To put it simply, a commodity trading advisor, or CTA, is a person who gives advice about commodities markets and trading them. A CTA can be a firm or individual registered with the National Futures Association (NFA) as a trading advisor or the Commodity Futures Trading Commission (CFTC). There are exceptions and individuals who give advice who are not required to register, but normally these are people who provide advice to a minimal number of people. When someone is advertising themselves as a commodity trade advisor, they are likely to be (or should be) registered.
A commodity trade advisor trades futures contracts or options on futures contracts. Futures refer to futures on commodities and financial products, traded on a futures exchange. In the US, there are exchanges in New York and Chicago, as well as grain markets in Minnesota and Kansas.
A commodities trading advisor will normally manage clients’ accounts and trade using a particular system they have developed. This system may be a computer program which focuses on certain strategies or algorithms to determine trading opportunities. A commodity trade advisor might also use a personal combination of technical or fundamental analysis. Technical analysis focuses on price points and statistics, normally involved in reviewing charts of price movements over time. Fundamental analysis is primarily concerned with the dynamics of supply and demand and the perceived events which may shape either like weather or crop reports.
Some commodity trading CTA strategies use straight futures contracts, which is buying or selling contracts, while others may look to options on futures contracts. Options are the right, but not the obligation, to take a specific action on the underlying futures market. There are some commodity trade advisors who sell options exclusively in a technique known as premium collection or option writing. This is a CTA advisor strategy which involves unlimited risk of loss.
The idea behind premium collection is to take limited potential profit weighed against options which have a perceived limited probability to be worth money to the buyer. There is still a substantial risk of a loss to the option writer, but the commodity trade advisor will look for options which have a statistically low probability of being “in the money” at or before expiration. This is often employed in markets such as equity futures where volatility might make the price of options higher, or at least high enough to have a big enough possible reward.
Trading in futures and options involves a substantial degree of a risk of loss and is not suitable for all investors. Past performance is not indicative of future results.
