Commodity Trading

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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.

IV Discussion Links

  1. Commodity Trading Experiences
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