Tuesday, February 3, 2015

Open Interest And COT Report

Every Firday we should consider a look into the CFTC Commitments of Traders report out of affirmation purposes. Here is a short description about the COT report:

The Commitments of Traders (COT) reports provide a breakdown of each Tuesday’s open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC.

Important to point out are the release dates of this reports as well:

The Commitments of Traders reports are released at 3:30 p.m. Eastern time. The Futures Only reports and Futures and Options Combined reports are usually released on Friday. The release usually includes data from the previous Tuesday. Federal holidays may delay release by one or two days.

With that, we know the reports provide informations of each Tuesday's (weekly) open interest and usually relased on a Friday. But what is open interest?

Open Interest

For the sake of simplicity 'open interest' could also be referred as a trader's open position that are not closed or delivered on a particular day. Here the defination from CFTC:

Open interest is the total of all futures and/or option contracts entered into and not yet offset by a transaction, by delivery, by exercise, etc. The aggregate of all long open interest is equal to the aggregate of all short open interest.

Day 1: Trader S buys 1 contract and R sells 1 contract = 1 Open Interest
Day 2: Trader Y buys 3 contracts and X sells 3 contracts = 4 Open Interest
Day 3: Trader X buys 1 contract and S sells 1 contract = 3 Open Interest

Note: X closed one short position of his 3 shorts and S closed his long position, while Y still holds three open long positions and R one short position. So, we have three open longs and three open shorts in the market makes a open interest of 3 as the total of all long open interest is equal to the total of all short open interest.

What is volume then?

Volume is the number of business done in a particular market during a given period of time. It is the measure of activity between sellers and buyers. So, from the previous example the volume during the days are:

Day 1: 1 volume
Day 2: 3 volume
Day 3: 1 volume
Three days volume: 5

COT Reports

Back to the subject COT Report and looking on the CFTC website's list, we can see several reports for the various market sectors splitted in a Long or Short Format as well as Futures only and Futures and Options Combined makeup:

Let's assume we would like to analyze the report for the WTI Crude oil market (Petroleum and Products). Firstly we consider to keep an eye on the Futures and Options Combined Long Format report. Secondly we combine the NYMEX and ICE data. Why? Why should we leave out all the beautiful data and looking only at some Futures data?

Here is a screenshot form the COT report for WTI Crude oil with the week ended January 27, 2015. Tip: You can use CTRL+F to find the Crude Oil section rather than scrolling around.

Put the two together, we can see a open interest of 3,298,086. You should keep the closest attention to the 'Managed Money' section as this represents professional related guys such as hedge funds. Now with looking at this, we can observe an increase by 13,067 long positions and an increase by 10,025 short ppositions (NYMEX + ICE). This makes a managed money net buying of 3,042 long contracts in the week ended January 27, 2015. Additionally we can see that the managed money is positioned more to the long side with a ratio of 3:1.

It will be interesting to see the number of closed short positions in the next report that will be released on this Friday. Because of all the short covering and stop runs the number should be huge. We'll see.

Anyway, stay open minded and happy as success is a habit!