Tag: trading program rankings

Trading the Metals Markets

The metals market is really several markets. Precious metals such as gold and silver are often thought of as jewelry markets while base metals such as copper go into homes and manufacturing. Platinum and palladium are precious metals, but are used in automobiles while gold is many things to many people – a currency, an inflation hedge, a barometer of the economy, a central bank tool and of course, a commodity.

Collectively, metals markets offer investors access to truly global markets that are connected to everything from the computer industry to construction to macro-economics and geopolitics. This brings in a broad range of participants from commercial hedgers, to central banks to institutional traders and individuals looking for opportunities and diversity. The markets are sometimes volatile and unpredictable, which means they also offer flexible and creative trading opportunities, as well as ways to protect and hedge against broader moves in the stock and commodities sectors. Traders looking to tap into this major global commodity sector access to precious and base metal futures virtually 24-hours per day

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Platinum Product Overview

About Platinum Futures

Platinum futures (PL) at CME Group are an integral part of the global metals market.

With annual production totaling 5% of gold’s annual production and 1% of silver’s annual production, platinum is one of the rarest metals on earth. This extremely rare metal has a variety of uses in transportation and in the manufacture of jewelry and electronics.

The Contract

Each NYMEX Platinum futures contract represents 50 troy ounces of deliverable platinum, with a minimum tick price of $5.00. The contract trades electronically nearly around the clock, six days a week, and traders are able to leverage substantial margin efficiencies when gaining exposure to this liquid market.

Supply and Demand

Production of platinum is highly concentrated, with South Africa and Russia producing 70% and 15% of the annual supply, respectively.

Consequently, the supply, and in turn the price, of platinum fluctuates with the political stability of these countries. The demand for platinum is primarily influenced by its industrial uses.

Catalytic converters, automotive devices that reduce pollution, account for 45% of platinum’s demand. As environmental regulations become more stringent, demand and use for platinum may rise.

Additionally, with its many uses in the technology sector, the metal may move in concert with the broader economy. Platinum’s price is particularly attuned to the strength or weakness of the Japanese economy: 30% of platinum is used for jewelry manufacturing and Japan demands 95% of this jewelry.

Traders looking to take a position in a rare metal that offers some exposure to the broad economy have a valuable tool in the platinum futures contract.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Silver Product Overview

About Silver Futures

Silver futures (SI) are a valuable tool for investors looking for a precious metal that serves as an inflation hedge while also possessing many industrial applications.

Silver is the most extensively produced precious metal in history and has been mined for six millennia.

Historically, it has often served as a currency and thus it shares many of the inflation-hedge and safe haven qualities of gold. However, unlike gold, which is primarily used in jewelry, silver is widely used in industry as manufactures capitalize on its superior electrical conductivity.

Each NYMEX Silver futures contract represents 5,000 troy ounces of deliverable silver, with a minimum tick price of $10.00 per contract. The contract trades electronically nearly around-the-clock, six days a week, and traders are able to leverage substantial margin efficiencies when gaining exposure to this liquid market.

Silver Supply and Demand

The production of silver is widely diversified across many countries and continents, which helps prevent surprising variations in supply.

However, as silver production is the byproduct of copper, lead and zinc mining, when those metals experience decreased production, silver often rallies. The demand for silver is largely impacted by needs of the industry.

As the best conductor available, even besting copper, around 50% of silver demand is used in the manufacture of electrical appliances and circuitry.

Consequently, the price of silver often moves in partner with the tech sector and the broad economy. Approximately a quarter of the silver supply is used in jewelry and the tableware products.

These practical applications make silver an attractive addition to a portfolio for its capital appreciation qualities. Additionally, silver’s precious metal status help it rise in price as currencies decline in value, which makes silver an optimal instrument for capital preservation.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Gold Product Overview

Learn about Gold Futures

Gold futures, ticker symbol GC, are among the most widely traded futures products worldwide. Although Gold futures are contracts for physically-deliverable commodities, these products are also critical tools for diversifying portfolios and mitigating risk. Traditionally, gold has been seen as a “safe haven” in times of global economic or political uncertainty, and as such, prices may often move inverse to the U.S. dollar, treasury bonds, and U.S. stock indexes.

The Contract

Each COMEX Gold futures contract represents 100 troy ounces of deliverable gold, with a minimum tick price of $10.00. The E-micro Gold futures contract, symbol MGC, represents 10 troy ounces of gold and trades at a minimum tick price of $1.00. The contracts trade electronically nearly around the clock, six days a week, and traders can leverage substantial margin efficiencies when gaining exposure to this liquid market.

Trading the Contract

Market participants actively trading Gold futures must pay attention to numerous macro factors, both economic and political. U.S. economic and monetary policy, as well as the overall health of the U.S. economy, can heavily impact gold prices, so traders leveraging gold must pay close attention data points such as FOMC statements, inflationary indicators like CPI and PPI, and non-farm payrolls numbers.

Since gold is also used as a hedge for non-U.S. economies, traders must also be highly attuned to issues of political and economic stability worldwide, especially in China, Japan, the Middle East and the Eurozone.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Fundamentals and Metal Futures

Fundamentals and Metals Futures

The fundamental analyst will look at certain factors to determine where the price of metals like gold and silver might move in the future

There are a few unique factors that the fundamental analyst will use to evaluate trades in the metals futures market, including investment and manufacturing demand.

Uses and Movement of Metals

Many of the metals traded in the futures market are sought after for investment purposes and industrial applications.

The supply and demand of metal futures will be influenced by people using metals as a speculative investment, and those using metals as an input in manufacturing processes. For metals like gold and silver, there is also strong demand from ETFs and other investment funds, as investor appetite for precious metals increases.

For example, gold is used as a speculative investment and in the manufacturing of goods like jewelry and electronics. Gold has always been a unique metal, used as a currency and as a store of value to combat inflation.

Contrast that to copper, where investment demand is virtually non-existent, but the industrial demand is high. The fundamental analyst in this case will look at demand coming from the construction and other industries rather than focusing on copper as an investment.

The demand from each of these sources might move in the same direction at times and in opposite directions at other times.

For example, if the economy is growing rapidly and inflation is increasing, the investment demand for gold might increase as investors buy gold to hedge against inflation. At the same time, the growing economy will most likely create increased demand for industrial gold as consumers buy more products that contain gold.

But, if the economy is contracting, demand for investment gold is likely to increase as investors purchase gold as a stable investment as the equity markets show signs of weakness. At the same time, industrial demand may decrease as consumers demand fewer products in a weakening economy.

Supply

Supply is important for metals, but typically demand is the primary driver of price. The overall supply of metals is limited, but the fact that metals can be melted and reused increases the available supply as existing metals are re-melted, lessening the reliance on new production and smoothing out the supply cycle.

For example, once corn is fed to livestock, it is removed from the supply chain and new corn must replace it. But since metals can be reused virtually forever, the metals market supply comes from existing and newly mined inventory.

Demand

The main factors effecting demand for metals are economic. Factors such as GDP, inflation and interest rates all play a factor in both industrial and investment demand for metals.

Each of these factors will affect a particular metal differently. Some metals, like gold, will be impacted by all of these economic factors, whereas other metals will not be impacted in the same way. The demand for gold will respond to different factors than the demand for platinum.

Conclusion

Fundamental analysts evaluate a variety of factors, to determine which factors hold more weight than others, and then make trading decisions based on these opinions.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Stock Index Education Home Page

Beta Replication and Smart Beta

Beta

Beta describes the return achieved from exposure to the overall market, e.g., via an index fund. It is also a measure of the relative volatility of a stock compared to the whole market.

Stock index futures, especially E-mini S&P 500 futures, are the institutional choice for beta replication and can allow investors large and small to achieve the elusive goal of cheap beta. Beta can now be sourced efficiently and cheaply around-the-clock in nearly any major stock index.

The market in this case is the S&P 500. If a stock has a beta of 1.20, it is 20% more volatile than the S&P 500. If the S&P 500 was up 10%, a stock with a beta of 1.20 would be expected to rise by 12%. If a stock has a beta of .80, it is only 80% as volatile as the whole market. If the S&P 500 advanced by 10%, a stock with a beta of .80 would be expected to rise only 8%.

An S&P 500 Index fund, which owns each of the 500 members of the index, has a beta of exactly 1.00. Hence, if an investor was “buying beta,” it would refer to investing in the whole market, usually through derivatives such as S&P 500 futures. If an investor wanted exposure to small cap beta, he might obtain this through E-mini Russell 2000 futures.

Futures are a cheap and efficient way to obtain beta exposure. In fact, investors can replicate exposure in just about any type of market.

Beta or Exposure Sought	Beta source or primary underlying index	Cheapest beta for replication
MidCap Stocks	S&P MidCap 400	S&P MidCap 400 Futures
Small Cap Stocks	Russell 2000 Index	Russell 2000 Futures
Large Cap Stocks	S&P 500 Index	S&P 500 Index Futures
Japanese Stocks	Topix or Nikkei 225 Index	Nikkei 225 futures/Topix futures

While other sources for beta replication (swaps/options/ETFs) exist, futures offer the best combination of efficiency, liquidity and low transaction costs.

Next Generation Beta — Smart Beta

The latest evolution in passive investing goes beyond plain vanilla passive investing. Smart beta is an approach that tries to enhance the return from tracking an asset class by deviating from the traditional cap-weighted approach, in which investors simply buy shares or bonds in proportion to their market value in their respective index.

Fundamental indexing, where each component stock might be weighed according to their earnings or price-to-sales ratios, are part of many smart beta strategies.

Equal-weighted indices are another strategy and can help prevent overweighting caused by the most successful stocks in an index. As time progresses, successful companies can become over-weighted in their indices. This can cause balance issues and a portfolio that is biased toward the successful larger-cap companies.

As fundamental indexing and new generations of beta appear, look for more innovative products going forward including futures contracts and derivatives on such products

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Stock Index Education Home Page

Transition Management using Stock Index Futures

With the exception of the very largest pension plan sponsors, endowments and foundations, the vast majority of buy side investors hire external or outside third party money managers to manage their assets. These external managers may be equity managers, fixed income managers or alternative investment managers.

For a multitude of reasons, a pension fund, for example, may wish to make a change in one of their investment managers. The process by which an institutional investor switches manager is known as transition management.

Why a pension fund might transition from one manager to another

- Change in asset allocation policy. Several years back a major automaker decided to take their allocation to commodity investing down to zero and increase their equity exposure. As a result, they had to notify the managers involved and move the assets from one manager (the commodity managers) to an equity manager that would managed the funds within the new mandate.
- Underperformance: If a manager fails to perform as expected a pension fund has every right to terminate their agreement with the manager and seek out a new manager.
- Major changes in organizational structure that causes a significant shift in their investments. For example, a large U.S. based college endowment shifted their focus from passive investing toward active managers. Such a shift might require a significant transition period from indexed based managers to active managers.
- Recently, the industry has encountered more complex transitions that involve derivatives such as swaps, options and futures necessitating the need for transition managers that have experience with derivatives trading desks. With the extraordinary growth of futures and options over recent years, many portfolios contain these products and thus require specialized attention during transition.

FACTOID: Transition managers are adding new capabilities to transfer assets in complex derivatives, futures and options, along with traditional transfers of securities. These managers increasingly are using derivatives desks to handle the complex transitions, particularly in fixed income. Ross McLellan, founder and president of transition management data analysis firm Harbor Analytics, calls it “an evolution in the industry that allows transition managers to stay relevant.” – Ross McClellan quoted in Pensions and Investments

The process by which assets or funds are moved from one asset manager to another is referred to as Transition Management. And firms that offer expertise in this area are known as transition managers.

What are the considerations and risks in transitioning a portfolio from one manager to another? Anytime you sell a portfolio and reinvest in another, you incur costs. Transactions costs, commissions and other fees can be performance killers. Moreover, there is market impact. If the portfolio contains small and/or illiquid securities, the market impact in selling/buying can be much greater than transaction costs.

However, the biggest risks during the transition period is having no exposure to the market during the process. One of the ways to combat this risk of “missing out”, is to utilize the futures markets. Say for example, an endowment was going to move their small cap exposure from an active small cap manager to a passive indexer benchmarked to the Russell 2000 index. From the time securities are sold from the legacy manager, to the purchase of the new issues by the passive small cap manager, there is the risk that the Russell 2000 might rise resulting in tracking error and underperformance. Hence, the transition manager would consider using E-mini Russell 2000 futures. See illustration in figure one below.

Whether an investor benchmarks to large cap indexes, midcap indexes, small caps, sectors or international indexes, there are literally dozens of liquid stock index futures available that replicate many key global benchmarks. The S&P 500, the S&P MidCap 400 and the Russell 2000 are primary U.S based benchmarks that have extremely liquid futures contracts and are useful in transition management. Thus, it’s no surprise that transition managers have come to rely on these instruments to transition portfolios smoothly and quickly. Other futures such as Treasury futures and commodity futures could conceivably be used in transitions that involve fixed income and commodity managers respectively.

And finally, while derivatives themselves are being transitioned as part of complex portfolios, they are primarily being used to facilitate orderly and efficient transitions from one manager to another.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Metals Intramarket spreads

Intra market spreads, also known as calendar or time spreads, are where a trader opens a long or short position in one contract month and then opens an opposite position in another contract month in the same futures market on the same exchange.

For example, long Copper futures May and short Copper futures August on COMEX. Essentially they allow traders to express a view on the expected value of assets at different points in time.

Forward Curve Structure and Carries

Traders can express a view about the structure of a metals forward curve. If you expect nearby contract to rise in value relative to the back end of the curve, you can buy that nearby contract and take an opposite position in a long-dated month to benefit from the change in the relationship and the forward curve. Carries may be used to manage futures potions hedges against a change in the underlying physical market being hedged.

Example

If you planned to buy a physical metal for future delivery in November, you would be worried about price changes from now until delivery. In order to hedge this price risk, you would enter into a long futures contract for the same product, also with a delivery date of November. But what happens if the delivery date for your physical metal changes to December?

In order to maintain the hedge, you will need to move the futures position to December. To do this you would sell the November versus December spread. In other words, you would sell the November contract and buy the December contract. The net position of would be a long December futures contract, matching the new physical metal delivery date.

Less Volatility than Outright Futures

Intra market spreads offer a trader exposure to the price of a metal, but with reduced volatility because the time spread tracks changes in relationship between the two contracts, rather than the price of the outright futures contract. The risk is the change in the forward curve impacts the two open positions at different rates, but the difference between the two open positions will be less than the outright value and thus such spreads are less volatile.

Reduced Margin Requirements

If a trader expresses a view on the relative value of metals futures by trading an intra market spread, they may see reduced initial margin requirements. Initial margins may be lower for spreads because of the reduced volatility. For example, the maintenance margin required for one lot long Copper futures Feb versus short Copper futures August on COMEX might be $200 per lot. The outright one lot long Copper futures Feb could be around $3,100 per lot.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Understanding Futures Spreads

Spreading, a trade in which you simultaneously buy one futures contract and sell another, is a popular strategy among many different asset classes.

One reason they are popular is because they can be less risky when compared to outright futures. And because they are less risky, they also tend to have lower margin requirements.

In this lesson, we will look at the various types of spread trades, including the features that make them valuable strategies for both hedgers and speculators alike.

Types of Spreads

Spreads can be categorized in three ways: intramarket spreads, intermarket spreads, and Commodity Product spreads.

Participants who use these strategies are more concerned with the relationship between the legs of the spread than the actual prices or direction of the market.

Intramarket Spreads

Intramarket spreads, also referred to as calendar spreads, involve buying a futures contract in one month while simultaneously selling the same contract in a different month.

One example would be the buying the March 2018 Eurodollar futures contract and selling the March 2021 Eurodollar futures contract.

Calendar spread traders are primarily focused on changes in the relationship between the two contract months; the goal of this strategy is to take advantage of those changes. In most cases, there will be a loss in one leg of the spread, but a profit in the other leg. If the calendar spread is successful, the gain in the profitable leg will outweigh the loss in the losing leg.

Calendar spreads are also used by hedgers to roll a futures position from one month to the next.

Intermarket Spreads

Intermarket spreads involve simultaneously buying and selling two different, but related, futures with the same contract month in order to trade on the relationship between the two products.

For example, the Gold-Silver Ratio spread is a tool for trading on the relationship between Gold and Silver futures prices. This spread can be viewed as an indicator of the health of the global macro economy.

Market participants can express their views on the economy or the relationship between these two products with this spread.

Commodity Product Spreads

Commodity product spreads involve buying and selling futures contracts that are related in the processing of raw commodities. For example, the Soybean Crush involves buying Soybean futures and selling Soybean Meal and Soybean Oil futures.

The participants in this spread are able to simulate the financial aspects of soybean processing, that is, buying soybeans, crushing them and selling the resulting soymeal and soybean oil. The Soybean Crush spread allows processors to hedge their price risks, while traders will look at the spread to capitalize on potential profit opportunities.

Spread Margins

As previously mentioned, one of the attractions of spread trading is the relatively lower risk versus outright futures positions, and the subsequent lower margins. See how this works with the Soybean-Corn spread.

Assume, the outright margin for Soybean futures is at $3,000 and the outright margin for Corn futures is $1,500.

Rather than posting $4,500 to trade a spread on these two contracts, a trader may receive a 75% margin credit; in other words, the initial margin would be $1,125, which reflects the lower risk in spreading the two contracts as opposed to trading each of them outright.

Conclusion

There are many spread strategies that allow market participants to manage risk and capitalize on potential opportunities.

You can learn more about product-specific spreads in other lessons in this course.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Interest Rate Education Homepage

How Can You Measure Risk in Treasuries?

How to Measure Risk in Treasuries

When it comes to measuring risk for fixed income (rates) traders and portfolio managers, they tend to use one or two yardsticks, value of a basis point and modified duration.

Value of a basis point (VBP), also known as basis point value (BPV), or, for U.S. dollar products, dollar-value of an 01 (DV01),is the financial effect of a 0.01% (one-basis point) change in that instrument’s yield.

For example, if a 10-Year note is current 1.30% yield to maturity with a DV01 of $859 per million par value and the yield goes up by 0.01 to 1.31%, we would expect the financial value of that note to drop by $859 per million par.

DV01

One can identify the DV01 of individual securities or an average DV01 of a whole portfolio. DV01s tend to get larger as you move out the yield curve.

For example, a 2-Year U.S. Treasury note may have a DV01 of $185 per million par while a 30-year Treasury bond may have a DV01 or $2,131 per million par.

Modified Duration

Modified duration represents the financial effect as a percentage gain or loss to a 1.0% (100 basis points) change in underlying yield.

For example, consider our previously mentioned 10-Year note: if its duration was 8.95 years and yields move higher from 1.30% to 2.30%, or by 1.0%, we would expect the value to fall by 8.95% in value.

Treasury	DV01
Ultra 30-Year	$289.34
30-Year	$213.14
Ultra 10-Year	$115.84
10-Year	$76.55
5-Year	$47.94
2-Year	$36.97

In general, the longer the maturity, the greater the price sensitivity and risk. Duration measures this risk precisely.

Traders and portfolio managers routinely refer to your position or portfolio in basis point value and modified duration terms.

Implied Basis Point Value and Implied Duration

U.S. Treasury futures can also be referred to in implied duration and implied basis point value terms.

To look more closely at the BPV and modified duration of a futures contract, we must first go back to the concept of a U.S. Treasury futures contract’s cheapest-to-deliver (CTD) security. You may recall from previous modules a U.S. Treasury futures contract’s CTD security is the eligible bond or note that is most financially efficient for the short position to deliver to the long position at contract expiration. Very few market participants go all the way to delivery, in fact the number is quite low (usually less than 5% of open interest).

The reasons we want to know about the CTD security is two-fold: contracts trade like their CTD security and we will use the CTD security and its conversion factor to arrive at that contracts implied BPV.

Once we know a U.S. Treasury’s CTD security we can determine that security’s BPV per $100,000 face value (or $200,000 face value in the case of 2-Year note futures). We use $100,000 because, with the exception of 2-year notes which have an underlying face value of $200,000 per contract, U.S. Treasury contracts have an underlying face value of $100,000 per contract.

Once we know a contract’s CTD we can determine its BPV; and using that security’s conversion factor (CF) and some simple mathematics, arrive at the implied BPV.

Assume we have a 5-Year Note futures contract and its CTD security is the 1.375% of May 31, 2021 with a BPV per $100,000 of $42.45 and a conversion factor of 0.8317.

To arrive at the BPV, we take the BPV of CTD and divide it by its conversion factor:

BPVcontract = BPV ctd ÷ CF

For our example, BPVcontract = 42.45 / 0.8317 = $51.04 per contract.

Once we have the implied BPVs for the U.S. Treasury futures contracts we can use them to calculate appropriate dollar-weighted hedge ratios versus a cash security of portfolio. We could also calculate the spread ratios between futures contracts so we can construct dollar-weighted yield curve trades.

Interest rate traders and managers of risk use basis point value and modified duration to measure their market risk. Futures contracts based on U.S. Treasury securities can also be referred to in implied basis point value and implied modified duration with a little knowledge of how the contracts price and behave and some simple math. Knowing the contract’s CTD is the starting point.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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