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Senior Contributor

of bankers and pedestrian commodity longs.

I think years ahead all will look back in awe, imagine “investors” going enmass long commodities, corn, cocoa, copper, their spec pursuits creating spec high fat premium prices that incites production. Index length. Are there short commodity index funds? The day they start one  …..

 

Premia, where is, it where can it be captured.

 

Will these newbie commodity longs at a point tire, paying to carry your physical corn and give up? If we hit a phase like that it will bury the market, but setup a great  new up cycle , as credit dries up.

 

Bankers, they make the tops and bottoms and don’t even know they did it!

Art

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Senior Contributor

Re: of bankers and pedestrian commodity longs.

Just as the commodity index craze created better hedging opportunity, spec premium to harvest, I think for the yin the yang exists. 

If we go full cycle and for example, the financial world unwinds in a 2nd phase, there is high odds of a commodity index liquidation round.

Somehow that needs to be built in a mkting plan. Maybe Way out of the $ puts, protection for the outside the norm.

Comments?

Art

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Senior Advisor

Re: of bankers and pedestrian commodity longs.

Well Pritch, I think the conventional wisdom that 'volatility is your friend' is dead as a door nail. Likewise, the idea that a producer hedger gets an advantage with 'high' (whatever that means - depends on the context) futures prices is also likely not the result of judicious consideration. The premium for an option is determined by volatility, and the difference between cash price and an unenforceable futures contract represents the portion of that premium price that can never be recovered.


The only back stop would be seasonals. Which, if trusted, leads to horrific losses from time to time - which Pritch proved beyond a shadow of a doubt.


Speculating on speculation is a tough row to hoe.

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Senior Contributor

Re: of bankers and pedestrian commodity longs.

Epictetus- deal with what you control, not what you can’t.

 

Volatility ups the speculator’s game, bigger stakes.

Volatility offers the producer better opportunities – big plus.

 

The premium for an option is determined by many things, one being the market’s sentiment, fear/hope etc.

 

For hedging there is no backstop, no losses, you accept the price.

 

INDEXing exacerbates up move and down moves. Suppliers of excess artificial demand  earn from the crazed spec, be it a producer hedger or short spec.

 

We had the up phase, we could be facing the down phase. What price would it take to clear index liquidation? Q has been asked here, and the topic put up for discussion.

 

Would it be better to  discuss in the midst of it.

 

Art

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Senior Advisor

The price of options .....

...... is determined by perceived risk. Nothing more, nothing less. But we've been through this before Pritch.


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Senior Contributor

Re: The price of options .....

Mr Palouser. Good morning.

If you went through it before, did you gain any insight? The price of options is determined by underlying price, strike price, time, and a market component consisting of many moving parts - price expectations, anxiousness, sentiment of various sorts, availability of backing capital and what can’t I think of right now.

A simple example, in a crisis phase, as margins rise across markets, capital in the bis of selling premia, can suffer serious limitation  as financing requirements rise. A OTM cbt wheat call at X is ripe, but his book of bis already has him fully invested, he can’t sell, which adds to the fire and excess.

CBT provides excellent ways to capture some extra “crop”, objective is harvest spec excess, of which there has been masses, but, trying to get the topic in discussion , of which there may be less of for a year or two.

If it is 50/50 INDEXing liquidates, or 1/3, how would you want to be positioned?

 

Artifice

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Senior Advisor

Re: The price of options .....

I have no problem with buying insurance at high cost if an operator's situation demands it. I'm thinking of low margins, high debt leverage, or other specific business and personal situations that affect the business.

 

But your emphasis on 'money to be made' is trader's and irresponsible in the realm of advisors or brokers. Had everyone followed your advice in the run up to 2007-8 it would all be different voices on this forum as almost everyone would have been run out of the farming game because they got into a specs game. You were big into seasonals and the market went 180* from that course. A physical fundamental frame of reference indicated the strong possibility of that situation. Seasonals broke you.

 

If professional advisors can't beat the market on average, why would an individual think he could gain advantage in a game that is rigged to favor fast computer trading based on pennies? I believe your confidence is more on the level of a mind game. You can define a winning situation any day of the week as an example. But the reality of pulling it off is different - and more on the level of theoretical. Looking back for examples is strictly an illusion creating exercise.

 

Risk is risk. Risk is a cost of business.

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Friend

Re: The price of options .....

Very good observation Palouser.

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Senior Contributor

Re: The price of options .....

Producers shouldn't be "playing" he market, should they.

 

FACTS:

1) A producer that hedges a % of his crop is reducing risk and overtime  harvesting crazed spec interest

 

2) A producer that does so over time, is WAY ahead.

 

3) Mindsets that acts on emotion vs balance makewss foir a POOR hedger.

 

4) producers with thick balance sheets can bear risks at will easier than those without who need to hedge the most.

 

5) Yes those who hedge over the last 4 yrs have done well, no one can prdict  wild moves, but all can earn in them.

 

6) Commodities don't tend towards some "nice: price , a  socialized syetem, move to N Korea!, insted they tend towards the COP.

 

7) Futures have  the cost of carry built in, in well supplied times anyway W has come down more than it went UP, if you keep track.

Thank heavens for futures and speculators,.

 

Specs pick up the slack and earn the carry on your unsold wheat.

 

ARtifivce

 

 

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Senior Contributor

Re: of bankers and pedestrian commodity longs.

"""Speculating on speculation is a tough row to hoe."

 

Exactly;y that is why producers hedge to reduce speculation.

 

You prefer to speculate  on speculation, staying speculated,

your choice.

 

Artifice

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