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Will Nascent Commodities Rally Last?

Those paying attention to commodity prices recently will have noticed an uptick off of historic lows. Depending on your trading method, this rally is prices may provide relief or trouble. But the long-term quest of commodity prices is still quite uncertain.

Erik Norland from the CME Group has a helpful short video giving his perspective on recent price action in commodities, especially as it relates to China and global sovereign debt.

Click on the title or the image below to view the video.

Will Nascent Commodities Rally Last?

How have you been trading different commodity markets? Interested in getting started or considering a new approach? Call one of our BROKERS to discuss different ways you can approach these markets.

All examples in this video are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author(s) and not necessarily those of Foremost Trading, its DBAs, or its Principals and brokers. This report and the information herein should not be considered investment advice or the results of actual market experience. Futures trading like all investments, carry certain risks and may not be appropriate for all investors. All trading should be done with risk capital. Past performance is not necessarily indicative of futures results.

The Foremost Trading Team

Have questions? Call or email us!

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info@foremosttrading.com

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Disclaimer: Trading futures, options on futures, retail off-exchange foreign currency transactions (“Forex”), investing in managed futures and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. This website contains information obtained from sources believed to be reliable, but such information has not been independently verified and its accuracy is not guaranteed by Foremost Trading. Past performance is not necessarily indicative of future results. Any mention of performance in any context whether actual or hypothetical is no guarantee of future results. Foremost Trading became a registered ‘dba’ of RCM Alternatives in July of 2020. Please see full disclaimer here: https://www.rcmalternatives.com/disclaimer/

New Low Trading Ranges for Commodities?

Commodities have been trading lower for quite a while. Blu Putnam, Managing Director and Chief Economist at the CME Group, has some helpful thoughts about the long-term price action for these markets.

Watch this brief but helpful video from him at the Futures Institute sponsored by the CME Group. Then give your BROKER a call to see how you might benefit from lower commodity prices.

 Click to access Video HERE

As always, any opinions shared are that of the source and not necessarily that of Foremost Trading. We believe this information to be true but have not independently verified it. All trading carries risk and should only be done with risk capital. Past performance is no guarantee of future results.

The Foremost Trading Team

Have questions? Call or email us!

(888)818-0880
info@foremosttrading.com

Follow us on Facebook!

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Disclaimer: Trading futures, options on futures, retail off-exchange foreign currency transactions (“Forex”), investing in managed futures and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. This website contains information obtained from sources believed to be reliable, but such information has not been independently verified and its accuracy is not guaranteed by Foremost Trading. Past performance is not necessarily indicative of future results. Any mention of performance in any context whether actual or hypothetical is no guarantee of future results. Foremost Trading became a registered ‘dba’ of RCM Alternatives in July of 2020. Please see full disclaimer here: https://www.rcmalternatives.com/disclaimer/

Are Commodities Less Risky Than Stocks?

Are Commodities Less Risky Than Stocks?

We ran across an interesting article from MarketWatch that you should read: “Why futures contracts are actually less risky than stocks.” In this article, columnist Mark Hulbert gives five insights comparing stocks and commodity futures. Citing a new white paper from the Yale International Center for Finance, he gives some compelling “facts” towards his conclusion that commodity futures are not as risky as stocks.

Here are his “facts” as quoted in the article:commodities less risky than stocks

  1. Commodities are actually more conservative than stocks
  2. Stocks and commodities futures have nearly identical risk-adjusted returns
  3. Commodities futures are not very correlated with either stocks or bonds
  4. Commodities are a far better inflation hedge than not only bonds but also stocks
  5. Stocks of commodities producers are not a good substitute for commodities futures”

Click HERE to obtain the research paper from Yale supporting his conclusions.

While we prefer a more balanced discussion of risk and reward when talking about futures, Hulbert makes some good points in this article. Futures and commodities are not well understood by the public and often avoided for reasons other than sound research and study. We can attest to this in our experience as a futures brokerage.

Additionally, the misunderstood structure of the futures contract leads investors to misuse these markets or miss opportunities. One primary example is the flexibility futures provide by allowing investors to sell (short) a market just as easily as they could buy. Many investors lack this understanding and approach futures and commodities from a “to buy or not to buy” mindset. You’re missing half the story! This versatility does not increase your profit potential; it just increases your flexibility in making trade decisions.

However, we would differ on a few points with Mr. Hulbert. We disagree with any minimization of risk. We also would differ on the use of commodity ETFs. While those are a viable option for investors, most commodity ETFs are looking to mimic the performance of a commodity or group of commodities (e.g. grains or energy). It is still limited to the mindset of trading from the buy-side only. Instead, consider a managed futures account. Having a futures account managed by a professional trader gives potential benefits:

  • Potential for risk reduction of your overall portfolio
  • Diverse market exposure
  • Exposure to different trading strategies
  • Trading flexibility for bullish, bearish and sideways markets
  • Performance based fees
  • Transparent account statements
  • Reasonable liquidity

Futures, Forex and Option trading involves substantial risk, and may not be suitable for everyone. Trading should only be done with true risk capital. Past performance either actual or hypothetical is not indicative of future results. Leverage can work with you and against you.

Of course we’re biased. We wouldn’t focus on managed futures if we didn’t think it was best for you.

So what do I do next? If you like the idea of addition diversification and flexibility to your portfolio, the next step is to educate yourself on managed futures. Here are two steps:

  1. Call one of our BROKERS who are standing by to help you learn. (888-818-0880)
  2. Access the net track records for hundreds of professional futures account managers in our database. Click on the link below to sign up and receive login credentials.

Foremost Managed Futures Database

You can’t remove the risk from trading, period. Managed Futures have the potential to reduce a portfolio’s volatility by offering different markets and strategies with less correlation to stocks and bonds. However, adding Managed Futures to a portfolio can also reduce the efficiency of a portfolio and by adding Managed Futures is no guarantee of profit.

The Foremost Trading Team

Have questions? Call or email us!

(888)818-0880
info@foremosttrading.com

Follow us on Facebook!

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Disclaimer: Trading futures, options on futures, retail off-exchange foreign currency transactions (“Forex”), investing in managed futures and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. This website contains information obtained from sources believed to be reliable, but such information has not been independently verified and its accuracy is not guaranteed by Foremost Trading. Past performance is not necessarily indicative of future results. Any mention of performance in any context whether actual or hypothetical is no guarantee of future results. Foremost Trading became a registered ‘dba’ of RCM Alternatives in July of 2020. Please see full disclaimer here: https://www.rcmalternatives.com/disclaimer/

“Talk This Way” (Part 1)

In 1975 Aerosmith famously said “Walk this way, talk this way.” While the retail futures industry was then in its infancy, it has since grown to have its own walk and talk. The language of a futures broker can be confusing to many who aren’t familiar with it. Like many industries however, the terminology isn’t hard to understand; it just takes some getting used to. After all, we aren’t rocket scientists – well most of us aren’t.

In an effort to bring you up to speed, we’re giving you a cheat sheet of some terms that may not be obvious – a pocket dictionary of futures lingo, as it were. Most people don’t talk broker-speak.

We’ll do this in two installments. The first will focus on general industry language. The second will describe terms specific to managed futures and the performance summary pages we often show and send.

As always, call your BROKER for more about how to talk this way.

Common Industry Terms (in alphabetical order):

Arbitrage – Attempting to take advantage of small price discrepancies of the same commodity by simultaneously buying and selling on different exchanges. For example, buying WTI Crude Oil on NYMEX and Selling WTI Crude Oil on ICE.

Ask Price – The lowest price someone is willing to sell. Also known as the “offer.”

Back Months – The contract months of a futures market after the front month.

Bid Price – The highest price someone is willing to buy.

Carry – The cost (or return) of holding an investment. In a normal market, futures contract months are typically higher the farther out in time by the carry cost. The cost of carry may be comprised of storage fees, interest rates, insurance, etc.

CFTC – The Commodity Futures Trading Commission. This is the government body responsible for overseeing derivative markets including futures, options on futures, forex, swaps and other OTC products.

CME Group – The umbrella corporation over the largest group of futures exchanges in the world. It is comprised of the Chicago Board of Trade, Chicago Mercantile Exchange, New York Mercantile Exchange, Commodity Exchange, Kansas City Board of Trade, Dubai Mercantile Exchange and more.

Contrarian – A type of trading style that seeks to profit from periodic retracements amidst a larger trend.

Front Month – Properly, the first futures month after the current spot month. Colloquially, it is the nearest month with the most trading volume. For example, if it is currently June, the next futures month for Gold is July. Since the vast majority of trading volume takes place in August, however, August would be referred to as the front month.

Futures Contract – An agreement to make a transaction at a future time for a specified price, quantity and quality. The buyer agrees to pay and receive at the future time; the seller agrees to deliver at the future time. For example, an August 2015 Gold futures contract represents 100oz of Gold to be delivered on August 27, 2015 at a grade of no less than .995 fineness.

Hedging – Hedging is all about protection. You can be referred to as a “hedger” as a commercial producer or user of a commodity when you use the futures markets for price protection. For example, a farmer with corn in the storage bin or even in the ground is “long” his actual corn. He may choose to hedge by selling a corn futures contract. Additionally, speculators can “hedge” by using a trade to help mitigate the risk of a position. For example, if a trader is long e-mini NASDAQ futures, she may buy a put option as a hedge.

ICE – The Intercontinental Exchange. Formerly known as the New York Board of Trade, this exchange was known for facilitating soft markets (e.g. cocoa, sugar) but has since grown to be the second largest group of futures exchanges in the world.

Long vs. Short – Long refers to a buy position or bullish disposition. Short refers to a sell position or bearish disposition. Short-selling in the futures world is not the same as with securities in that there is no borrowing involved.

Limit Order – An order to buy or sell a contract at a specific price or better. For example, “Sell 10 June E-mini S&P contracts at 2100.00 or better.”

Market Order – An order to buy or sell a contract at the current market price. A market order to buy will be filled at the Offer or Ask price. A market order to sell will be filled at the Bid price.

Margin – The amount required to have on deposit in your account, which is held as a good faith deposit for your trade(s). The exchange determines current the margin rate, however, your clearing firm (FCM) reserves the right to increase it.

Margin Call – When the required margin (good faith deposit) for a trading account exceeds the funds available. This may happen through a rising margin requirement or falling equity. Margin calls can be met by promptly adding sufficient funds or by reducing/adjusting positions to reduce the margin requirement.

NFA – National Futures Association. A Self Regulatory Organization established by the CFTC to oversee much of what goes on in the alternative investment space.

Normal vs. Inverted Market – Since the cost of carry (see above) is generally, positive, the futures front month and each subsequent month are normally progressively higher reflecting this cost of carry. A normal market shows futures months farther out in time trading at a premium to nearer months. An inverted market shows the opposite – farther out months trading at a discount to near months.

Offset – To exit a position. To offset a buy (long) position, you must sell the same market. To offset a sell position, you must buy the same market. E.G., to offset a long position of 5 September Copper contracts, you must sell 5 September Copper contracts.

Option Contract – a contract that represents the right but not the obligation to buy or sell an underlying market at a given price called the “strike” or “exercise” price. You can have options on stock, futures, forex and other assets. A Call option represents the right but not the obligation to buy the underlying asset at the given strike price. A Put option represents the right but not the obligation to sell the underlying asset at the given strike price. You can buy and sell both Puts and Calls. The price you pay or receive for an option is called “premium.”

The Pit – An octagonal area on the exchange’s trading floor designated to trading one or a group of markets (e.g. the bond pit). In this area, brokers would communicate their needs to buy/sell via open out-cry and hand signals. In recent years, the vast majority of trading now occurs electronically instead of orders being filled by an actual pit broker in a market’s given pit.

Speculating – Trading with intent to profit from the rise (long) or fall (short) in a market’s price. This type of trading is in contrast to hedging.

Spot (Cash) Market – The actual market upon which the price of futures contracts are based. For example, you can buy and sell Live Cattle today at your local market (spot market).

Spread – There are many different contexts for this word:

  • Inter-commodity – simultaneously buying and selling different commodities that are correlated. E.G., Buy 1 December Wheat / Sell 1 December Corn
  • Bid/Ask – the difference between the bid price and the ask (offer) price in a market. Typically, very active markets have a small bid/ask spread whereas less active markets have a wider bid/ask spread.
  • Calendar – simultaneously buying and selling the same market in different contract months. E.G., Buy 25 July Lean Hogs / Sell 25 December Lean Hogs
  • Options – There many different types of options spreads, but they all involve a bullish and bearish part. Examples include, credit spreads, butterfly spreads, ratio spreads, etc.
  • Cash Basis – Used especially by hedgers, this is the difference in price between the cash market and the chosen futures contract month. This affected by the cost of carry among other factors.

Stop Order – A type of market order that is conditional upon the market trading at a certain price, the “stop” price. For example, “buy 10 August Gold contracts at 1200 STOP.” This order will rest until August Gold trades at 1200/oz. Then your order becomes a market order intended to be filled at the best available price.

The Foremost Trading Team

Have questions? Call or email us!

(888)818-0880
info@foremosttrading.com

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Disclaimer: Trading futures, options on futures, retail off-exchange foreign currency transactions (“Forex”), investing in managed futures and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. This website contains information obtained from sources believed to be reliable, but such information has not been independently verified and its accuracy is not guaranteed by Foremost Trading. Past performance is not necessarily indicative of future results. Any mention of performance in any context whether actual or hypothetical is no guarantee of future results. Foremost Trading became a registered ‘dba’ of RCM Alternatives in July of 2020. Please see full disclaimer here: https://www.rcmalternatives.com/disclaimer/

NEW Managed Futures Database Service

Foremost is always looking for new and better ways to improve service to you.

One of our many roles is to provide personalized investment strategies for your consideration and use. Professional futures account managers also known as Commodity Trading Advisors (CTAs) are an increasingly important way to gain access to alternative markets and potentially diversify your portfolio. We make information about CTAs easy for you to access.  This database allows you to gain access to alternative market considerations and diversify your portfolio.

Foremost is pleased to announce an update to the Foremost Trading Managed Futures Database, now powered by Autumn Gold.   Please sign up HERE or call us for a User Name and Password. Your existing User Name and PIN will no longer work in this new upgrade.

Autumn Gold has decades of experience and we believe is the best account managers resource for our clients. This update will now allow you to have access to additional investment information and more managers to review and select from – plus we think it is more user-friendly!

We encourage you to contact your FOREMOST BROKER to learn how this update can better serve you and your investment needs. With this database, you will be able to:

    • Find professional futures trading managers in your capital range within seconds
    • Review CTA statistical and monthly rankings
    • Analyze Top CTA categories
    • Rank CTAs based on risk-adjusted statistics to find the most efficient producers of profit and more.

**If you created a watchlist or portfolio in our current database, you will receive another email about how we plan to address your specific needs.**

Your broker stands ready to show you this powerful tool.  Their contact information is below. We ALL look forward to your call.

 

The Foremost Trading Team

Have questions? Call or email us!

(888)818-0880
info@foremosttrading.com

Follow us on Facebook!

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Disclaimer: Trading futures, options on futures, retail off-exchange foreign currency transactions (“Forex”), investing in managed futures and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. This website contains information obtained from sources believed to be reliable, but such information has not been independently verified and its accuracy is not guaranteed by Foremost Trading. Past performance is not necessarily indicative of future results. Any mention of performance in any context whether actual or hypothetical is no guarantee of future results. Foremost Trading became a registered ‘dba’ of RCM Alternatives in July of 2020. Please see full disclaimer here: https://www.rcmalternatives.com/disclaimer/

Trading the Grains

There is no question that the primary grain markets have seen a large down move. Solid planting seasons and good weather have contributed to significant sell-offs in Corn, Soybeans and Wheat. (See charts below.) As investors and traders watching these markets, it is only natural we seek opportunities to take risk for potential reward.

Corn Futures

December Corn – chart by OEC Trader

November Soybean Futures

November Soybeans – chart by OEC Trader

December Wheat Futures

December Wheat – chart by OEC Trader

Here are potential moves:

1) *Sell option credit spreads to strangle the market. Supply and demand factors have pushed the grain markets considerably lower. If you believe supply and demand have reached a better equilibrium and the market will trade in a range for a certain period of time, selling credit spreads may be a way to profit in a sideways market.

Theoretical Example: Sell 1 Dec Corn Call Spread / Sell 1 Dec Corn Put Spread

Leg 1: Buy 1 Dec Corn 4.25 Call (in descending order of strike price)

Leg 2: Sell 1 Dec Corn 4.00 Call

Leg 3: Sell 1 Dec Corn 3.50 Put

Leg 4: Buy 1 Dec Corn 3.25 Put ….….. (Dec Corn options expire 11/21)

(-) Maximum Risk – if Dec Corn goes above $4.25/bushel or below $3.25/bushel at the expiration, then you could sustain maximum losses. In either of those cases, your maximum loss is limited to the difference in strike prices of the options that are In-The-Money, less the premium you received for the “strangle” at the beginning. (Note: selling naked options has potentially unlimited risk.)

(+) Maximum Profit – if Dec Corn stays between $3.50/bushel and $4.25/bushel by option expiration, then you can keep all the premium received when establishing the “strangle.” You can NOT make any more profit than the initial premium received. As the time to expiration decreases, so does the mathematical probability of your options expiring In-The-Money. Options losing value over time is called “time decay.”

2) *Sell a covered put. You may believe the market has more room to fall. Better weather might increase supply and push prices down farther. But eventually you believe prices will be low enough to attract world demand and provide price support. Selling a covered put will help you maintain a net short position while taking advantage of time decay on an option.

Theoretical example: Sell 1 Nov Soybean futures / Sell 1 Nov Soybean 10.00 Put option

(Nov Soybean Options expire 10/24)

(-) Maximum Risk – if Nov Soybeans turns around into a bull market, you will lose on your short futures contract. A soybean futures contract is for 5000 bushels, so a one-cent move equates to $50 in your account. The premium you received from selling the Put Option will provide some relief by raising the break-even price on your short futures position. Ultimately, however, it will not reduce your over all risk. With any short position, there is technically unknown risk.

(+) Maximum Profit – if Nov Soybeans fall below your Put Option’s strike price at the time of expiration, your short Put option will be automatically exercised into a long futures position at the strike price. This will simultaneously offset your short futures position for a profit. In addition, you get to keep the premium you received for the Put option at the outset.

3) *Find a Commodity Trading Advisor with exposure to grains. The process of analyzing markets and choosing your trades can be frustrating and laborious, and that’s before you even take the risk of trading! Having your account managed by a CTA is another way to take the same risk but save yourself time to focus on other things. Call your BROKER and ask for a recommendation.

There are many ways to trade the markets. The above ideas are merely three and not necessarily recommendations. All trading involves risk. A thorough understanding of those risks is necessary before you place any trade. Give us a call to talk more about the opportunities in grains and other markets.

*Note: Transaction costs are a reality of trading, but have not been accounted for in these theoretical trade examples. Commissions have the effect of exacerbating losses and dampening gains. It is essential to know your commission rate whether you trade on your own or your account is managed by a CTA.

Option Disclaimer: Transactions in options carry a high degree of risk. Purchasers and sellers of options should familiarize themselves with the type of option (i.e., put or call) which they contemplate trading and the associated risk. Selling (“writing” or “shorting”) an option generally entails considerably greater risk than purchasing options. Naked options writing involves unlimited risk. Although the premium received by the seller is fixed, the seller may sustain a loss well in excess of that amount. Option buyers should calculate the extent to which the value of the options must increase for a position to become profitable, taking into account the premium paid and all transaction costs.