• Every week, the CFTC releases a number of Commitments of Traders reports breaking positions down in a number of ways. 

• I have always used the Legacy/Futures Only set of numbers based on the idea the reports aren't all that important, but confirm (usually) what we've already seen in the markets. 

• I don't use futures and options positions out of respect for option traders who are playing chess while the rest of us play checkers. 

I had a question come in Monday that might be on the mind of others in the industry. The gentleman’s message read, “You like the legacy Commitments of Traders report over the disaggregated and supplemental reports. Why?”

Direct and to the point. I like that. 

My answer, as I’ve talked about before, was Yes.

And here’s why: 

Before I get to the nuts and bolts of my argument, let me say I took the stance a long time ago that noncommercial interest were trend SETTERS rather than trend FOLLOWERS. It’s a fuzzy distinction, I know, given many algorithms are triggered by technical indicators that would be considered “trend following”. But for now I’ll stick with the conclusion reached by applying Newton’s First Law of Motion to Markets: A trending market will stay in that trend until acted upon by an outside force, with that outside force usually noncommercial activity. 

With that out of the way, onto my answer: 

First, we have to keep in mind the numbers aren’t overly important, so we might as well keep it simple. The Commitments of Traders reports don’t actually provide us with anything tradable – usually – but act as confirmation of what we already know about market activity. Again, usually. 

Let’s take the first vocabulary hedge: I’ve been tracking the noncommercial HRW wheat (KEN25) positions closely, and recent Commitments of Traders reports have shown funds moved to record large short and net-short futures positions. This tells us that at some point, even with no change in fundamentals, Watson could start covering some of these positions. When that happens, like we’ve seen so far this week, and sell orders were exhausted on the way down, it creates what I call a vacuum above the market. (Yes, I know, that isn’t how a vacuum works. I’m just as much a physicist as I am an economist.) If, as traders, we are in that market, we need to take note when futures positions reach extremes and position - or reposition - accordingly. 

As for the second hedge: There are weeks when CFTC’s numbers do not confirm what we’ve seen in market activity. What do I do then? Turn off the computer and enjoy the weekend. Again, these numbers don’t mean much in the grand scheme of things. 

Second, folks at CFTC have told me they still have difficulty classifying what group holds what, so again, much of the breaking down of positions is nonsense. 

Third, and most importantly, the folks who talk about “Futures and Options” show how much they don’t understand option markets. 

I’ve talked to a number of option traders over the years. I’ve read books on option trading strategies and followed option traders through newsletters and social media. For the most part, they are not concerned with bullish or bearish but rather using any or all the Greeks to give themselves an advantage in the market. Therefore, they can buy or sell hundreds of put or call options, a move that sends the squawking throng into a frenzy when they see the CFTC numbers, with option traders simply being Delta neutral, or some other name for another covered position. The bottom line is option traders are playing chess while the rest of us play checkers.