Commitment of Traders (COT) Report

[twiggytwo]

Commitment of Traders Report

Does anyone out there use this to apply when trading commodities. I have just started testing an idea of shorting when large speculators ie big funds are 100% long. In the last couple of weeks it has lead to profits of over 800 points on cotton and 165 points on copper and a good deal on wheat, sorry haven't got figures to hand on this one.

 

[Andreas]

The COT report (and even more the COT charts) are a good indicator of changes in the longer term trend of a commodity. I could never use it successfully as a trade signal though. More important than the absolute numbers or percentages, are the changes that occur. For that it is important to look over a longer time frame at the COT figures.
Have a good weekend, best regards,
Andreas

 

[bgold]

I would agree with Andreas. A good example is gold where large speculators have been more long than ever (20yrs) for (I believe) past six months, but gold continues its bull run.

 

[oatman]

Have all those hedges been lifted yet?

 

[rog1111]

Here's a different perspective on the COT reports. Many traders look back in time at major highs and lows, and correctly observe that for some (not all) commodities, the Commercials were either very short or very long respectively at the time.

This can be explained as follows. For many commodities the commercial guy is on the other end of the trade when the speculator opens the trade. That's what commercials do. Therefore logically as a commodity goes up in price, the specs climb in with more and more long positions, and the comms get correspondingly progressively shorter. With a nice large long term trend, by the time the peak is reached, it is perfectly understandable that the comms will be very very short, simply because the specs are very very long. Therefore it's no great surprise to see this sort of pattern emerging, so on this basis it's hardly a tradable indicator, rather just pot luck.

As an aside, there's an intersting associaton between options positions and futures positions, particularly for commodities like gold, simply because commercials are contimually hedging their positions. But of course, the way the COT futures & options reports deals with the options positions, you cant get the info you really want.

Safe trading
rog1111

 

[bgold]

Rog111, Interesting observation. very common sense, however, I think it is not the absolute long/shorts of commercials but the relative position one should look at. Clearly if fe a supply outlook for a commodity points to scarcity, commercials (fe buyers - coffee, cocoa etc) will not be inclined to open short positions. Result rapidly rising prices without significant volume and/or rise in OI. Only when price reaches a level where commercials (supposedly the insiders) are confortable opening shorts will one see a significant rise in OI (assuming funds are bullish).


On the options issue, I do believe there are statistics on COT excl options. Certainly I have seen them in Gold. importantly, I think it is not the size of options but the net delta of outstanding calls and puts. Fe if delta of call option is 0.5, than for very 2 options sold, options market maker will be long 1 future.

Actually, I would therefore argue that the net gamma (change of delta as result of change price) will provide insight on how the market is set-up. This kind of info tends to be only accessable by the real insiders (eg banks, brokers, mm, and large speculators with good brokers).
Options positions can have a significant impact on direction and close of a future at expiry!!

If you have any good sources for these data ,I would be keen to know, especially in metals. tx

 

[rog1111]

Hi bgold

I tend to agree with you, although I think far too much is made of the net positions of the commercials when trying to predict trend. If prices are rising fast, then as far as I can see comms will still open the shorts as they are hedging the short elsewhere in any case. The public dont always respond quickly with long positions if price moves up fast, as IMHO there'a lot of pyschology involved. In a similar situation, I have often seen market makers in stocks create sharp moves on low volume when they have acquired all the stock they want. The big one day move excludes a lot of traders pyschologically, as they think they have already missed out on most of the move, which of course they havent. Only when the move has really established itself will they start getting in.

Regarding options positons, I think it is very interesting. I did a lot of work in 1999 on this. My philosophy on this is related to yours ie it is where the calls and puts are actually lying that is the main factor, not merely callsuts ratio. I plotted a whole lot of graphs of the optimum futures price vs actual price, the optimum price being the futures price where the options, should they all be liquidated, would be worth the minimum amount of money. The logic being that the public mostly buy options, and the commercials write them. Therefore if loads of options get heavily into the money, then this would not be good for the commercials, as even though they are hedging the positions the best they can, they are relying on not having radical movements against them, and they use futures trading to try and keep the prices where they want them. Certainly for metals like gold, the options OI is massive compared to the futures, and must be highly significant.

Unfortunately I have lost most of the material due to a hardware crash last year, including some large VB programs, but I remember that at the time there was free data from futuresource with all the options OI and all strikes for all commodities, and I found some very interesting patterns. The futures price would rarely break through the nearby contracts (with large options OI) "optimum" price unless the trend was for real, often just touching the line, then reversing, noticeably for oil products. It didnt work at all for currencies, but then thats a different type of market I guess.

Rgds
rog1111