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Get Metals and Energy Exposure with emiNY and Mini contracts.

September 18, 2006

 

E-mini contracts, especially the popular e-mini SP, have been in individual system trading portfolios for years, in many ways becoming even more popular amongst investors than its full size counterpart because of the lower risk and ease of entry and exit on the highly reliable GLOBEX platform. These same attributes that have e-mini stock futures so popular are now creeping into other markets such as the energy and metals markets and opening up new opportunities for multi-market trend following systems which monitor those markets.

For investors with less capital or perhaps just a lower appetite for risk, electronic e-mini contracts are starting to make more and more sense in what have traditionally been high risk markets - but there is also the argument of less slippage in the electronic version of these long time pit traded markets.

Less Risk, better liquidity:

The "new" mini contracts in energies and metals differ in their relationship to the full-size contract across the various markets. Unlike a food label that reads “reduced fat” which specifically requires that a food contain 25% less fat than the original product, the term “mini” in futures has no standard conversion value to the full-size contract - meaning the energy and metals minis aren't necessarily 1/5 the full size value as they are in stock index futures.

For example, EmiNY Crude is valued at half of its full-size counterpart at $500 per full point, while EmiNY Natural Gas is valued at a quarter of the full-size contract or $2,500 per full point. Likewise, mini Gold on the eCBOT platform is valued at one third of the full-size Gold contract traded at the COMEX in New York or $33.33 per point, while mini Silver shares the same platform as mini Gold but is valued at one fifth of the full-size silver or $10/cent. Note that the difference in spelling has to do with the various trademarks from different exchanges where the products clear. Examples are E-mini at the CME, emiNY at the NYMEX and mini at the CBOT.

The result of all this is the chance to participate in higher risk markets with between 1/2 and 1/5 the risk. Take the recent plunge in Natural Gas prices - the initial risk to take 1 contract of full-size Natural Gas was in excess of $10K for most long term systems due to the large daily ranges and volatility. Investors utilizing mini contracts could have shorted one contract of the emiNY Natural Gas at a risk of just $2,500 and would still be reaping the benefits from this historic move.

Additionally, mini contracts are constantly gaining in daily volume and in turn making for better liquidity. Crude oil is a highly liquid market to begin with, but is arguably more liquid in the emiNY Crude thanks to a smaller minimum move of $.005 vs. $.01 in the full-size. On first glance that may not seem like much of a difference, but considering that pit-traded Crude Oil typically trades in $.05 increments it often has a much wider market as noted in the difference between the bid and the ask at any given time. Add to that the fact that fill reporting is instant and contracts are cash settled leaving no potential delivery issues, additional costs, etc…and you have a good case for trading the minis in today’s current market conditions.

The advantages:

At face value, choosing to trade the mini version of either of these markets makes sense to the more conservative system investor. Lower point value = lower risk especially when holding positions overnight as most long term system investors do. However, after digging a little deeper we have found another “hidden” benefit of including e-mini contracts in a long term trend following portfolio, and that attribute is increased diversification.

To understand how trading e-mini energies can improve portfolio diversification it is important to understand how long term trend following systems issue trades. Each time a long term system enters a trade it also issues a risk value that corresponds with current market conditions. When market conditions are calm or in slower markets like Corn and Wheat the typical entry risk is around $1000 per contract, i.e. the system will risk up to $1000 before closing out the trade. As you might expect as market conditions become more volatile the risk on each trade increases as well, sometimes as a high as $10,000 per contract! Obviously the average investor will not (and should not) risk this much capital on one single trade. System developers know this as well and most recommend a cap risk at $3000k or $4000k per trade in hopes of preserving capital and decreasing volatility.

For example let’s assume that you are an average investor trading the Aberration starter portfolio of corn, live cattle, cotton, sugar, palladium, the dollar index, 10 year notes, and crude oil. This well rounded portfolio provides exposure to each of the major commodity and financial sectors and we will cap the risk per trade at $3,000 per trade as the developer recommends. Now, before moving too far along, what if I told you that one of the commodities in this well rounded portfolio has not traded in three years, effectively reducing your market diversification by 15%! Would you still be as interested in trading this starter portfolio? Wait, before you answer, you should also know that most profitable and trendy market is the one that has not taken a trade since 2003. Are you still confident in the portfolio selection? Of course not, and neither would I.

Obviously, the market we are discussing is crude oil and the reason Aberration has not taken many trades is not because crude oil hasn’t been trending higher (and lower recently). Rather the risk on each trade has been in excess of $3,000 causing the system to skip the trade and limit each investor’s exposure in this market not to mention the overall diversification of this portfolio. However, if we include the option to trade e-mini contracts when system risk is over $3000 Aberration has traded 9 times since the last full size trade in 2003.

Some negatives:

There are a few negatives to implementing mini contracts you should be aware of. . Long term programs use the full-size contracts to issue signals and while it’s fairly easy to enter into new trades by using market orders on the open of the pit session it is more difficult to follow stops in the market. Using mini Gold as an example, a program might enter long in December Gold at $580.00 and issue a stop loss at $550.00. When trading the full-size contract, the stop can be placed in the market and if the price breaches $550.00 a market order will be triggered.

When trading the mini Gold, it is necessary to wait for the full-size price to trade below/above the stop prices by using alarms and then execute using market orders in the mini contracts which can lead to additional slippage during volatile conditions. You might ask-why not just work the stop orders in the mini contract to avoid slippage? It is a logical question but the main problem is that minis tend to trade nearly 24 hours a day while the data is only tracking the pit session and this can lead to the investor being out of sync with the system due to a tick here or there.

Another problem we’ve seen has to do with the rollover of the contracts from month to month. Attain follows the contracts with the highest volume and open interest and rolls to the next contact whenever this shifts. We have seen that in the mini contracts, specifically in the energies, that all of the volume stays in the front month contracts until the last few days before Last Trading Day making it difficult to roll in sync with the full-size contract.

- John Cummings & Adam Whitehead

IMPORTANT RISK DISCLOSURE


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Feature | Week In Review: Commodity Correction?

***Overview***

US stocks reversed the previous week’s profit taking trend to post solid gains as both the SP 500 and DJI scored new 4 month highs. The week was dominated by economic reports that pointed to a healthy, but not robust economy squelching concerns of inflation and boosting recent bullish sentiment. For the week SP futures gained +1.7 points closing at 1332.20. NASDAQ futures were finally able to keep pace and in fact lead the whole sector as the tech laden index rallied 3.9%. Smallcaps also staged a nice comeback with Russell 2000 futures adding 2.75% and SP Midcap 400 futures +1.45%.

Energy prices again took it on the chin as the seasonal slowdown in demand and lack of weather or geo-political news sent the whole sector into a tailspin. Most of the sector saw prices move down to levels not seen in several months - or as was the case in the Natural Gas - fresh 12 month lows. Hurricane patterns so far this season have kept the storms out of the delicate Gulf of Mexico producing region, which has eased production concerns and even aided in new exploration which yielded a large discovery. For the week Crude Oil futures fell -4.4%, Unleaded Gas futures moved -2.1% lower, Heating Oil futures were down -7.6%, and Natural Gas futures lost -12.2%.

Metals prices were again lower this week as the flurry of U.S. economic reports basically put a halt to worries of rising inflation which kept safe haven buying out of the sector. Silver futures led the downward move falling -11.5%, High Grade Copper was next dropping -7.0%, Palladium was down -5.6%, Gold fell -5.5%, and Platinum lost -5.3% for the week.

Interest Rate and Currency Futures spent last week basically retracing the ranges from the week before despite the slew of U.S. economic releases. With both sectors basically expecting no Fed action in the near-term and a lack of any new foreign market moving news it was a week of rest. Last week foreign currencies including Eurocurrency, the Swiss Franc, Japanese Yen, and British Pound moved slightly lower against the US Dollar. US treasury futures also moved slightly lower as bond yields were up a tad last week.

The agricultural sector was a mixed bag. Live Cattle ended down -2.3% for the week on lower cash cattle prices paid by packers in most cattle feeding regions of the U.S. Most grains and oilseeds had a pretty uneventful week despite the release of the recent USDA survey of the crop production and usage as both Corn and Soybeans were basically unchanged. Wheat did get some action from the USDA report as it fell -5.5% due to the lack of a cut in foreign production. The soft sector also was mixed last week with the most active moves coming from Coffee -3.8% and Sugar futures +3.9%.

***Day Trading***

The bulk of the day trading systems were able to post modest gains last week thanks to some increased volatility and expanded trading ranges. Tuesday set the stage for the majority of the gains with a widespread rally in equities both foreign and domestic.

The systems that trade on Eurex fared the best last week with Beta v2 Dax taking top honors with profits of +$1,461.67. RC Success eRL had the top spot among domestic programs with profits of +$1,230 for the week. BetaCon 4/1 Dax had one trade on Tuesday that went on to make +$1,122.68.

The Bounce family of systems continues to impress investors as both Bounce eRL and Bounce eMD were ahead by +$850 and +$104.60 respectively for the week. Rayo Plus started the week on fire but trailed off a bit towards the end of the week for a total gain of +$539.74 on four trades. Impetus eRL continued its push higher this year with a small profit of +$120 on one long trade from Tuesday. BetaCon 4/1 ESX had two trades for a gain of +$104.88 but gave back a large portion of gains from Tuesday on Friday. Finally, Epsilon 12/12 Bund had four trades for a gain of +$90.37.

On the losing side, Omega3 v1 Dax had three trades for a loss of -$89.10. Compass SP traded every day except Friday and lost -$317.50. Phi Plus Dax had five trades for a loss of -$587.11.

***Swing Trading***

Another steady week for the markets proved valuable for several swing trading systems.

The closed out trades of the week goes to SC Forex which locked in gains of +$4,830 on two short positions that closed out early Monday morning. SC struggled in August but after last week appears to be getting back to its winning ways. Tzar also had, yet another, solid week earning +$4,057.50 across the 4 markets in open and closed trade profits. Tzar eRL remains one of the best systems at Attain in 2006.

Other weekly results were as follows: Ping +$2,910, Bounce eRL +$1,640, Axiom eRL +$1,320, Targets eRL +$1,190, Targets eMD +$1,160, Pivots +$1,125, Axiom NQ +$1,045, Bounce eMD+$780, Eclipse eRL +$510, Axiom eMD +$493.70, Delphi eRL +$306.60, Seasonal ES -$342.50, Seasonal eRL -$410, Adaptive US -$445, and Jaws Narrowneck -$1,106.25.

In Forex trading the results were mixed with Volcano GBP earning +$630, Delphi EUR gaining +$490, Volcano EURJYP adding +$311, and Volcano EUR falling -$60.

***Long Term***

The past week’s market action was very subdued in most sectors with really only the energy, metals and wheat markets having any major impact on term trend followers. Many Sectors that have established trends like interest rates and currencies experienced a choppy trade with no big week over week change.

Not many systems have short energy positions even though the sector is in a downward trend and posted new 6-month lows during the past week. Systems with short positions include Trend Simplicity which is making +$6750.00 and Pegasus +$8,450 per contract (open trade) on a full size Crude Oil trade. Aberration Plus is short an e-mini Crude Oil trade for profits of +$3,150 (open trade) per contract. Eminis are great option for investors who do not want to take the risk of a full size energy contract and can cut the risk (and profits) of each trade in half.

The metals all posted moderate declines during the past week, leading some to believe that the the current trend could - or has already -turned down. Some short entries into both Gold and Silver were initiated in Trend Simplicity.

Most wheat futures posted moderate loses last week as the USDA did not slash foreign production as much as anticipated on the most recent supply/demand monthly release. Chicago wheat was down -5.5%, KC wheat was down -3.6%, and Minn. Wheat was -4.2%. Trend Simplicity is short both Minn. and Chicago Wheat making +$1,750 (open trade) and Axiom LT is short Minn. Wheat making +$600.

Closed out trades from last week include Axiom LT getting out of Crude Oil for a gain of +$8450.00 per contract, and Trend Simplicity was stopped out of Cotton for a small gain of +$150.00 per contract.

 

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IMPORTANT RISK DISCLOSURE
Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect investor returns.

Past performance is not necessarily indicative of future results. The performance data for the various Commodity Trading Advisor ("CTA") and Managed Forex programs listed above are compiled from various sources, including Barclay Hedge, Attain Capital Management, LLC's ("Attain") own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

The dollar based performance data for the various trading systems listed above represent the actual profits and losses achieved on a single contract basis in client accounts, and are inclusive of a $50 per round turn commission ($30 per e-mini contracts). Except where noted, the gains/losses are for closed out trades. The actual percentage gains/losses experienced by investors will vary depending on many factors, including, but not limited to: starting account balances, market behavior, the duration and extent of investor's participation (whether or not all signals are taken) in the specified system and money management techniques. Because of this, actual percentage gains/losses experienced by investors may be materially different than the percentage gains/losses as presented on this website.

Please read carefully the CFTC required disclaimer regarding hypothetical results below.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.