When you say you've wanted to be long ethanol for quite some time, does that mean this is a position you intend to hold for a while (assuming it doesn't hit your stop)? Or do you have a short term target? Also do you always only trade 1 unit (of whatever size) or do you scale in and out? (apologies if I've asked about position sizing before)
Ethanol at an interesting juncture. Just had a quick look at an Ethanol chart and it's coming to an interesting juncture. Two big bullish candles posted on the 14th and 15th of February on large volume followed up with some sideways consolidation and then a very bullish hammer candle finishing just under 1.50. Planning to take a 1 unit position long on this just because I like the price action and the way it's built up from the lows around 1.35 an expectation that will probably see a pop through the 1.50 level. That should probably some buffer to the initial trade with a likely expectation that the market will drift back towards 1.50 and either confirm the break or fail and stop me out. There were quite a few false breaks from October 2016 to October 2017 before the price finally broke through to the downside. That seems to have been exhausted for now. Also on the previous occasions where the price has found a floor around 1.2950, the price has rallied twice before to 1.72+ as shown on the chart. trade brought to my atttention by @TraDaToR. I like the price/volume action so i'm going to have a go.
I was typically looking for a 1 week to 1 month move. Not just the reaction to the initial report. For outrights, I don't scale in and out but for spreads, I do scale out when I feel the potential of the market to go parabolic. By the way, yesterday's EIA ethanol numbers were fun to watch. At the release, it immediately ticked up then some large offers appeared. Someone was willing to sell because the production had increased. But an other guy realized that even with the production increase, the stocks decreased which meant demand was even higher. He took the big offers and the market went up. Hard to trade but logic in hindsight...
You see that April 2014 spike? This was my worst 1 day loss ever. I wasn't trading ethanol actively at the time, but with all the action, I started to scalp it at the end of March. At beginning of April, I was trading bigger size when all my bids were taken simultaneously. The market immediately disappeared and I was instantly confronted to some 30+ ticks spread falling down. I managed to cancel a few other orders before they were taken. After the first day, I closed 2/3 of my positions at market which is something a scalper rarely do in such an illliquid market. this was one of the best decisions I made. It took 1 month to recover the losses...
Question for the Ag traders here: Do you find that the softs and grains have limited downside potential as price begins to settle near multi-year lows? The thought being that as store-able, but more perishable than other commodities (CL, NG, GC, etc) and they are part of a fully mature supply chain for agricultural and consumer marketplaces, so there is essentially a price floor for these items that is very unlikely to be penetrated with velocity to the downside? The KC chart for instance. Is there a structural element that will prevent it from dropping below the 110 - 120 price zone rapidly?
I do my best at very long term commodities, I have smaller amount of funds allocated to commodities cause of margins requiring less than stocks and intra-day scalping and yet most years make more than the other instruments or timeframes. I don't do nearly as well when world says something is in a trend, let's face it more companies do better by screwing others during trending declared markets. I do less when commodities are stuck in middle of 9 year ranges are only times scalping and or stocks do better. I use 9 year percentage extremes and work at finding the extremes, have to be patient and get use to many losses and why I hedge, but it like anything else, it is a system, a set of rules. Compared the grains and less so of the softs, grains when government announced forgotten when, of making corn into Ethanol, it dragged all the grains up and they not gone back to old levels. So the answer to your question, prices can go much further down, you ever expect crude oil to go to 147 then 32.40 over ten years ago and recent nine years of 114.65 and 26.05?, breaking of 32.40 cost retail and commercials hugely, but it is likely anything else in the markets last dozen years of having most quants develop systems and have no clue of history, and history will always repeat. I know many prefer to use their brain to formulate when you get in various spreads or outrights, I can't test that well as there way too many unknown parameters and lack of truly timely information, so never could trade this way. But have methods that trade reports but not for long term but minutes. I liked the Ethanol last July when open interest dropped like a rock telling me commercials bought the product, but knew better of waiting for retail and commercials to get royally screwed and hit the stops, I know better cause all the times I was on the end of being royally screwed in low volume markets. There is simple no way am going to trade Ethanol futures cause lack of volume and no options, so instead I trade GPRE and they give great divergences and I can hedge. KC, Cash is much higher, and I have tried finding few major attempts in last few years since late 2013, am long again/hedged and deep concern when markets might slam the stops and market will really tank between 90-100, heavy trendline on the monthly, and what was once a solid support.....let's screw the retail. Volume is way up which tells I am siding on "let's roll em" and down Humpty Dumpty will fall, but heavily hedged.
Thanks for the detail @Handle123 there are a couple of things I didn't understand and wanted to ask about. Can you explain the link between the drop in open interest and the commercials buying it? Does that mean buying the physical ethanol product? If so what would be the combination of events / trades that the commercials would be doing in practice? Sorry for the basic questions, just want to draw the right inference. Also the 'volume is way up' - so you mean that everyone that is long in an uptrend or short in a downtrend is already in their position so they are actually pretty fragile and it would only take a small bit of volume in the opposite direction to see a heavy reversal? Finally a question about your position so the cash is much higher then the futures would normally employer backwardation to my way of thinking so is that correct and is that one of the reasons why you are long? Also when you refer to being heavily hedged do you mean that you're out right position is hedged with some sort of explosion hedge ? So if you are long the futures you are also long some deep out of the money puts? Or do you have some exposure to the underlying physical?
Right they are buying physical and closing out or taking delivery of futures, and be shorter term storage, when I was up North in Nebraska, and Midwest northern states they seem more into Ethanol and having extra pumps to have blend of fuels and Ethanol added. I am not a commercial, am a chartist, have friends in the industry but once they start talking numbers, I phase out, I only for most part discuss what the charts are showing me. <<Also the 'volume is way up' - so you mean that everyone that is long in an uptrend or short in a downtrend is already in their position so they are actually pretty fragile and it would only take a small bit of volume in the opposite direction to see a heavy reversal?>> My take has been when prices start going up so should volume but not necessary open interest, as shorts closing out and more taking other side for small confirmation of it not going down, and strict traders thinking a rally to sell, will be waiting to sell higher. Well, am not long Ethanol futures cause no options, risk way too great for me, I stopped trading outrights without hedges in the 90s cause my style long term is very risky without hedges. Am long for the Ethanol is in the percentage of being low of the 9 year range, I do this method in over 50 instruments, I am going to eventually nail the highs/lows of every futures market unless no options. The stock of GPRE pretty much follows Ethanol and if you get a chart of it, when Ethanol is near the bottoms the GPRE is not, so a divergence, cash is higher, so those who have it expect futures to rise and if you look at further out the futures rise, not that concerns me in the least. If this was Corn, I'd be a certain percentage beyond 1 for 1, meaning so many Put options for one contract of Corn, and have close to zero risk at a cost as I do ATM puts. Matter of fact, I often lose in the futures positions from 85 to 95% of the time, cept in this case using GPRE/hedged, but regardless, I almost hope they take a drop in at least 7 tries, take the loss in futures or stock and Put options recovers the loss and system controls the risk management of when to start getting out of the options and taking profit on what most consider a losing trade. Nothing losses forever, and I do have a target to dump 10% of the lot to recover the hedge. I wouldn't know what to do with the physical, don't own storage or refinery, friends do, but that a whole lot of work I know little about.
When we're talking about softs one needs to be keeping the London markets in mind. That goes for London cocoa, white sugar, and robusta coffee (all ICE EU) to use as a cross-check for projections and general correlation. CC for instance is a USD denominated contract but cocoa is traditionally traded in GBP hence CC itself is fairly correlated to the performance of GBP (not 100% but the correlation is there) and the phys markets still revolve around London. London Cocoa: Cocoa arb: