July 2008
Intermediate to advanced
1008 pages
27h 37m
English
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CHAPTER 17
How to Design a Commodity Futures Trading Program
Hilary Till
Principal
Premia Capital Management, LLC
Joseph Eagleeye
Principal
Premia Capital Management, LLC
We provide a step-by-step primer on how to design a commodity futures trading program. A prospective commodity manager not only must discover trading strategies that are expected to be generally profitable, but also must be careful regarding each strategy's correlation properties during different times of the year and during eventful periods. He or she also must ensure that the resulting product has a unique enough return stream that it can be expected to provide diversification benefits to an investor's overall portfolio.
When designing a commodity futures trading program, a commodity manager needs to create an investment process that addresses these steps:
- Trade discovery
- Trade construction
- Portfolio construction
- Risk management
- Leverage level
- How the program will make a unique contribution to the investor's overall portfolio
This chapter covers each of these subjects in succession.
TRADE DISCOVERY
The first step is to discover a number of trades in which it is plausible that the investor has an “edge” or advantage. Although a number of futures trading strategies are well known and publicized, commodity managers continue to apply them. Three examples of such strategies follow.
Grain Example
In discussing consistently profitable grain futures trades, Cootner stated that the fact that they “persist in the face ...