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santa123 07-29-2009 11:10 PM

Commodity trading - Pls share your experiences
 
Hello IVians,
As we all await our GCs, I thot we can explore some investment vehicles.

Does anyone here have experience with commodity trading?
Can we trade in commodities on H1 or L1 status?
Is it too risky like forex trading?
Who are the online brokers offer commodity trading?
Is there a minimum account balance / trade required every month or so?

Pls share your experience. Thanks!

smisachu 07-30-2009 02:01 AM

Dont even think about it unless you are a quant and have resources that can compete with the Hedge funds. Commodities do not behave like stocks, you need to be able to model prices using multi variate models. Then there is jumps. You should be familiar with jump diffusion/step functions etc. To be able to model these you will need to use a factor model like the Pilipovic model. Even then it will only be an approximation.

Commodities are purchased as futures. Futures are derivatives and you will need to hedge them. A perfect hedge for a future is 1:1 in the spot. Since there is no arb here you will have to use options. To model the price of an option you will have to be a master of Black-Scholes option pricing model or a similar method like monte carlo simulation. Even if you figure all this out you will have to delta hedge. Delta hedging commodity options is very expensive, you will bleed money. Look up Hodges-Nuberger model for delta hedging options on derivatives.

I suggest a book by Daragana Pilipovic called "Energy Risk", buy it and read it. After that if you still feel you can take on hundreds of computers running parallel with teams of quants modelling prices and programs trading algarithimic models; then Good luck!!

Trade stocks as modelling stocks is comparitively easy. Stocks have drift (mu). If you are saturated with stocks look into options and Fixed income. Leave all these complicated stuff to the pros. You have better chance of hitting a jackpot in a casino than making money in trading commodities.


Quote:

Originally Posted by santa123 (Post 567331)
Hello IVians,
As we all await our GCs, I thot we can explore some investment vehicles.

Does anyone here have experience with commodity trading?
Can we trade in commodities on H1 or L1 status?
Is it too risky like forex trading?
Who are the online brokers offer commodity trading?
Is there a minimum account balance / trade required every month or so?

Pls share your experience. Thanks!


reedandbamboo 07-30-2009 02:32 AM

I read this on an investing forum:

old saying in commodities:

"they take the staircase up and the elevator down"

puddonhead 07-30-2009 10:51 AM

Quote:

Originally Posted by santa123 (Post 567331)
Hello IVians,
As we all await our GCs, I thot we can explore some investment vehicles.

Does anyone here have experience with commodity trading?
Can we trade in commodities on H1 or L1 status?
Is it too risky like forex trading?
Who are the online brokers offer commodity trading?
Is there a minimum account balance / trade required every month or so?

Pls share your experience. Thanks!

Commodity trading is probably the most "fundamental driven" (as opposed to being driven by chartists) out of all trading activities I have seen. So theoretically, you are at the least disadvantage in commodities market against the big guys if you know your fundamentals right.

However, the very reason there is less technical trading in that market - lack of liquidity - again works against the average Joe. The most liquid of them - the Crude Oil future in Nymex - has a minimum lot size of 10,000 barrels - worth about $60k now. Any smaller sized derivatives (think of miNY futures etc) - come with significant liquidity or transaction cost penalties.

All in all, I personally think that a rational investor should prefer a market with the following criteria:
1. As much liquidity as possible. A liquid market will make stop loss the least painful. If you are a rational investor - stop loss is your lifeline.
Commodities market is not very liquid. The most liquid market in the world is FX - followed by equities.

2. As little special advantages for the big guys as possible.
The worst offender here is FX. Since these things are not traded in a listed exchanges - the big guys don't have to publish anything other than the bid and ask prices. Talk about a transparent price discovery. :confused: . Commodities market - specially the electricity market - used to have a lot of the opacity which benefited the big guys a few years ago. Some of the recent regulations have done away with much of this. I have personally worked on creating some of these so called "Chinese walls" mandated by new regulations.

That's all of my 2 cents. :)

thakurrajiv 07-30-2009 12:34 PM

Quote:

Originally Posted by smisachu (Post 568059)
Dont even think about it unless you are a quant and have resources that can compete with the Hedge funds. Commodities do not behave like stocks, you need to be able to model prices using multi variate models. Then there is jumps. You should be familiar with jump diffusion/step functions etc. To be able to model these you will need to use a factor model like the Pilipovic model. Even then it will only be an approximation.

Commodities are purchased as futures. Futures are derivatives and you will need to hedge them. A perfect hedge for a future is 1:1 in the spot. Since there is no arb here you will have to use options. To model the price of an option you will have to be a master of Black-Scholes option pricing model or a similar method like monte carlo simulation. Even if you figure all this out you will have to delta hedge. Delta hedging commodity options is very expensive, you will bleed money. Look up Hodges-Nuberger model for delta hedging options on derivatives.

I suggest a book by Daragana Pilipovic called "Energy Risk", buy it and read it. After that if you still feel you can take on hundreds of computers running parallel with teams of quants modelling prices and programs trading algarithimic models; then Good luck!!

Trade stocks as modelling stocks is comparitively easy. Stocks have drift (mu). If you are saturated with stocks look into options and Fixed income. Leave all these complicated stuff to the pros. You have better chance of hitting a jackpot in a casino than making money in trading commodities.

Wow, smisachu summarized the issue in 2 paragraphs !! Great post smisachu.
As smisachu pointed out for futures, forwards or options trading you will be going against the pros. Hedging is also not a static process, it is dynamic which means you need scale(lots of money) to trade. Unless you have lot of money and big heart for loss, it does not make sense to play in those markets. If you really want to try, try playing with options using optionsExpress or some other cheap trading website.
Now fundamental investing is different. Instead of directly playing with commodities you can play commodity stocks which are proxy for the commodity. The issue here is there are a few big players and bunch of small players. Small plays are too risky as most of them have resources outside US. You might be able to play big ones or medium sized ones. Have a look at companies like COP, EAC etc. You might be interested in looking at Canadian oil sands and trust plays.
Let me warn you about the volatility. As covered by smisachu, the pros can manipulate the prices in futures. Futures seem to be affecting spot a lot. Oil prices or any commodity can be very volatilile. So if you can't take 10% swings in days/hours, don't even think about commodity stocks !!
Personally I am long bull of oil and will stay like this in forseable future. I have interesting stories on my boom and bust experiences but that is a good beer talk :).

smisachu 07-30-2009 01:47 PM

You can trade commodities like stocks by taking a directional bet on long term price movement. But this is what you need to consider. Stocks always trade in Spot. If you buy MSFT you own shares of Microsoft today. Although single stock futures (SSF) are available now we will not look at derivatives right now.

Commodities are traded as futures. You can buy Soy futures today for December delivery or lean hogs for dec 2010 delivery.
Under conditions of No-Arbitrage the price of the future will be the price of the spot plus storage and delivery costs. If for example 3 month LSC (Light Sweet crude) is trading on NYMEX at $60; the cost of storage and delivery is say $20 for 3 months. Then 6 month LSC should be trading at $80. But if you look at the contract it might be trading at $55.

The reason being fundamentals. The peak driving season or the hurricane season is over and heating oil season is not yet on us or by looking at weather derivatives traders are factoring in milder winter. The leader of Iran has declared he will step down from office and retire to Hawaii, the rebels in Nigeria have turned themselves in and joined a church missionary..stuff like that.

So you might believe these fundamental assumptions or you might do your own research and say that the traders are wrong and they are discounting critical factors and the price should be more. So you can go long the future and hope for an increase in price and sell the future before delivery for a profit. This is the expensive route but you will never be wiped out for sure. Price of crude may drop but will never go to zero.

Or you trade options on the futures, for example:
Borrow money (leverage) buy the call; short delta units of the future contract and invest the proceeds at the risk free rate.
If you are correct the call will end up in the money, the shorted futures will loose value but since it is “delta” units it is only a portion of the position and the invested money will earn you the risk free rate. So you make some money on the call and loose some on the hedge and net you will profit. (Hopefully to cover the transaction costs and taxes)

If you are wrong (price falls) your call will expire worth less so you are wiped out there, your short will increase in value and you will still earn the risk free rate. So although net you will loose money it will not be as much as a naked call because of delta hedging.

This is explained in very very simple terms. Each transaction step will indicate modeling prices to know if the future is priced correctly, if the option is priced correctly and if the leverage you are getting is correct. Plus modeling future price movements and expected rate of returns and the most primary thing in any transaction the “Alpha”. Source of alpha should be very clearly defined. Let me go a bit deep and include some simple math:

E[R] = Alpha + betaR + epsalon

Where E[R] is the expected return-(see statists for more on expectation functions.)
alphais the excess return
betaR is market return or what the price of the commodity does in the duration chosen. (Market betais 1)
epsalonis error term or un explained return.

(Sorry the greek symbols did not display so I wrote words)

This is a kindergarten model of modeling your alpha. As there are many variables you will use a multi variant model to figure out return. Plus as I said in my previous post you have to model jumps. Jumps are spikes of very short duration which will only be seen in a log normal price distribution. A Gaussian distribution might not be changed much because of a spike of small duration. For example if you are trading electricity and the temperature in NJ hits 110 degrees, there is going to be a spike on that day for electricity prices but this will fall as soon as temperature falls.

And the core issue of all is you need to have access to products as indicated by puddonhead plus money and leverage capacity and risk bearing capacity. As you see this is not for the faint of heart or for some one to do part time. If you are really sophisticated and can do this with good resources, fine or else my advice is stick to stocks or stock derivatives. Hedge funds have teams of quants and super computers sitting and doing this every day. They will vacuum out even the slightest of alpha out there; they will simply take your money if you enter into a wrong trade. If someone is a quant and does this for a living then if his contract allows it or if his licensing allows it legally he can do it on the side but apart from it definitely not something the retail investor should indulge in. Just invest in some ETF like GLD or USO or some commodity mutual funds at the max.

Best of luck!!

johnwright03 07-30-2009 01:51 PM

Awesome
 
Wow...You seem to be a Guru in this field...!!! expert in the lingo too....

Quote:

Originally Posted by smisachu (Post 568059)
Dont even think about it unless you are a quant and have resources that can compete with the Hedge funds. Commodities do not behave like stocks, you need to be able to model prices using multi variate models. Then there is jumps. You should be familiar with jump diffusion/step functions etc. To be able to model these you will need to use a factor model like the Pilipovic model. Even then it will only be an approximation.

Commodities are purchased as futures. Futures are derivatives and you will need to hedge them. A perfect hedge for a future is 1:1 in the spot. Since there is no arb here you will have to use options. To model the price of an option you will have to be a master of Black-Scholes option pricing model or a similar method like monte carlo simulation. Even if you figure all this out you will have to delta hedge. Delta hedging commodity options is very expensive, you will bleed money. Look up Hodges-Nuberger model for delta hedging options on derivatives.

I suggest a book by Daragana Pilipovic called "Energy Risk", buy it and read it. After that if you still feel you can take on hundreds of computers running parallel with teams of quants modelling prices and programs trading algarithimic models; then Good luck!!

Trade stocks as modelling stocks is comparitively easy. Stocks have drift (mu). If you are saturated with stocks look into options and Fixed income. Leave all these complicated stuff to the pros. You have better chance of hitting a jackpot in a casino than making money in trading commodities.


thakurrajiv 07-30-2009 02:02 PM

Quote:

Originally Posted by smisachu (Post 571088)
You can trade commodities like stocks by taking a directional bet on long term price movement. But this is what you need to consider. Stocks always trade in Spot. If you buy MSFT you own shares of Microsoft today. Although single stock futures (SSF) are available now we will not look at derivatives right now.

Commodities are traded as futures. You can buy Soy futures today for December delivery or lean hogs for dec 2010 delivery.
Under conditions of No-Arbitrage the price of the future will be the price of the spot plus storage and delivery costs. If for example 3 month LSC (Light Sweet crude) is trading on NYMEX at $60; the cost of storage and delivery is say $20 for 3 months. Then 6 month LSC should be trading at $80. But if you look at the contract it might be trading at $55.

The reason being fundamentals. The peak driving season or the hurricane season is over and heating oil season is not yet on us or by looking at weather derivatives traders are factoring in milder winter. The leader of Iran has declared he will step down from office and retire to Hawaii, the rebels in Nigeria have turned themselves in and joined a church missionary..stuff like that.

So you might believe these fundamental assumptions or you might do your own research and say that the traders are wrong and they are discounting critical factors and the price should be more. So you can go long the future and hope for an increase in price and sell the future before delivery for a profit. This is the expensive route but you will never be wiped out for sure. Price of crude may drop but will never go to zero.

Or you trade options on the futures, for example:
Borrow money (leverage) buy the call; short delta units of the future contract and invest the proceeds at the risk free rate.
If you are correct the call will end up in the money, the shorted futures will loose value but since it is “delta” units it is only a portion of the position and the invested money will earn you the risk free rate. So you make some money on the call and loose some on the hedge and net you will profit. (Hopefully to cover the transaction costs and taxes)

If you are wrong (price falls) your call will expire worth less so you are wiped out there, your short will increase in value and you will still earn the risk free rate. So although net you will loose money it will not be as much as a naked call because of delta hedging.

This is explained in very very simple terms. Each transaction step will indicate modeling prices to know if the future is priced correctly, if the option is priced correctly and if the leverage you are getting is correct. Plus modeling future price movements and expected rate of returns and the most primary thing in any transaction the “Alpha”. Source of alpha should be very clearly defined. Let me go a bit deep and include some simple math:

E[R] = Alpha + betaR + epsalon

Where E[R] is the expected return-(see statists for more on expectation functions.)
alphais the excess return
betaR is market return or what the price of the commodity does in the duration chosen. (Market betais 1)
epsalonis error term or un explained return.

(Sorry the greek symbols did not display so I wrote words)

This is a kindergarten model of modeling your alpha. As there are many variables you will use a multi variant model to figure out return. Plus as I said in my previous post you have to model jumps. Jumps are spikes of very short duration which will only be seen in a log normal price distribution. A Gaussian distribution might not be changed much because of a spike of small duration. For example if you are trading electricity and the temperature in NJ hits 110 degrees, there is going to be a spike on that day for electricity prices but this will fall as soon as temperature falls.

And the core issue of all is you need to have access to products as indicated by puddonhead plus money and leverage capacity and risk bearing capacity. As you see this is not for the faint of heart or for some one to do part time. If you are really sophisticated and can do this with good resources, fine or else my advice is stick to stocks or stock derivatives. Hedge funds have teams of quants and super computers sitting and doing this every day. They will vacuum out even the slightest of alpha out there; they will simply take your money if you enter into a wrong trade. If someone is a quant and does this for a living then if his contract allows it or if his licensing allows it legally he can do it on the side but apart from it definitely not something the retail investor should indulge in. Just invest in some ETF like GLD or USO or some commodity mutual funds at the max.

Best of luck!!

Again a great post. Just want to comment that be careful with ETF's too. Most of the ETF's are not physical commodity holders. They play in futures and OTC swap markets.
I have looked hard to find ETF's or MF's fwhich are pure commodity holders e.g gold, silver etc.I still have not found good ones. The closest I could get was some portfolio of mix of real assets and futures. Most of the ETFs are again leveraged and kind of trap for average investors.
There are a few hedge funds or big funds which might offer pure plays but those tend to have huge entry investment requirement basically making them inaccessible to individual small investors.

vin13 07-30-2009 02:47 PM

Is this related to immigration?
 
There can be several things that we want to discuss and share. But isn't this platform supposed to be for immigration? If we start discussing about Best phone cards, airtickets to india, jokes, unrelated politics etc., we will soon loose the purpose of this website and forum.

If many senators, attorneys, other aides visit this website and can find all this unrelated posts, we loose the seriousness and focus we would like to address.

Maybe core team can evaluate and see if they want to create a special section for general discussion that does not show on the front page. Just a suggestion.

This is not an attack on any individual.

thanks

smisachu 07-30-2009 02:52 PM

LOL, Thanks but I am light years away from being a Guru. I am just a student (Shishya).

Commodities are not my strength I am better with Options, credit Derivatives and synthetic credit products but again nowhere as good as the really quant traders out there.

Quote:

Originally Posted by johnwright03 (Post 571134)
Wow...You seem to be a Guru in this field...!!! expert in the lingo too....


smisachu 07-30-2009 03:01 PM

I am not endorsing any fund or product. You have to do your own research and you have to figure out your own risk appetite- Disclaimer

Superfund is a hedge fund which has two funds of managed futures. Its enrty was $5K last time I checked. But again in a hedge fund you typically pay 2 & 20. That means 2% maintenance and 20% off the profits and there is huge down side risk where your entire investment can be wiped out. Tread carefully!!

Quote:

Originally Posted by thakurrajiv (Post 571182)
Again a great post. Just want to comment that be careful with ETF's too. Most of the ETF's are not physical commodity holders. They play in futures and OTC swap markets.
I have looked hard to find ETF's or MF's fwhich are pure commodity holders e.g gold, silver etc.I still have not found good ones. The closest I could get was some portfolio of mix of real assets and futures. Most of the ETFs are again leveraged and kind of trap for average investors.
There are a few hedge funds or big funds which might offer pure plays but those tend to have huge entry investment requirement basically making them inaccessible to individual small investors.


rksaigal 07-30-2009 03:11 PM

Share a thought
 
What would you recommend to enter this field on a long term basis and to supplement one's income?

maheshmail 07-30-2009 03:42 PM

for options trading...is there any site you will suggest which provides daily alerts???

thakurrajiv 07-30-2009 03:53 PM

Quote:

Originally Posted by sachug22 (Post 571227)
NYSE:GLD : SPDR Gold Trust holds physical gold
NYSE:SLV : iShares Silver Trust, the assets consist primarily of silver held by the custodian on behalf of the Trust.

SLV profile in yahoo mentions it tries to hold instruments to match SLV performance.
GLD claims physical gold holding in their profile. There is not holding detail on yahoo finance.
It will be interesting to dig into their actual portfolio holdings. But I agree that these are probably the closest instruments on gold and silver price play.

thakurrajiv 07-30-2009 03:57 PM

Quote:

Originally Posted by maheshmail (Post 571639)
for options trading...is there any site you will suggest which provides daily alerts???

I have optionsexpress account which is cheap way to trade in options. I have not looked into alert features.
You should be able to look up option prices from most of the electronic brokers. I have used tdameritrade and optionsexpress.

smisachu 07-30-2009 04:08 PM

Quote:

Originally Posted by maheshmail (Post 571639)
for options trading...is there any site you will suggest which provides daily alerts???

Many sites. What kind of alerts are you looking for? Vols? Greeks? You can also customize most of the alerts depending on spreads you might be trading. This is possible even in simple option accounts with Level 4 approval.

Keeme 07-30-2009 04:13 PM

Quote:

Originally Posted by smisachu (Post 571731)
Many sites. What kind of alerts are you looking for? Vols? Greeks? You can also customize most of the alerts depending on spreads you might be trading. This is possible even in simple option accounts with Level 4 approval.

You seems an expert in this option trading. How about microcap stock trading ?

smisachu 07-30-2009 04:36 PM

Quote:

Originally Posted by thakurrajiv (Post 571684)
SLV profile in yahoo mentions it tries to hold instruments to match SLV performance.
GLD claims physical gold holding in their profile. There is not holding detail on yahoo finance.
It will be interesting to dig into their actual portfolio holdings. But I agree that these are probably the closest instruments on gold and silver price play.


Both these ETF's have huge loop holes that are well known in the pro circles. The very question that they are holding physical gold or silver is highly questionable considering the market cap of these ETF's. There is risk that they will not perform like the underlying at all.

The custodians of SLV is JPM who usually has a huge short position on Colmex silver and GLD is HSBC who has a huge short position on gold. Read this article for more info.

Are GLD and SLV Legitimate Investment Vehicles? -- Seeking Alpha

Again this goes to my point that trading commodities is not as straight forward as it seems even in plain and easy instruments.

smisachu 07-30-2009 04:41 PM

Quote:

Originally Posted by Keeme (Post 571778)
You seems an expert in this option trading. How about microcap stock trading ?

I am not a chartist or day trader if that is what you want to know. I have worked in high frequency Stat-Arb trading which also does micro caps sometimes.

awenger 07-30-2009 05:28 PM

Quote:

Originally Posted by santa123 (Post 567331)
Hello IVians,
As we all await our GCs, I thot we can explore some investment vehicles.

Does anyone here have experience with commodity trading?
Can we trade in commodities on H1 or L1 status?
Is it too risky like forex trading?
Who are the online brokers offer commodity trading?
Is there a minimum account balance / trade required every month or so?

Pls share your experience. Thanks!

Why / How is this relevant in an immigration forum?

northstar 07-30-2009 05:46 PM

Quote:

Originally Posted by thakurrajiv (Post 571685)
I have optionsexpress account which is cheap way to trade in options. I have not looked into alert features.
You should be able to look up option prices from most of the electronic brokers. I have used tdameritrade and optionsexpress.

Does optionexpress platform provide any special advantages related to option trading in terms of strategy analysis etc? I have etrade and I am not sure if i am missing anything

kosb 07-30-2009 06:18 PM

Plenty of sites.. to discuss this stuff. Lets keep this forum only for immigration related issues.
You can go to Online Coupons | Cash Back - FatWallet.com (Finance forum) or bogleheads forum to discuss specifics.

thakurrajiv 07-30-2009 06:23 PM

Quote:

Originally Posted by northstar (Post 572162)
Does optionexpress platform provide any special advantages related to option trading in terms of strategy analysis etc? I have etrade and I am not sure if i am missing anything

It is the cost. I think optionexpress charges 9.99 flat fee for any number of contracts. Most other well known brokers will charge some flat fee + per contract fee.
When I researched this is the cheapest I could find for individual options trading.

maheshmail 07-30-2009 06:26 PM

Quote:

Originally Posted by smisachu (Post 571731)
Many sites. What kind of alerts are you looking for? Vols? Greeks? You can also customize most of the alerts depending on spreads you might be trading. This is possible even in simple option accounts with Level 4 approval.

I have level 3 (spread) approval from TD. I am looking to get trade signals like Zacks for Options.

thakurrajiv 07-30-2009 06:27 PM

Quote:

Originally Posted by smisachu (Post 571869)
Both these ETF's have huge loop holes that are well known in the pro circles. The very question that they are holding physical gold or silver is highly questionable considering the market cap of these ETF's. There is risk that they will not perform like the underlying at all.

The custodians of SLV is JPM who usually has a huge short position on Colmex silver and GLD is HSBC who has a huge short position on gold. Read this article for more info.

Are GLD and SLV Legitimate Investment Vehicles? -- Seeking Alpha

Again this goes to my point that trading commodities is not as straight forward as it seems even in plain and easy instruments.

I agree. These ETFs are too risky. With so many pros in the game nothing is easy nowadays. As you had mentioned in one of your post, the market for individuals is as close to gambling as it gets.

vactorboy29 07-30-2009 06:35 PM

I trade UYM and SMN for materials.Dont hold these ETF for long .But if you know what is happenning arround then you can make decent money in sort time.Caution these are 2 x leverage ProShare ETF needs close reading of index.

vin13 07-30-2009 06:44 PM

Is this Immigration related?
 
Quote:

Originally Posted by santa123 (Post 567331)
Hello IVians,
As we all await our GCs, I thot we can explore some investment vehicles.

Does anyone here have experience with commodity trading?
Can we trade in commodities on H1 or L1 status?
Is it too risky like forex trading?
Who are the online brokers offer commodity trading?
Is there a minimum account balance / trade required every month or so?

Pls share your experience. Thanks!

This is not related in any way to Immigration.

smisachu 07-30-2009 07:51 PM

Quote:

Originally Posted by thakurrajiv (Post 572343)
I agree. These ETFs are too risky. With so many pros in the game nothing is easy nowadays. As you had mentioned in one of your post, the market for individuals is as close to gambling as it gets.

If you cannot make trading your profession then Invest don't trade. Or trade options where you don't have to watch tick by tick.

Hey guys who are scolding us that this is not related to immigration- Common cut us some slack. Can we discuss just immigration 365 days when we are the only ones doing it and policy makers dont care about us? We will go nuts doing it. What is the harm if we all discuss other stuff. Maybe there could be a seperate thread or something for discussing non immigration stuff. As a community we should be able to discuss and share other stuff than just our frustrations.

saketh555 07-30-2009 08:13 PM

Atleast you are taking a break from immigration.
Try onlinetradingacademy, offcourse they are expensive but heard its worth if you wanna be trader but do DD before making a decision.
I do swing trade and my portfolio consists only biomedical stocks which are around couple of bucks(can't efford more than that):D.

wantgc23 07-30-2009 08:27 PM

Quote:

Originally Posted by smisachu (Post 571914)
I am not a chartist or day trader if that is what you want to know. I have worked in high frequency Stat-Arb trading which also does micro caps sometimes.

smisachu,

Where can one learn about high frequency trading ? Can you suggest books that mathematically model various instruments price movements such as stocks, options and futures ?

Thanks in Advance!

northstar 07-30-2009 11:02 PM

So what?
 
Quote:

Originally Posted by vin13 (Post 572433)
This is not related in any way to Immigration.

Not related, correct! - That's why he posted under 'Interesting topics' where many other non-immi topics are discussed. Those who are not interested will choose not to visit the thread by looking at the subject line.

smisachu 07-31-2009 01:12 AM

I replied but it did not get posted so here it goes again.

By asking me to recommend books you are signing up for trouble.;)

I will list in the order of mathematical knowledge to stat arb and high frequency trading and building your own model based trading platforms.

A good starting point for any financial engineer are these two books from my Professors.

Principles of Financial Engineering- Neftci

Benchmark approach to quantitative finance- Platen - this is very academic.

For practical quant knowledge:

Paul Wilmott on Quantitative Finance
Tools for Incomplete Markets, 2nd Edition Ales Cerny
Quantitative Financial Economics, 2nd Edition Cuthbertson

Now for High frequency and stat arb:

High Frequency trading- Aldridge
The econometrics of sequential trade models- kokot
Staticall arbitrage- pole
Building Automated Trading Systems: With an Introduction to Visual C++.NET - I have personally not red this one as I am not a code writer/programmer but programmers I know say this is very good.

Applied quantitave methods for trading and investments- Dunis

I also recommend reading Volatility trading- Sinclair. Good book for options

I can go on and on but I thing this should keep you busy for a couple of years:D

Quote:

Originally Posted by wantgc23 (Post 572886)
smisachu,

Where can one learn about high frequency trading ? Can you suggest books that mathematically model various instruments price movements such as stocks, options and futures ?

Thanks in Advance!


bitu72 07-31-2009 03:53 AM

system development
 
smisachu and other gursus,

wonder if you guys have found any good trading strategy using options.

having you tried doing system development.

something as simple as buying etfs when rsi2 is below 2 or in other words its beaten down and you are expecting a turnaround.

would like to know if playing options on such short term( 1to 5 days) would generate profitabloe results or not.

do you guys mind sharing some ideas

geesee 07-31-2009 12:42 PM

smisachu and all other gurus above -
how do you guys manage to do options/commodities/fx trading without missing prod release? :) you all seem to have lot of knowledge about all this stuff and its good to learn something new (although one like me need to google to understand what smisachu is saying :D)
I invest in stocks and etfs but am very impatient when it comes to maximize profits.. i like to take small small profits (5% to 7%) instead of one big kill.. btw, can someone suggest good REIT etfs? (sorry, not related to original commodities topic)

puddonhead 07-31-2009 02:39 PM

For all the non-financial enginners who are trying to make sense of financial jargons (like myself - no financial enginnering degree for me but I have worked as a quant for some time in between):

Any time you are trading something - you are betting on the direction of "something". Smisachu - with his statistical arbitrage background - would probably like to vehemently disagree at this point. But please hear me out first.

If you are buying a stock - you are betting that the price of the stock will increase. If you are not sure whether prices will increase or decrease - but still sense some bubble forming, then you know that at the top of the bubble and duing the bust phase - the volatility goes through the roof. Maybe it is time for some option trading to trade on the volatility. So you are now trading on the volatility instead of the price.

If you become even more of a pro option trader - and you think that the market always undervalues out of money options (because human brain is not capable of anticipating the "black swan" events) - then you will buy out of the money options for pennies and will hope that you "poo like a chicken and eat like an elephant". The directional bet you are taking in this case is again on the vol increasing over a longer period of time.

If you are into statistical arbitrage - you have your own gold standard, usually some mathematical model, of how a specific market should be priced. If the market price differs from this - then you enter into a trade to make money when eventually this anomaly reverses.

Volatility is the second order "statistical moment" of the price. These, and other derived quantities (are usually termed as greeks in the trading perlance) - but if you are good in statistics - then you could think of all of them as statistical moments and formulate your whole mathematical model on that. There are ways you can formulate strateties to trade even higher order derivatives.

The basic fact that you are betting on the direction of "something" is often lost on even some professional traders - leading to some wonderful illusions of risk free return (like perpetual motion machine).

To be fair - there are some trading strategies which appear very simple and intuitively appealing - yet produce extremely complex mathematical results when you try to find out exactly which "something" you are taking a directional bet on.

So if you want to trade - I think a good idea is to first find out what is this "something" that you will like to bet on. Alternatively, if you have any strategy - please first understand what kind of direction bet you are taking - and the risks associated with it.

Any thoughts?

P.S.: "Directional bet" is a dirty work in trading perlance. I used it intentionally for effect.

smisachu 07-31-2009 02:54 PM

bitu72
I quite do not get what you are asking. You want to know if buying a call on an ETF that has had a drawdown with an expiration of less than 15 days will be profitable?

There are various option strategies and I usually trade spreads as the most basic strategy. I rarely if ever buy just calls that too with such low theta (<15 days). I usually trade 4 legged spreads like the butterfly, iron condor or at least bull/bear calls/puts.
Most of the time I am long vol (vega) with a strip strap or straddle. Sometimes I am short vega but hedge it with an exotic like a digital, or binary on the vix. I always go for optimal delta hedge and often construct synthetics. Never plain vanilla calls and puts unless I am hedging something else in a different universe with an option.

If you can explain better what your strategy is I can make comments. If possible clearly state the greeks on the strategy so I can visualize it.


Quote:

Originally Posted by bitu72 (Post 574855)
smisachu and other gursus,

wonder if you guys have found any good trading strategy using options.

having you tried doing system development.

something as simple as buying etfs when rsi2 is below 2 or in other words its beaten down and you are expecting a turnaround.

would like to know if playing options on such short term( 1to 5 days) would generate profitabloe results or not.

do you guys mind sharing some ideas


smisachu 07-31-2009 02:58 PM

LOL, Sorry about the jargon but it is derivatives, high freq, stat arb and options we are talking about. We can talk about stocks all day and I promise not to use math.:D

I partially work in the field plus studying too. And I am not in IT so I dont have to worry about product releases etc:D:D

Quote:

Originally Posted by geesee (Post 577202)
smisachu and all other gurus above -
how do you guys manage to do options/commodities/fx trading without missing prod release? :) you all seem to have lot of knowledge about all this stuff and its good to learn something new (although one like me need to google to understand what smisachu is saying :D)
I invest in stocks and etfs but am very impatient when it comes to maximize profits.. i like to take small small profits (5% to 7%) instead of one big kill.. btw, can someone suggest good REIT etfs? (sorry, not related to original commodities topic)


bitu72 07-31-2009 04:13 PM

smisachu,

here is what i have figured out in last 4 year and i have been to various blogs.

1. i have read various blogs all are saying trading options with all good stuff you can hardly make any money. Most of the term you have used i have some idea what its is , but havent studied it properly.

2. trading is gambling- you can have some edge by stastical analysis what have performed well over a long time. so backtest u r system over 10 years.

3. would like to know what kind returns are you targeting with options

4. spreads can be an way to go ..but has to be directional bet or else difficult. I have seen lot of iron condor guys breaking down in recent melt down and up.

5. so i kind of believe in hit and run and momentum play - what else can make you money where nothing is certain

6. buying when rsi2 is depressed and selling quickly - can be spread havent back tested it.
i backtest using stockfetcher. but u cant backtest options, you have to manually do it. itried some using think or swim platform.

so i am trying to see if anybody else has any good strategy to share.

smisachu 07-31-2009 04:31 PM

Very well said!!

[quote=puddonhead;577704]For all the non-financial enginners who are trying to make sense of financial jargons (like myself - no financial enginnering degree for me but I have worked as a quant for some time in between):

Again sorry for the jargon but the topic is such that it requires some technical terms. Although I dont think these are jargons; they are in fact the only terms out there. Jargon is what BA's use. :D

Any time you are trading something - you are betting on the direction of "something". Smisachu - with his statistical arbitrage background - would probably like to vehemently disagree at this point. But please hear me out first.

I wandered into stat-arb by chance, not married to the concept. I think high frequency stat arb is high tech front running. This will be the next biggest blow out according to me.

If you become even more of a pro option trader - and you think that the market always undervalues out of money options (because human brain is not capable of anticipating the "black swan" events) - then you will buy out of the money options for pennies and will hope that you "poo like a chicken and eat like an elephant". The directional bet you are taking in this case is again on the vol increasing over a longer period of time.

I read Nassim Taleb here. His hedge fund bled for 20 years buying deep out of the money options and finally in 2008 made 156% or so.

If you are into statistical arbitrage - you have your own gold standard, usually some mathematical model, of how a specific market should be priced. If the market price differs from this - then you enter into a trade to make money when eventually this anomaly reverses.

If anyone can withstand the terminology I can post some stat arb ideas. I gave it to another member who had PM'd me.

Nice post

smisachu 07-31-2009 07:00 PM

Quote:

Originally Posted by bitu72 (Post 578169)
smisachu,

here is what i have figured out in last 4 year and i have been to various blogs.

1. i have read various blogs all are saying trading options with all good stuff you can hardly make any money. Most of the term you have used i have some idea what its is , but havent studied it properly.

There is no silver bullet that will make money all the time. If some one says so he is lying. Options can give you a chance to minimize risk but also cap profits. And you can be wiped out in options routinely. However in stocks it is a rare event when your stock goes to zero.

2. trading is gambling- you can have some edge by stastical analysis what have performed well over a long time. so backtest u r system over 10 years.

Trading is most certainly gambling, even fixed income. You can build a model and hedge to reduce risk and make it a calculated gamble but still a gamble..

3. would like to know what kind returns are you targeting with options

Most professional option traders generate income by writing options. Writing options are very risky as you have a theoretical loss probability reaching infinity. Forming synthetic positions will minimize risk but you might bleed hedging the position. A seller of option is long theta and short delta; a buyer of options is short theta and long delta. Think of theta as the time factor and delta as the hedge factor to put simply. If you sell a call option you have to hedge the option by buying delta units of the underlying stock. And when the call is at the money or near you will end up buying the stock high and selling the stock low, thus loosing money. Black and Scholes famously showed that in an option trade you can delta hedge the risk away. This is not possible and their model is flawed. But it is simple and intuitive and every one serious in trading options NEEDS to learn the model. You don’t have to know the derivation but just the model, and the partial differential equation. I can talk about the flaw and the smile and smile dynamics but many of these concepts need to be drawn out and very hard to explain with out drawing.


4. spreads can be an way to go ..but has to be directional bet or else difficult. I have seen lot of iron condor guys breaking down in recent melt down and up.

Any model will work only for certain duration. That is why you need to keep running it and that is why quants have jobs. In stat arb sometimes you run models 3 times or more a day. I mean complicated mathematical models getting data from a provider and running large data sets to find the mean. And then trade when the stock diverges from the mean.
Each strategy or model has shelf life, so you need to keep researching and running new models.

Spreads are a good way of limiting down side while also capping upside. Volatility spreads are the most profitable ones and again short straddle makes money almost 95% of times but the 5% when they loose they will loose big. You need to have a certain limiting conditions and then hedge the spread with in this range. Usually you will make a little or loose a little. Sometimes you will hit a home run. It is easy to show this on a graph


5. so i kind of believe in hit and run and momentum play - what else can make you money where nothing is certain

I don’t trade momentum, swing or technical indicators. But there are profitable traders who do this.


6. buying when rsi2 is depressed and selling quickly - can be spread havent back tested it.
i backtest using stockfetcher. but u cant backtest options, you have to manually do it. itried some using think or swim platform.

Relative strength Index, McClellan RSI(2) and Oscillators can be an indicator of stock movement. Relating it to the option market is abstract but I think possible. But I feel the options will already be priced in for such potential movements in the underlying. A very good quant I know always says any new strategy will first manifest itself in the derivatives market before equity as the players there are much more sophisticated.

I am not sure which retail trading platform has good back testing, try options first with scottrade. I use Bloomberg which has loads of functions like OVME-GO where you can back test , simulate and see the volatility surface
.


so i am trying to see if anybody else has any good strategy to share.

There are many good strategies but I have no idea on sophistication of each individual. For example right now you can sell credit default swaps on Goldman sachs medium senior secured notes and hedge it with delta units of binary in-the-money call options on the VIX. This will give you synthetic exposure to the notes with steady cash flow and the binaries are cheap. If goldman defaults the VIX will sky rocket giving you a handsome payout better than what you will have to pay on the senior secured notes because of high recovery rate if all the default climbs up to the senior tranche. Actually this would be equal to the end of the world in today’s market.

Or better yet just buy SPX and sit, the market is doing all the work for you.

The US natural gas market is in contango (I swear this is not jargon:o, there is no other term). So buy long dated/leap calls at the money now. In 2 years you will be so deep in the money you wont know what to do. But average retail investor cannot hedge this as he cannot trade spot.

So I guess my point is there are sophisticated ways to make money for which the average retail investor has no access to. If there is a simple way then it has already been exploited under the no-arbitrage clause of free markets.

If you have 2-5 year horizon. Go long the market and sit on it would be my best advice. If people want to meet and share ideas I am open to it. I live in NJ so NY/NJ is fine spot to meet.


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