How to Invest in the Volatility Differential Between Futures and ETFs

Andy Waldock |

It is widely accepted that the commodity futures markets move farther and faster than their equity related cousins and I certainly agree with that supposition. We see it all of the time. The leveraged nature of the futures markets and subsequent margin requirements allow smaller players to enter the markets due to the lower capital requirements as well as forcing them to exit for the same reason.

The coffee futures market has fallen by nearly half since the September highs. Over the same period, the Coffee Exchange Traded Fund (JO) has fallen by 40 percent. The 8 percent difference is easily attributable to excessive pressure on the short side of the futures market.

JO coffee etf



This added pressure is also what will cause the futures market to bounce off its lows far more quickly than the ETF. The bounce will be fueled by massive short covering from Index funds and small speculators as the commercial traders in the coffee futures market have built up a very large long position on the market’s decline.

coffee futures

Clearly, the commercial trader sentiment is that this market has been beaten down below its deliverable price in the cash market. They are using these prices to ensure their production costs moving forward. Our philosophy of following the commercial traders in the commodity markets is based on our beliefs that no one knows a market like the people whose living is tied to it. We track their actions through the Commitment of Traders Report and put their analysis to work for us at COT Signals.

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Symbol Name Price Change % Volume
CXI:CA Currency Exchange International Corp. 22.04 0.00 0.00 2,286

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