Derivatives trading essay

Ryan Hazard

CME Group Trading Simulation Write Up

The CME simulator was a great learning tool for the derivatives course, it

allowed students to apply the knowledge learned in the classroom in a “real” setting.

It also required students to pay attention to news events and forces impacting the

financial and commodities market. I was able to raise my account value to a peak of

$186,410, representing a growth of +86% on October 8th. However by November

20th my account value had fallen 56% to $81,965. This was because after early

success I became pretty confident in my trading strategies and started to place very

aggressive trades and began doubling down on market movements, instead of

utilizing hedging strategies learned in the classroom. Figure 1 below is a graph of

the value of my trading account throughout the semester. The full list of all trades is

attached after the write up.

The trading simulator kicked off right around the time of attacks on Saudi

Arabian oil infrastructure, causing a spike in oil prices due to concerns about supply

shortages due to the time it would take repairs to occur, or the heightened sense of

concern about additional attacks. Being a freshly graduated chemical engineering

student I was pretty confident about this price movement being temporary. This is

because the processing units at most modern processing plants are modular.

Meaning that if a piece breaks, it can easily be swapped out for a new one. Older

plants would require extensive repairs involving the cutting of pipes, and changes in

design. Knowing that countries such as Saudi Arabia are committed to top of the line

infrastructure, I assumed the plant would be fixed with ease. Therefore on

September 17th I shorted 10 Brent Crude contracts, with a price of $65.38. My

assumption proved to be correct, I was able to then close the short out by buying

Brent Crude at $60.43, representing a gain of $49,500 to my account. During this

same period I had the feeling that the markets would experience a slight decline due

to news events, particularly the China Trade War. This assumption again proved

true and entered into 10 short contracts on the S&P500 on September 19th, exiting

on September 30th, leading to a profit of nearly $30k. This early success on my

account made me full of confidence, eventually leading to the decline of my account.

At the start of October I assumed that the market would continue to decline,

therefore I went long on 10 gold contracts, with a purchase price of $1,484.1 on

October 1st. In the following weeks the contracts performed well for the most part.

On October 24th I decided to double down on my bearish stance of the economy. I

shorted 10 contracts of the S&P500 at a price of $3005.03 at this point in time. In

the following few days the markets reached nearly historic highs after the release of

favorable economic data and speculation of a decrease in global tensions. On

November 6th the S&P contracts rose to $3074 and I decided to cut my losses of

$34,350. In the following days gold prices began to bottom out, eventually my losses

became too large and made it so that my account value was smaller than my

required margin. A If this weren’t a simulation, the account holder at this point

would be in default and need to flatten all positions. Thankfully I was able to keep

some smaller positions open, but in order to keep making trades I closed my

position in gold at a price of 1457.20, a loss of $26,900. At this point I figured the

market really couldn’t continue to climb any higher, and took a large position

shorting the Dow, hoping I could recoup the previous losses from my short. This

again was a lesson not to short the US economy, resulting in a loss of $28.8k. Figure

2 below shows a summary of the large gambling trades made throughout the

semester.

Figure 2. Overview of Gambling Trades

After gambling in the beginning of the semester, I decided to play a little more

strategically in the last couple of weeks. I decided to long both the E Mini Dow

product and the Micro Gold product. This gave me the opportunity to hedge against

most market risk and hold my account balance steady. If the markets worked as

planned, in a bull market, the Dow product would rise, but gold would fall and my

account would experience little change. If there was a bear market the opposite

would happen, the falling equity index would be offset by rising gold prices.

However, these two products aren’t perfectly aligned, so there is always some risk,

it is also not a great strategy for growing wealth as it is preserving wealth. For my

practice account I entered this situation on the 20th of November with an account

balance of $82,178, and exited on November 25th with an account balance of

$83,463 (+1.56%). In this case the portfolio was much more exposed to the Dow

contracts (total notional value of $695k) than the gold (total notional value of

$14.7k). Therefore, my account benefited from the rise in the value of the Dow

Jones.

Item Type Date Open Date Close Open Price Close Price Multiplier (No. Contracts

x Contract Size) P/(L)

Brent Crude Short 9/17/2019 9/30/2019 65.38 60.43 10000 49,500.00$ S&P 500 Short 9/19/2019 10/1/2019 3002.25 2942.50 500 29,875.00$ Gold Long 10/1/2019 11/18/2019 1484.10 1457.20 1000 (26,900.00)$ S&P 500 Short 10/24/2019 11/6/2019 3005.03 3074.00 500 (34,485.00)$ DowJones Short 11/6/2019 11/18/2019 27453.00 28029.00 50 (28,800.00)$

Net of "Gambling" (10,810.00)$

From this assignment I learned that anyone that has a job that involves being

actively involved in the markets must remain current with news and politics. In

addition they must stick to fundamentals, as gambling will win some of the time, but

someday you will lose, badly. I also learned it is nearly impossible to run a “one –

man shop” and you need different analysts covering macro and micro level events,

and giving their opinion to the portfolio manager.

[All Trades Attached, Next Page]

Trade Date Symbol Contract Contract size Last Price Notational Value Margin Commitment Side Quantity Type Open/Closing Account Value 1 17-Sep BZZ9 Brent Crude 1000 65.38$ 653,800.00$ 46,000.00$ Short/Sell 10 LMT Open 100,000.00$ 2 19-Sep ESZ9 E Mini S&P500 50 3,002.25$ 1,501,125.00$ 63,000.00$ Short/Sell 10 LMT Open 120,000.00$ 3 23-Sep NGV9 Natural Gas 10000 2.507$ 125,350.00$ 10,000.00$ Long/Buy 5 LMT Open 130,000.00$ 4 30-Sep BZZ9 Brent Crude 1000 60.43$ 604,300.00$ (46,000.00)$ Long/Buy 10 MKT Closing 164,385.00$ 5 30-Sep ZNZ9 10 Yr Treasury 100000 130.06$ 130,060,000.00$ 13,000.00$ Short/Sell 10 LMT Open 164,385.00$ 6 1-Oct ESZ9 E Mini S&P500 50 2,942.50$ 1,471,250.00$ (63,000.00)$ Long/Buy 10 MKT Closing 175,791.00$ 7 1-Oct GCZ9 Gold 100 1,484.10$ 1,484,100.00$ 49,500.00$ Long/Buy 10 MKT Open 175,278.00$ 8 8-Oct ZNZ9 10 Yr Treasury 100000 131.20$ 131,200,000.00$ (13,000.00)$ Long/Buy 10 MKT Closing 186,410.00$ 9 24-Oct ESZ9 E Mini S&P500 50 3,005.03$ 1,502,515.00$ 63,000.00$ Short/Sell 10 MKT Opening 186,197.50$

10 28-Oct PAZ9 Palladium 100 1,762.60$ 176,260.00$ 13,475.00$ Short/Sell 1 LMT Opening 175,572.00$ 11 6-Nov ESZ9 E Mini S&P500 50 3,074.00$ 1,537,000.00$ (63,000.00)$ Long/Buy 10 MKT Closing 133,592.00$ 12 6-Nov YMZ9 E Mini Dow 5 27,453.00$ 1,372,650.00$ 54,450.00$ Short/Sell 10 MKT Opening 133,790.00$ 13 11-Nov PAZ9 Palladium 100 1,684.30$ 168,430.00$ (13,475.00)$ Long/Buy 1 MKT Closing 114,240.00$ 14 18-Nov GCZ9 Gold 100 1,457.20$ 1,457,200.00$ (49,500.00)$ Short/Sell 10 MKT Closing 82,440.00$ 15 18-Nov YMZ9 E Mini Dow 5 28,029.00$ 1,401,450.00$ (54,450.00)$ Long/Buy 10 MKT Closing 82,540.00$ 16 20-Nov YMZ9 E Mini Dow 5 27,826.00$ 695,650.00$ 27,500.00$ Long/Buy 5 MKT Opening 81,965.00$ 17 20-Nov MGCZ9 Micro Gold 1 1,472.30$ 14,723.00$ 4,950.00$ Long/Buy 10 MKT Opening 82,178.00$ 18 25-Nov MGCZ9 Micro Gold 1 1,456.30$ 14,563.00$ (4,950.00)$ Short/Sell 10 MKT Closing 83,413.00$ 19 25-Nov YMZ9 E Mini Dow 5 27,931.00$ 698,275.00$ (27,500.00)$ Short/Sell 5 MKT Closing 83,463.00$