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In our November Trade Trends piece, "Too much failure to avoid big regs," we discussed how the regulatory shake-up in Washington could change the futures industry. Over-the-counter (OTC) derivatives regulation advanced when the House Agriculture Committee passed its bill on regulating OTC transactions on Oct. 21. The bill would institute a clearing requirement for swaps and security-based swaps and provide exemptions from the clearing requirement for commercial end users who are not swap dealers or major swap participants. It also would require cleared, listed swaps to be traded on exchanges and allow the Commodity Futures Trading Commission (CFTC) to impose position limits on swaps and the Securities and Exchange Commission (SEC) to impose limits on security-based swaps. The House Financial Services Committee approved a similar bill to regulate OTC derivates on Oct. 15. On Oct. 16, the SEC and CFTC released their report on harmonization. Recommendations in the report include facilitating portfolio margining, a call for legislation for the expediting of new product approvals, stronger authority for the CFTC on exchange and clearinghouse compliance with the Commodity Exchange Act, and requirements for foreign boards of trade to register with the CFTC.

In Paul Cretien's November feature, "Predicting grain futures with options" breakeven price spreads are computed for December grain futures. The upper and lower breakeven prices are those that would result in zero profit or loss on a delta-neutral trade, using a long position in one futures contract and selling two at-the-money calls. At-the-money, the slope of the call price curve (the delta value) is approximately 0.5, meaning that the calls are expected to move at half the speed of the underlying futures at that point.

The breakeven spreads were calculated in mid-August, and the following exhibit, "Grain predicted price spreads," shows how well the predicted price ranges compared with high and low prices over the past 100 days leading to the final four days before expiration.

In the article, a delta-neutral trade based on December corn futures was described, long one December futures contract and sale of two 340 strike price call options. A protective call at 390 strike and protective put at 290 strike were proposed in the event the futures contract exceeded the breakeven prices on either high or low values. The exhibit, "Delta-neutral trade," shows the maximum profit would have been $2,625 before accounting for the gain or loss on the protective put and call. At the Nov. 16 futures price four days before expiration, 402.5, the trade has a $500 loss. The 390 strike protective call is priced at $750 on Nov. 17.

Spotting momentum swings in advance

Here's an update from Dennis Hudson from his Trading Techniques piece, "Spotting momentum swings in advance":

The mid-month FLIR market picture shows an upcoming six to eight weeks' matching volatility against sheer nerve. While day-traders will likely dance with delight, swing traders may be consigned to rubber rooms by yearend.

On the weekly Dow chart, there are multiple FLIR probabilities, generating whipsaws from about Dec. 4-20; the daily's steady northward march creates abundant blind spots for all indicators, FLIR included. But the S&P-500 daily shows a strong inflection either Nov. 25 or 27, based on one of FLIR's cousins, synthetic trendlines.

Meanwhile, based on a FLIR-synthetic combination, financial bellwether BAC (Bank of America) appears to be moving strongly through Dec. 4, then reversing. BAC's recent pullback may have been only a mild options expiration week correction before moving onward and upward, and though BAC is often a financials contrarian, the size of the suggested move (about 20%) implies the carrying of other financials with it. Bias is now to the upside, but we need to get further into the period to be sure.

Unlike FLIR, which derives its data partly from speed of price change (trendlines), synthetics are independent of time, causing price to oscillate around them while anticipating the mean path. Adding FLIR to the synthetic marks this week or next as the end of the Dow's remarkable run, at least for awhile.

Using price shocks to time the market

In the feature, "Using price shocks to time the market," Arthur Field explains how periodic shocks to price can serve as reliable indicators of trend reversals. He set up a simple model to trade live cattle. In the second installment of this two-part series, Field explores ways to expand on this basic method by adding contracts and adjusting the model for other commodities. Field uses the model to look at hogs, and crude oil in the December issue and offer additional analysis on lumber and soybeans online.

In "Funds could flee U.S.," we discuss how some index providers are looking into developing commodity indexes made up of non-U.S. futures markets to continue to provide a hedge against inflation. Some proposed regulatory changes could alter the indexer's ability to offer these products based on U.S. markets.

Representatives of both the Intercontinental Exchange and CME Group noted during the Futures Industry Association's Futures and Options Expo in Chicago that while outside markets were not liquid enough to handle this now, they could develop.

Gold: One of our analysts predicted gold futures would reach the $1200 to $1300 area by year end and based on the price of gold when we spoke to him for this issue compared to its current price, around $1140, it is more than halfway there. Gold continues to rise as the dollar continues to struggle with increasingly halfhearted rebounds based on official statements of support from the Administration, which become harder to take seriously as they are offered without any real support for the greenback.

Aussie dollar: Like equity markets, the Aussie dollar dipped briefly before making a new recent high. With Australia being the first and only Western economy to begin a tightening cycle it stands to continue to appreciate against the dollar and other currencies as a long in many carry trade models.

E-mini S&P: The S&P 500 corrected lower in the second half of October but recently rebounded to take out the mid-October highs. Equity markets continued their near perfect negative correlation with the dollar and although they continue to reach levels not seen since last year's crisis, there is nervousness about this rally that will not go way. Not with 10.2% unemployment anyway.

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