Lessons from the Pros


Would You Take Delivery of 5K Bushels of Corn?

Unless you were a commercial entity and could actually use the physical corn to feed livestock or perhaps refine the corn to produce ethanol, you most likely would not take delivery.  But even the Commercials who would ordinarily take delivery of these Commodities rarely do.  Instead they will use the cash proceeds from the Hedge they created with Futures contracts and purchase or sell the Commodity in the Spot market.  Taking delivery of a Futures contract can be very expensive compared to purchasing the product in the Spot market (a place where you purchase the physical Commodity on the spot and take it with you).

Free Trading WorkshopPerhaps this is why approximately 2% of all deliverable Futures contracts are actually physically delivered and 98% of expiring contracts are offset.  Offset is simply liquidating your position.  If long you sell, and if short you buy it back.

As a large or small speculator in the Futures market, the last thing you would want is to be assigned a delivery of a Futures contract from the Exchange.

So what impact could FND (First Notice Day) have on price action in physically delivered Futures contracts?

Because all Futures contracts expire at some point speculators need to make a decision when they will exit their trade before something called FND occurs.  FND is simply a day in which the trader will notify their broker that they wish to take delivery of the contract they are holding.  Otherwise, the speculator must exit their position in the expiring contract before close of business of FND to fulfill their obligation to the contract.

After FND the Exchange will look at all remaining open Long positions (contracts that were bought), both intra-day and overnight, and then match them with a Commercial who wishes to deliver their Commodity.

This brings us to an interesting point.  If all speculators with long positions will be forced out of the market by FND and the market has been rallying into this date, wouldn’t there be a possibility of more supply coming into this market right before FND?

As a trader you should be aware of when FND is for the market you are trading.  Then, about 10 days before FND, observe the daily chart price action.  Has the market been in a strong uptrend?  If so it is highly likely there are a bunch of large and small speculators in long positions that will have to exit soon by selling their contracts.

If the market has been selling off during the last 10 days then there is probably not going to be a trade based on FND because speculators will most likely be short and they will not be forced out of their positions like the longs will be.

To confirm if it is the speculators building these long positions you look at the open interest (positions entered into and not yet offset) and see if it has been rising with the price rally.  To get open interest to increase there must be both a new buyer and a new seller.  Usually speculators are trend followers and Commercials are dollar cost averaging into a rally.

Once you have confirmed there are a lot of speculators in this rally you might look at your large timeframe charts and see if there is some nearby resistance (supply) levels.  If so, this could enhance your chances of this level stopping the rally.

A trader might wish to use a short Futures position, or an Options trader might lock in some premium. There are different ways a trader can take advantage of this FND occurrence.

“It has been my observation that most people get ahead during the time that others waste.” Henry Ford

Don Dawson

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.

Join over 170,000 Lessons from the Pros readers. Get new articles delivered to your inbox weekly.