Commodities

It’s There If You Need It

dondawson
Don Dawson
Instructor

It’s there if you need it, but most of time there is very little demand.  I’m referring to the availability of Commodities at contract expirations.  When you are trading Commodity Futures you are in reality trading a contract that will eventually expire.  When the contract expires you could take delivery or make delivery of the particular Commodity you are trading.  Or you may elect to offset your position before the contract expires which is what 98% of market participants do.

Commodity Futures contracts all have standardized specifications.  These contracts specify quantity, quality, trading hours, limit moves and of course which months the contracts will be expiring in.  These months are what I wish to write about in this article.

Depending on the Commodity Futures contract you are trading the expiration months will vary.  The months for expiration are selected by the Futures Exchanges as months that have the most demand for that particular Commodity during the year.  This makes the Commodity available for physical delivery during that month of high demand.  For example, Corn Futures have expiration months of March, May, July, September and December.  Knowing that Corn is planted in the Spring and harvested in the Fall these months become key for physical delivery and hedging of crops.

Most Commodity Futures contracts have the greatest volume and open interest in the first month listed in available contracts to trade.  However, some of the physical Commodities have months listed to trade, but do not have sufficient volume or open interest for a speculator to trade.  This can create problems when it comes to creating Commodity Futures un-adjusted continuous charts that we use to find our supply/demand levels on.

The Commodity Futures Exchanges create these “extra” delivery months in case a Commercial trader needs to take or make delivery during a time of year other than high demand months.  Why would a Commercial need to do this?  They are the smart money, right?  You would think Commercials would know what months they need to use ahead of time.

Let’s look at a crop growing season that actually gets planted earlier than usual.  Believe it or not Mother Nature sometimes accommodates producers of Commodities with exceptional growing weather.  In these rare instances,  the crop can actually be harvested earlier than normal.  Corn for example, needs 60 to 100 days to grow, depending on the hybrid type or ear size.  If the crop is ready early then, the Commercials may choose to use the September contract to hedge their crops with instead of the more commonly used December contract.

In this rare event,  the September contract is traded with heavy volume and open interest.  Most of the time September is not traded this way and has very low volume and open interest.  Speculators and hedgers both roll from the July contract to December and skip over the September contract.

The problem comes when chart packages continue to plot the September contract on our continuous un-adjusted charts.  Trade Station users would normally use the symbol @C=110XN.  This symbol works great for most Commodity Futures, but there are a few that need additional symbol formatting to make the charts useable to a supply/demand trader.

Figure 1 is a chart of the Gold market using the symbol @GC=120XN.  The Exchanges offer an October contract for delivery.  There is very little volume and open interest in this particular month, but the charts plot this anyways.  Look at the poor liquidity causing gaps and low quality candles. (I had to use the Gold illustration instead of Corn due to Corn September has already expired)

fig 1

To eliminate this problem a trader needs to adjust the symbol to chart only months that have the most volume and open interest.  To see Gold trading with the most active contract month a trader using Trade Station should use the symbol @GC=120XN+GJMQZ   Notice the letter U is missing from this list of contract months.  This tells Trade Station charts to skip that month.

Figure 2 shows a chart of Gold during the same time period as Figure 1, but notice the difference in the quality of the candles and lack of gaps.

fig 2

Table 1 will provide a list of markets that need to have these symbol adjustments:

Market

Symbol

Gold

@GC=120XN+GJMQZ

Silver

@SI=120XN+HKNZ

Corn

@C=110XN+HKNZ

Wheat

@W=110XN+HKNZ

Soybeans

@S=110XN+FHKNX

Soybean Meal

@SM=110XN+FHKNVZ

Soybean Oil

@BO=110XN+FHKNQVZ

Cotton

@CT=110XN+HKNZ

Orange Juice

@OJ=108XN+FHKNX

Lean Hogs

@LH=109XN+GJMQVZ

Live Cattle

@LC=117XN+GJMQVZ

Table 1

If you trade these markets and use Trade Station I would recommend you update your radar screen with these symbols.  If you are using another chart package you do not need to do anything, the symbols are automatically corrected for you.

I would like to thank Online Trading Academy student Don S. of California for bringing this to my attention.  Our students have a wealth of knowledge to share that makes my job as an instructor that much more rewarding.

Another question that arises from trading Futures is, “Can I trade Futures on my chart like I do with Stocks using Trade Station?”  The answer is yes.  You will need to change the symbol on your chart to make this work.  Using just @ES=107XN  won’t work.  This symbol is not recognized by the Futures Exchange and the order will be rejected.  Try using @ESZ13=107XN instead.  This should allow you to trade from your charts.  Note: I used ESZ13 as an example because that is the current front month, it is up to you to use the current front month symbol at a later date.

“Once you replace negative thoughts with positive ones, you’ll start having positive results” Willie Nelson

Disclaimer
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.