What the heck is COT???

Due to reporting requirements by the CFTC, all traders of any size must report who and what they are.  We call this COT or the Commitment of Traders.  By putting together the total positions of large fund traders, we can come up with a net contract position which is either long or short for that particular group.   If the report shows funds long 30,000 contracts, it is reporting a net position. The funds may in fact be long 240,000 contracts and short 210,000 contracts with the net being long 30,000.  Over the years, we have considered this to be a very good indicator of what might happen in the market based on which market segment is long and by how much. 

There are three segments that we divide all contracts into.  Funds, which is the large speculators.  Commercials, a group we all know and love.  And the small Spec or what I usually refer to as just the Specs.  This is the group that is made up of non-reporting traders. 

So you will understand, when I trade corn, my position will show up in the non-reporting trader category or what we will call the Spec position.  On the other hand, I do trade rice in enough size to have to report my positions so when that happens, my contract position will show up in the Large Spec position or what we call Funds.  All contracts in all commodities are divided into these three camps. 

1)  Fund

2)  Commercial

3)  Spec (speculator)

Here is the idea.  The Fund is a large trader who has the ability to trade size and will be less likely affected by price changes against him; however, he is a risk taker and is in it to make money in the futures.  The Commercial is a firm that usually is a hedger.  If they are long the market they have sold contracts in the cash market to offset the longs in the market.  In other words, they are never open to market risk other that the basis since a penny made in the futures is a penny lost in the cash.  By the way, basis is the difference between the cash and futures market.  In general, the commercial never loses in the futures market because they have the exact offset in the cash market.  The futures then is a place for them to get rid of risk.  The Fund on the other hand, uses the market to take on risk.

Now comes the Spec.  In fact, the Spec is made up of both risk takers and risk "dumpers".  For instance, if a farmer sells 5 contracts of corn to protect himself on a 250 acre field where he expects to cut 100 bushels per acre, he has just "dumped" his risk.  He has done the same thing as the commercial as he hedges his risk.  At the same time, if I buy 5 contracts thinking the market is going up and I want to make some money, I am openly speculating and taking on risk.  You could say I am doing what the Fund is doing.  What I did is the exact opposite of what the farmer did.  Now don't get confused here.  Yes, he sold and I bought but that is not what I'm talking about.  The key is that he is hedging and I'm speculating and both of our trades will show up in the small trader account or the segment we call the Spec.  So it is important to understand that what we call the Spec category contains both speculators and hedgers but they are too small to report what activity they are actually doing.

With the categories explained, let's go back now to the actual numbers we use.  Most of the time, we only look at the differences between the longs and shorts in each specific segment.  Sometimes, we look at the total amount of contracts owned in total by a certain segment.  In the example in the first paragraph above, we would have a total position of 450,000 contracts with 240,000 long and 210,000 short.  With a net position of 30,000 long, we can see the Funds inside their segment as 53% long.  Again, this is just a reference number that we can keep up with to see when and how the market responds to certain market segment positions. 

Let's look at what the line looked like for corn on October 19th.

Notice the huge size owned by the commercials.  The Funds and Spec combined own only 62% of what the commercials own.  This heavy dominance by the commercials is always the case.  Next notice the huge short position for the non-reportable trades or the Specs at the far right.  From this one line we can see who is short, by how much and with a little math, what percentage of each category is long or bullish.  Starting to look like PB isn't it, but it has absolutely no connection.  This is based on volume, PB is based on price movement.  Anyway, here is some interesting numbers from this COT line.

Funds have the lowest overall position at 209,900, of which 36% of the total is long.  Commercials by far have the largest open position with 790,000 contracts and are showing 59% long. The Specs are in third at 279,000 contracts with 39% long.   But notice, the funds have the 56,000 contracts short while the Specs are short a net 63,000 contracts.  So, even though the Funds do not have as many net short positions as the Specs, what shorts they have make up a larger percentage of their segment.  So who is the most bearish?  Based on these numbers, it's hard to tell.  What we can know is who to watch closely.  For instance, suppose the Funds had only 10 contracts open interest and 8 of them were short.  That is a 20% long calculation for their segment but what is 8 contracts  So while the percentage calculation is an interesting number, the largest position data is the one we watch so closely.  In our example above, it is the Spec we will be watching.  This information is very interesting to watch and can be an important indicator at tops and bottoms. 

The main thing to remember in this total commentary is that COT is just another fundamental.  If we have the funds net short 60,000 contracts of corn, they have a lot of buying to do to get to a balanced position; however, since they have been short as much as 100,000 contracts, we could also say they have some room to sell more as well.   

Finally, we always add options with futures to get the total position.  This means we use the delta factor of options and add them to the outright futures.  Delta is a whole other subject but just understand that if I buy two at the money calls, it is the same as if I bought one futures contract outright.  That is because an at-the-money call will always have a delta of .5 and two of them would equal 1 which is the delta of a futures contract.  So, we use the delta value of the option strike price and multiply it times the number of contracts owned by each of the segments and abracadabra, we now have their option positions equated to futures.  We add that to our position sheet so we have the net position by segment including all options.

If you want to see the recent COT report, click on this link.  Full COT reports.

Now you know what we mean when we say COT!!!