Choose a Site
Share:
Send to FacebookTweet ThisShare on Google+Email to a Friend
Download

Commitments of Traders: Breaking Down the Open Interest

Related Files

Download Files 

By Stanley Dash


Vice President, Applied Technical Analysis
TSLabs@TradeStation.com

 


Features:
  • Focus: Technical, Fundamental 
  • Markets: Futures
  • Time Perspective: Intermediate-term,
                                  Long-term
Studies/Files Included:
  • Workspace 
  • Indicators

 


Summary

 
Each week, the Commodity Futures Trading Commission (CFTC or the Commission) issues the Commitments of Traders (COT) report. This report is a breakdown of the open interest in each of a long list of futures markets according to trader category. Although the data is gathered so the Commission can meet its market oversight responsibility, the report offers traders and analysts insight into the positioning of the major categories of traders: speculators (large and small) and hedgers. The underlying theory is that traders’ opinions and hedgers’ needs, in the aggregate, are reflected in the data and can be used to identify market turns and confirm trends. This Analysis Concepts paper looks at the COT data, which is available through the TradeStation Data Network, and offers a variety of ways to view and interpret the information.

 

Commitments of Traders Data

 

Traders with positions exceeding a certain size in a futures market are required to report their identity, business purpose and positions to the Commodity Futures Trading Commission. The number of contracts that constitutes the “reportable level” is set by the Commission and varies from market to market. (1) This data is used to compile the Commitments of Traders report.

 

Traders who have positions large enough to be reportable are broken into commercials (hedgers) and non-commercials (speculators); the remaining open interest is classified as non-reportable (smaller traders, category unknown).

 

Categories of traders in the Commitments of Traders report:

Commercials: “… Reportable trader … if the trader uses futures contracts in that particular commodity for hedging … that it is commercially engaged in business activities hedged by the use of the futures or option markets." (2)
Non-commercials: Reportable traders not classified as commercial, i.e., not hedgers, are classified as non-commercials. These are traders with positions large enough to require reporting, yet they are not hedgers. For example, they may be private speculators, hedge funds or other money management entities.
Non-reportable: The balance of the open interest not accounted for by reportable traders (commercials and non-commercials) is classified as non-reportable.

 

Table 1: Futures only COT data for corn
Table 1

 

The data derived from these filings is summarized in two ways. The table above is the “Futures Only COT” report for corn. Notice the long and short positions for non-commercials, commercials and non-reportable positions. This is based only on the positions and open interest in corn futures, hence the description “Futures Only.”

 

 

Table 2: Option and futures combined COT data for corn
Table 2

 

The other mode of summarizing the data is known as “Option and Futures Combined.” This version of the report adds the option open interest to the futures open interest on a delta-adjusted basis; that is, each option position is added to the long or short open interest based on the delta of the option. The purpose is to weigh options into the COT report and the open interest according to the option’s market sensitivity.

 

The Commission releases the Commitments of Traders data every Friday afternoon (subject to change due to holidays) at 3:30 p.m. ET. However, it is based on data as of the most recent Tuesday; that is, the data is weekly only and released with a three-day lag. Therefore, COT analysis generally falls into the category of intermediate to long-term and is most often used as a confirming indicator rather than a primary signal.

 

Notes on Commitments of Traders Data in TradeStation

 

The COT data is uploaded to the TradeStation Data Network following the release on Friday. It is back dated to the prior Wednesday in consideration of the fact that the data is “as of” the Tuesday close.

 

For those interested in accessing the data directly in TradeStation using their own EasyLanguage analyses and strategies, please see the Help topics About COT Data in TradeStation and COT Data Fields - Futures Only / Combined Futures & Futures Options in the TradeStation Platform Help.

 

Those familiar with COT data may be interested to know that the data available via the TradeStation Data Network is from the “Legacy Long Format” report. The CFTC also offers additional information known as “disaggregated” and “supplemental.” See the “Commitments of Traders” section of the Commission’s website for more information. (3)  

 

Analysis

 

The theory behind the analysis of Commitments of Traders data may be simplified as “follow the smart money.” In this context, the “smart money” is generally assumed to be the non-commercials. As noted above, this includes hedge funds, Commodity Trading Advisors and professional traders whose interest in futures is strictly profit driven.

 

Commercials are considered savvy and their positions are worth monitoring; however, they are in the markets to hedge positions and so their futures positions are only one part of their position book. Their goal is to operate their business with net profitability and at times they are willingly on the wrong side of futures as part of the big picture of their operations.

 

Non-reportable is the “everyone else” category and includes the smallest traders with the least capital.

 

Analysis of the COT data, therefore, involves reviewing whether each of the groups is net long or short and by how much, the changes in each group’s positions from report to report and each group’s share of the total market – with particular attention paid to non-commercials and commercials.

 

The recent rally in corn prices provides an illustration. Details of the indicators shown in this example will be discussed later.

 

Figure 1: Corn, daily interval
Figure 1

 

With prices still in a trading range (in retrospect, a basing pattern), the indicator COT Net Position begins to show an uptick in the net long position (heavy green line at point A) of non-commercials. In other words, non-commercials’ positions began shifting further in the direction of net long before prices began their advance.

 

In the ensuing few weeks, with non-commercials increasing their net long positions, the indicator COT Total Position shows that the total open interest of non-commercials (heavy green line at point B1) was still declining. Total open interest (B2) was also falling during that period.

 

From this we can infer that the increase in the non-commercials’ net long position was likely the result of short covering with new capital coming into the market and fully confirming the uptrend at points C.

 

An interesting note is that both the total open interest and the net short position of commercials (as represented by negative values) were increasing, indicating that short-hedgers may have been trying to capture higher prices by selling into the rally (dashed lines at points D).

 

TradeStation Commitments of Traders Indicators

 

TradeStation supplies three indicators that tap the COT database:

  • COT Net Position (shown in figure 1 above) plots the net long or short position of each of the three categories of traders. A positive number indicates that the group is net long; a negative number indicates that the group is net short.
  • COT Total Position (shown in figure 1 above) plots the total position of each of the three categories of traders.
  • COT Total Position % (not shown) plots the percentage of the total open interest represented by each category of traders.

 

Additional details on these indicators may be found in the TradeStation Help.

 

TradeStation Labs’ Indicators

TSL:COT_Open Int_All Months

 

This indicator is offered as an alternative to the supplied indicator, Open Interest. By using the open interest data from the Commitments of Traders report instead of the standard open interest field, it displays the open interest for all contract months of a futures market combined; the original supplied indicator, Open Interest, displays the open interest only for the contract month in the chart.

 

Figure 2: Crude oil continuous contract with standard open interest indicator and TSL:COT_Open Int_All Months
Figure 2

 

This has two advantages:

 

In some markets, like ES futures, this may not make much difference, since the open interest is so concentrated in the nearby contract anyway. In other markets, like CL, the open interest is more distributed throughout the contract months, and the open interest across the board may be more indicative of market conditions as hedgers establish positions in both price and time. Note the disparity of the values at the arrows in figure 2.

 

The brief period during which any contract month is active makes it challenging to follow the open interest in any market via a single delivery. Continuous contracts do not fully address this, since there are usually anomalies in connecting the data. Open interest figures from the COT data do not have this problem. Note the difference in the patterns of the two indicators in figure 2.

 

The limitation to using the COT data for open interest is that it is updated only weekly, with a multi-day lag.

 

The indicator TSL:COT_Open Int_All Months also includes the option to plot a moving average of the open interest.

 

Plot Description
OI_COT Plots the open interest from the COT database
AvgOI Plots the moving average of the open interest
Input Default Description
ShowAvgOI "False" Turns the display of the average open interest on and off
AvgLength 4 Sets the length of the average of the open interest. The length is in reporting periods, i.e., weeks, not bars.
TSL:COT_NonComm Net Chg

 

This indicator affords an analysis of the direction of the net non-commercial position. It plots the net change in the net non-commercial position from the previous reporting period. A positive number means that non-commercials have moved toward the long side, indicating that they have either decreased shorts or increased longs on a net basis. A negative number indicates the opposite.

 

The indicator includes an input to change the calculation slightly. The alternative is to calculate net change in the net non-commercial position from the previous reporting period as a percentage of the total non-commercial open interest. This may be more useful particularly when making comparisons across markets or within a market over very different time periods. This latter formulation is used in the strategy concept tested below.

 

Figure 3: Crude oil continuous contract with TSL:COT_NonComm Net Chg indicator set to percent
Figure 3

 

Plot Description
NetChNC The net change in the net non-commercial position from the prior report. This is either in contracts or percent of total non-commercial open interest according to the input NetCh_1_NetChPct_2
Zero A horizontal reference line at 0
UpperBound A horizontal reference line for ease-of-use in identifying significant values
LowerBound A horizontal reference line for ease-of-use in identifying significant values
Input Default Description
NetCh_1_NetChPct_2 1 A value of 1 will display the net change in the net non-commercial position in contracts; a value of 2 will display the indicator as a percentage of the total non-commercial open interest
UpperBound 5000 Location of horizontal reference line, in contracts. Should be set to an appropriate value for percent if NetCh_1_NetChPct_2 is set to 2
LowerBound -5000 Location of horizontal reference line, in contracts. Should be set to an appropriate value for percent if NetCh_1_NetChPct_2 is set to 2
NeutralColor LightGray For indicator values between the UpperBound and LowerBound
BullishColor Green For indicator values above the UpperBound
BearishColor Red For indicator values below the LowerBound

Using COT Data to Confirm Strategy Signals

 

Earlier in this paper, we noted that Commitments of Traders data is often used as a confirming indication for other analyses. This is largely due to its availability only weekly and with a lag.

 

Given that premise, we examined using the net change in the net non-commercial position, the same calculation made and plotted in the indicator above, to confirm trend signals as identified by a 1-line simple moving average strategy. To do this, we tested the moving average strategy in its most basic form and then added the COT calculation to confirm signals.

 

If the concept has merit, we should see an improvement in Total Net Profit as well as such metrics as Percent Profitable. Of course, as with any confirming or filtering tool, there should be fewer trades overall.

 

Common settings for both tests:

Symbol: @CL=103XN, custom continuous Crude Oil contract
Bar interval: Daily
Date range: Five years ending August 31, 2012
No stops
No profit targets
Commissions $5.30 round turn

Simple 1-line moving average

 

TradeStation’s supplied strategies MovAvg Cross LE and MovAvg Cross SE were used for this study, with Price, Length and ConfirmBars inputs set to Close, 20 and 1, respectively.

 

Long Entry: Close above 20-bar moving average
Short Entry: Close below 20-bar moving average

 

Table 3: Strategy Performance Report Summary and Equity Curve Line; crude oil, daily custom continuous contract, 5 years ending August 31, 2012, 1-line simple moving average strategy.
Table 3
Table 3 B

 

The results of the first test using only the 1-line simple moving average strategy become the baseline for examining whether the COT data can improve on the same basic signals.

 

Simple 1-line moving average with COT data

 

In this test, the same signals were taken only if and when confirmed by the direction of the net non-commercial position. In addition, all trades are taken on the opening of the Monday bar to account for the delay in COT reporting.

 

Another addition to the strategy uses the change in net non-commercial positions to generate exit signals.

 

Long Entry: Close above 20-bar moving average and net non-commercial position increases (becomes more bullish) by at least 3.6% of the total non-commercial open interest.
Short Entry: Close below 20-bar moving average and net non-commercial position decreases (becomes more bearish) by at least 3.5% of the total non-commercial open interest.
Long Exit: Net non-commercial position decreases (becomes more bearish) by at least 2.9% of the total
non-commercial open interest
Short Exit: Net non-commercial position increases (becomes more bullish) by at least 2.6% of the total
non-commercial open interest.

 

The percentages as enumerated in the signals above were arrived at from general observation of the TSL:COT_NonComm Net Chg indicator and rudimentary tests. They are not offered as final or fully optimized values for crude oil or any other market.

 

Table 4: Strategy Performance Report Summary and Equity Curve Line; crude oil, daily custom continuous contract, 5 years ending August 31, 2012, 1-line simple moving average strategy with confirming COT data
Table 4 A
Table 4 B

 

The results from this test support the idea that the COT data may be used as a confirming indicator for a strategy that identifies trend direction. Note the dramatic reduction in the Total Number of Trades and the improvement in the Percent Profitable and, of course, in the Total Net Profit.Remember that there were no protective stops used in either test, nor was profit maximized with sophisticated exit rules; the drawdowns are undoubtedly large. The examples are offered in an attempt to isolate and test analytical factors and not as a complete trading strategy.

 

Conclusion

 

The Commitments of Traders report is unique to the futures markets. It has been compiled and made public by federal regulators for decades. TradeStation makes the data available directly in the platform with several supplied indicators, but it can also be the basis of custom calculations, displayed graphically and in tabular form, and referenced in strategies.

 

Any data that offers traders greater perspective in their analysis and trading is worthy of investigation, and Commitments of Traders data fits this description. Futures traders have the opportunity to move beyond price and volume to survey the status of other traders of varying size and purpose by understanding and monitoring the Commitments of Traders reports.

 

Works Cited

1.  http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=abfb6cedd5fd2afe370545bd8bcb5af5&rgn=div5&view=text&node=17:1.0.1.1.14&idno=17#17:1.0.1.1.14.0.7.4
2.  http://www.cftc.gov/MarketReports/CommitmentsofTraders/ExplanatoryNotes/index.htm
3.  http://www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm

 

 


 

To use the files provided with this issue of Analysis Concepts:

  • Files with extension ".eld" – These contain EasyLanguage® documents: analysis techniques and strategies. Double-clicking on this file will start the EasyLanguage Import Wizard. Follow the prompts to completion. The analysis techniques or strategies will automatically be placed in the correct locations for your use in TradeStation. This should be done before opening any workspaces provided.
  • Files with extension ".tsw" – These are TradeStation workspaces. These may be stored in any folder where you choose to save TradeStation workspaces.
  • Files with extension ".txt" – These are text versions of the EasyLanguage documents and are generally used only by advanced EasyLanguage users.
  • Other supporting documents or files may also be attached to the report.

Questions or comments? Contact us at TSLabs@TradeStation.com