well

A tale of two metals

GOLD VS. COPPERCopper has outperformed gold in 2009, which may be a positive economic sign asgold tends to rally on fear and copper demand is a good indicator of future growth.

Source: Barchart .com

GOLD Dec 2009 (daily OHLC plot)

HIGH GRADE COPPER Dec 2009 (daily OHLC plot)

Apr May Jun Jul Aug SepMar30 13 27 11 25 8 22 6 20 3 17 31

1020

1000

980

960

940

920

900

880

860

840

3.20

3.00

2.80

2.60

2.40

2.20

2.00

1.80

1.60

1.40


a rise in prices, which in turn createddollar weakness. That dollar weak-ness in turn pushed crude oil higher,creating a vicious circle. The studynotes that there was little correla-

tion between the dollar and crude oilfrom 1986-2000. This is an inter-esting notion, but there are quite afew other variables that need to be

considered. The theory that specula-tion from index funds was the maindriver for the price of crude oil maybe tested as the Commodity FuturesTrading Commission appears ready

to place limits on speculation andhas already pulled the exemptions toposition limits on some commodity-based funds.

NATURAL GAS OVERLOAD

The supply story has become THE storyin natural gas as inventories approachrecord levels.

Chirichella says that natural gas pro-

duction has not been cut enough to getahead of the declining demand curve,and by mid-November, natural gasinventories will exceed available stor-

Continued on page 28

Check out ResourceInvestor.comfor metals and mining news.


27/71

age space in the United States. Unlesssomething major changes, well be atthe highest level of natural gas inven-tories as we approach this winter sea-son, and thats bearish. Natural gas

prices right now are trading at levelsthat we havent seen since 2002. Thenext stopping point if nothing chang-es could be as low as $2.60-$2.80 permmBtu, he says. He adds much of theincreased supply is due to decreasedindustrial demand, which could pickup as the economy recovers. The piecethats absent in the natural gas marketis the industrial consumer. That sectorwill come back, but slowly.

Brian Milne, refined fuels editor for

Telvent DTN, says crude oil usual-ly trades up to six times higher thannatural gas, but right now crude oil istrading at a ratio of 25:1 over naturalgas (see Widening chasm, page 29).Natural gas could go down to $2 ifcrude oil holds up. We saw a lot ofreduction in industrial demand as aresult of the recession, he adds.

Brad Smith, price risk manager forU.S. Energy Services, says that medi-um- and long-term, traders should

watch economic recovery and supplysituations in the natural gas market. Heexpects natural gas prices to fall throughthe end of the year. Manufacturingactivity has picked up in the third andfourth quarter, but there are going to bea lot of drags based on the labor marketand consumer spending that are goingto hamper growth going into 2010.That accompanied with a very largesupply will drag prices down, he says.

Hartmann expects natural gas to get

to the $2 range by the end of the year.Chatterton predicts a year-end naturalgas price of $3.50-$4.

Rafield expects natural gas to be at $3by the end of the year, barring any sup-ply disruptions in the Gulf of Mexico.She says theres also an inventory over-hang in heating oil. If anything, youcould see fuel switching out of heatingoil and into natural gas and that couldput a floor under natural gas prices.We need to see a pickup in industrial

demand to see both natural gas stockand stocks of middle distillates (diesel,

heating oil) start to erode.Chatterton expects heating oil to

hit $1.60-$1.75 per gallon by the endof the year and RBOB/Gasoline toreach $1.75 to $1.85 per gallon.

DEMAND DOLDRUMS

For much of the energy complex,while supply is not a concern, demand(or lack thereof) is. The economicdownturn has contributed to decreased

demand, but a pickup in manufactur-ing could help.

Milne says theres optimism thatdemand will return when the econo-my rebounds. However, he notes that

gasoline demand is down comparedto last year and diesel is down 10%year-to-date due to the recession. Wecan see how the contraction in GDPhas weighed heavily on the demandfor diesel fuel. Right now the concern



28/71

see Chinese demand ease. Now its a question of whether ornot theres going to be enough demand to absorb the built up

inventories in China, Virga says.

George Gero, vice president of global futures at RBC WealthManagement, says the recovery in the economy has helped

copper. Weve reached a $3 (per lb.) area for copper and aswe go forward youre going to see more and more volatility

because the higher the price, the bigger the possible volatil-ity as we think about whether the Chinese and the other BRIC

countries will need copper for infrastructure going forward.Trading in China has been huge, and we expect that to contin-

ue. If the economy continues to improve, youre going to havebetter housing starts and you need copper for that, he says.

Abramson says that as long as U.S. copper demand isnt col-lapsing, then copper can do well because China has been the

real marginal buyer of copper. Over the last six years, Chinahas accounted for [a large portion] of the increase in copper

demand in the world. If U.S. housing and car demand is col-lapsing, its not good for copper, but if its ebbing or going

nowhere, you have to look at whats going on in China.

A rise in manufacturing has been good news for cop-per, Virga says. The U.S. ISM for July is at 48.9, up from 32.9

in December, while Japan rose to 50.4 in July from 29.6 inJanuary. The manufacturing index has corrected, so there

has been a turnaround in manufacturing and well see somegrowth in the U.S., she adds. Traders should watch supply

trends for both metals. The supply trends for copper havebeen bullish in the sense that there are constant strikes and

wage settlements. Weve gotten used to these surprises and ifthey stop, it could be negative for copper, Abramson says.

Continued from page 26

is on the demand side. The EnergyInformation Administration and theInternational Energy Agency expectdemand to start to improve next year.

Itll likely take until 2011 or 2012 toget back to where we were in 2007.Demand still appears that itll recover,but not as strong immediately, he says.

Chirichella agrees. Everything associ-ated with economic recovery is going toresult in an increase in energy demandfor oil and natural gas, but its going tobe slow. The big overhang on the oil

product side is in diesel fuel. We couldsee some recovery in diesel demand ifmanufacturing starts expanding in theUnited States. We could see a turn-around in diesel demand in the nextseveral months. If we get a cold winter,itll impact heating oil, he says, addingthat demand growth will be slow in theUnited States and Europe and quickerin the emerging markets like China.

Hartmann says the economic down-turn has thrown normal supply/demand

fundamentals for crude out of whack.There are probably only two com-modities out there that are followingtheir classic case of supply and demand:natural gas and hogs. You see a hugeamount of supply in crude oil, but theprice is rising because were seeinginvestment flee the U.S. dollar andgo into commodities. Crude is beingused as an investment tool, as a hedgeagainst devaluation of the dollar. Thatsthe problem going forward can that

continue without bringing us back intoa recession?

Obviously there are other factorsin crudes rebound, as natural gas andeven hogs are proportionally repre-sented in commodity funds used as aninflation hedge.

Markets continued

ITS NOT THAT COMPLICATEDWhile Congress is blaming speculators and others are wringing their hands over a supply/demanddisconnect, crude oil is marching in stride with equities and opposite movements in the dollar.

Source: eSignal

Crude oil futures (continuous)

S&P futures (continuous)

U.S. dollar index (continuous)

Crude oil futures (continuous)

Jun Jul Aug Sep Oct Nov Dec 2009 Feb Mar Apr May Jun Jul Aug Sep

May Jul Sep Nov 2008 Mar May Jul Sep Nov 2009 Mar May Jul

150.00

140.00

130.00

120.00

110.00

100.00

90.00

80.00

7000

60.00

50.00

40.00

30.00

150.00

140.00

130.00

120.00

110.00

100.00

90.00

80.00

70.00

60.00

50.00

40.00

30.00

6807

140000

130000

120000

110000

100000

90000

80000

70000

90000

88000

86000

84000

82000

80000

78000

76000

74000

72000

99625

78805



29/71


Rafield says that while there weresome indications that oil demand wasstarting to firm in late August, thats abit of a premature call. We need to seemore than two to three weeks of data.

Chatterton says the expectation forincreased demand has already beenfactored in. Were probably going tobe disappointed with the pace of thatrecovery and the length that its goingto take to get these stocks to diminishto the point that they are bullish andwill support these prices. That linesup with a sideways-to-lower outlookfor crude prices through the end of theyear, he says.

With an abundance of supply and

the current state of the economy, geo-political factors seem to be taking abackseat in the crude market.

Geopolitical factors are not a hugeissue right now, Chatterton says. Idont expect any changes out of OPEC.Any of the problems in Venezuela,

Nigeria or the Middle East theresplenty of excess capacity to make up forthat. I dont see those as big price driv-ers toward the end of the year, short ofa war breaking out, Chatterton says.

Milne says that ample crude supplydeadens impact from Iran. Iran willagain come into play, but near-term,theyll be less of a factor. Nigeria hassuccessfully taken some supply off themarket, and that offers some supportfor prices, he says.

Analysts agree that when it comes tocrude, traders should keep their eyes onthe dollar and the stock market.

Traders should watch what goes onin global equity markets and the direc-

tion of the dollar, especially how itrelates to the euro. They also have towatch inventories diligently, to see ifcrude oil and diesel fuel de-stocks andif demand picks up, Chirichella says.He predicts crude will be at $70-$80per barrel by the end of the year.

Chatterton says that traders shouldalso look at economic data from theIMF and IEA on demand, consumerconfidence, employment and othereconomic activity. [Those] are key

drivers to the market. If those thingsdont start to show the improvement

that has been anticipated, or already

priced in, then the disappointment willquickly turn around. If they do showthat, then well need those kind ofindicators to gravitate prices higher.

Rafield predicts crude will be at$75-$80 at the end of 2009 and Milneexpects crude to break through $75 andtarget $90 towards the end of the year.

Hartmann says the dollar is themain factor driving commodity mar-kets right now and expects the dollarto get weaker in the near term. Were

going to have pretty loose monetarypolicy, which unfortunately doesnt give

much confidence to our foreign lend-

ers. People are running away from thedollar and were letting it run at thispoint. In the near-term, crude will getinto the $80 range. Well get a correc-tion and head back to the $50 range bythe end of the year, he says, adding, Ifoil prices get back into the $80 range, itcould hurt demand again and we couldsee the recession bite back.

CRUDE ROLLER COASTER TO END?Despite the wild ride of recent years, many experts including the EIA expect crude tosettle into a range.

Source: EIA

EIA estimates

Jan-

05

May-

05

Sep-

05

Jan-

06

May-

06

Sep-

06

Jan-

07

May-

07

Sep-

07

Jan-

08

May-

08

Sept-08

Jan-

09

May-

09

Sept-09

Jan-

10

May-

10

Sept-10

140.00

120.00

100.00

80.00

60.00

40.00

20.00

WIDENING CHASMThe normal relationship between crude oil and natural gas has exploded as the currentcrude to natural gas ratio has reached 25 to 1. When natural gas hit highs in 2005, thatratio was 4 to 1 and it only reached 11 to 1 when oil peaked in 2008.

Source: eSignal

Nat. gas continuous weekly

Crude oil futurescontinuous weekly

11-1 CL toNG ratio

4-1 CL toNG ratio

25-1 CL toNG ratio

Oct Jan Apr Jul2004

Oct Jan Apr Jul2005

Oct Jan Apr Jul2006

Oct Jan Apr Jul2007

Oct Jan Apr Jul2008

Oct Jan Apr Jul2009

140.00

120.00

100.00

80.00

60.00

40.00

16.00

14.00

12.00

10.00

8.00

6.00

4.00

2768

6813

FuturesMag.com

Check out weekly energyreports at futuresmag.com.


30/71

T

raditionally, short volatility

trading is regarded as a riskyinvestment approach. Evenduring quiet periods, strategies

based on selling naked options can leadto considerable losses. It is no wonderthat a financial crisis, accompanied bya sharp rise in historical and impliedvolatilities, is commonly considered afactor that dramatically raises the riskof substantial losses, right up to thenear-bankruptcy level. Scrutinizing thedata of the current crisis allows us tojudge whether such views are correct.

Three basic issues will be examined:how does the crisis influence the prof-

itability of short option positions, doesthe crisis change the structure of trad-ing opportunities existing at the optionmarket and is the effectiveness of thecriterion used in selection of the mostpromising trading opportunities affect-ed by the crisis?

Because the timing of trade entryplays a key role in volatility sellingstrategies, all of these questions willbe studied in the context of differenttime intervals between trade entry and

option expiration.The success of almost any strategy

based on selling naked options dependson the selection procedure. This pro-cedure can be based on one or severalcriteria that may be informal, or have

strict mathematical guidelines. A pop-ular metric is profit expectations basedon various probability distributions.Here, well examine how the current

financial crisis affects the mathemati-cal expectation of profit estimatedusing lognormal distribution. This iscalculated as the integral of the payoff

function with respect to the lognormalprobability density function.Two databases were used in this study.The first one, corresponding to the crisis

The financial crisis has been in play long enough to analyze its effects on

various trading techniques. Here, we examine volatility selling strategies

with a discussion of the criteria that work.

BYSERGEY IZRAYLEVICH AND VADIM TSUDIKMAN

Short volatility trading

in extreme markets

EQUITY TRADING TECHNIQUES

COMPARING PROFITSHere we can see the relationship between realized profit and the number of days fromthe moment of portfolio creation until the expiration date. Points denote average values.Vertical lines represent standard errors.

15

10

5

0

-5

-10

-15

-20

-250 10 20 30 40 50 60

Days to expiration

CrisisCalm market

Profit,%



31/71

period, covers the time interval fromAug. 1, 2007, to March 30, 2009. Thesecond database corresponds to the peri-od before the crisis (Jan. 2, 2003, to

July 31, 2007). Both data arrays containprices of options corresponding to theshares that make up the S&P 500 index.

Within each database, a series of 60portfolios was created for each expira-tion date. These portfolios differed fromeach other in terms of time to expira-tion. The most distant portfolio was 60trading days away from the expiration,the next one was 59 days, and so on.

Each portfolio consisted of 500 shortstraddles related to the stocks forming

the S&P 500 index. Each straddle usedthe strike closest to the current stockprice. The quantity of options corre-sponding to each stock was determinedas $1,000,000/x, where x is the price ofthe stock underlying the straddle.

For all combinations, criterion valueswere calculated at portfolio creation.Profits were calculated at the expira-tion date. The sum of mathematicalexpectations of all straddles in the port-folio gives the criterion value, while the

profit is calculated by summing up prof-its and losses of these combinations.

During calm periods, profit does notdepend on the number of days left toexpiration, while at the time of crisis,the profitability of short option port-folios falls as the time left to expira-tion increases (see Comparing prof-its, left). Besides, a decrease of aver-age profit is accompanied by a sharpincrease in its variability (vertical barson chart), which can be explained by

high market volatility during the crisis.Close to expiration date profits duringboth crisis and quiet periods are virtu-ally the same, which may be the mostimportant conclusion of this study.

TAKING A TRADE

A trading opportunity arises when themarket price of the option deviates fromits fair value that is, the value thatimplies zero profit for both buyers andsellers. We assume that trading opportu-

nities are inherent to combinations forwhich the absolute difference between

market and fair values exceeds 1%. Therelative frequency of such combinationsreflects the abundance of potential trad-ing opportunities existing in the marketat a specific time moment.

Trading opportunities (above)shows that in crisis, potential tradingopportunities exceed those in a calmmarket. As expiration approaches, the

number of trading opportunities fallssharply. However, during the crisis, the

rate of this decrease is not as high asduring the calm period. Close to expi-ration, the number of opportunitiesexisting during the crisis is greater thanthose in the calm period. Also, far fromthe expiration, the difference betweentrading potentials is negligible.

Thus, when expiration approach-es, more unfairly priced combinations

arise during the crisis. Does it meanthat the criterion used to reveal poten-

TrADING OPPOrTUNITIESThis figure shows the relationship between the abundance of trading opportunities (thepercentage of unfairly priced combinations) and the number of days from portfolio cre-

ation until the expiration date.

rANKING ANALYSISThe relationship between the coefficient of criterion effectiveness and the number of daysfrom the moment of portfolio creation until the expiration date.

100

90

80

70

60

50

40

1.8

1.7

1.6

1.5

1.4

1.3

1.2

1.1

1.0

0.9

0 10 20 30 40 50 60

0 10 20 30 40 50 60

Days to expiration

Days to expiration

CrisisCalm market

Crisis

Calm market

Tradingopportunity,

%

k



32/71

Equity Trading Techniques continued


tially profitable combinations wouldallow identifying these additional trad-ing opportunities, which could raisethe number of profitable combinations.

Analyzing the criterion effectivenesswill answer this.

CRITERION EFFECTIVENESS

Several valuation methods should beapplied to investigate the impact of thecrisis on criterion effectiveness. Webegin with ranking analysis developedon the basis of the set theory. This meth-od is based on calculation of the coeffi-cient of the criterion effectivenessk:

In the above, B is the total numberof combinations (500 in this study,which is the number of straddles inevery portfolio), K is the number ofcombinations with expected profithigher than 1% of the current under-lying asset price, P is the number ofcombinations with profit realized atexpiration that is higher than 1% of

the current underlying asset price, KPis the number of combinations includ-ed in both K and P sets (those of theprofitable combinations which werecorrectly identified by the criterion atthe stage of portfolio creation).

The criterion is considered to pos-sess a forecasting capacity when kvalue exceeds 1. The higher the valueof this coefficient, the more effective isthe criterion.

Ranking analysis (page 31) shows

that the criterion used in this study doesnot allow benefiting from the sharp risein the number of trading opportunitiesoccurring during the crisis. While nearexpiration, the number of trading oppor-tunities is much higher during the crisisthan during the calm period, the crite-rion based on mathematical expectationand on lognormal distribution is moreeffective in a quiet market. However,when this criterion is applied far fromexpiration, it shows the same effective-

ness regardless of the market phase. Inboth market environments, the criterion

effectiveness is highest close to expira-tion and decreases sharply as the time toexpiration increases.

Ranking analysis of criterion effec-tiveness estimates the relationshipbetween different combination sets.This method is based on relative fre-quencies and omits absolute profits ofseparate combinations. This drawbackcan be compensated for by considering

deviations of actual profits from theirexpected values and by using correla-

tions between criterion and profit values.The difference between expected and

realized profits increases as the intervalbetween portfolio creation and expira-tion widens. Such direct relationshipis evident both during calm and crisisperiods. However, during the crisis, thedivergence of two profits increases at ahigher rate (see Deviations from real-ity, above). Positive difference means

that potential profitability of a combi-

DEVIATIONS FROM REALITYThe relationship between the difference in profits (expected - realized) and the number ofdays from the moment of portfolio creation until the expiration date.

CORRELATIONSThe relationship between the correlation of expected and realized profits and the numberof days from the moment of portfolio creation until the expiration date.

40

35

30

25

20

15

10

5

0

-5

-10

0.20

0.15

0.10

0.05

0.00

-0.05

-0.10

-0.15

-0.20

0 10 20 30 40 50 60

0 10 20 30 40 50 60

Days to expiration

Days to expiration

CrisisCalm market

CrisisCalm market

Difference

Correlation

coefficient

Equity Trading Techniques continued, page 35


33/71

TRADING TECHNIQUES

Over the last decade or so,

traders have witnessed anunprecedented advancementin trading technology and

access to the markets. Traders nowenjoy everything from streaming quotesshowing accurate bid/ask spreads andmarket depth, to point-and-click tradingwith instant fills, and up-to-the-secondaccount reconciliation and accounting.

The days of an active day-trader havingto manually match buys and sells to seewhere he or she stands is a thing of thepast. To those who werent born into thisexciting new world, the current landscapeis incredible: The things traders fantasized

about in the 1980s and dreamed about inthe 1990s are now not only a reality, buta necessity.

With the creation of electronic globalaccess, traders now have multiple doors ofentry to many of the markets. However,this seems to confuse many traders morethan help them. To better understandhow this new access is a benefit to a trad-er, consider this: Chicago Board of TradeTreasury bonds are one market with twodoors to gain entry or exit, open outcry

(pit session) or the Globex market (elec-tronic access).

Regardless of the entry method, themarket is the same. Its just that the pitsession door is accessible from 8:20 a.m.until 3 p.m. (Eastern), while the Globex

door is open from 6:30 p.m. until 5p.m. (Eastern). Thats 22-1/2 hours a dayfor Globex! Its also worth mentioningthat you can enter through one door andleave through the other. It doesnt mat-ter. Its the same market. However, thosewho have used both markets will tell youthat the Globex alternative offers fasterfills with more transparency.

NOT TRUE FOR ALL MARKETS

The only order-entry challenge for

a modern-day futures trader is plac-ing option spreads. While the equityoptions world has long been primar-ily an electronic market, options onfutures are the last bastion for thefutures trading floor. And while therehas been progress electrifying simpleoptions on futures, complex ordersstill require that personal touch. Manyorder-entry platforms, as well as thevarious electronic exchanges, do notaccept multiple leg (beyond verticals)

option spreads. In f

1009 futures magazine crude oil correlations

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