An Interview with Chad Geraigiri

Chad Geraigiri is the president of Optimus Capital Management, a Florida-based commodity trading advisor. His trading systems incorporate technical analysis and aggressive entry/exit management in an attempt to deliver strong risk-adjusted returns.

He spoke with the editors of HardAssetsInvestor.com recently about why short-term trading makes sense in the commodities market, and about where he sees opportunities today.

HardAssetsInvestor.com (HAI): How did you get your start in commodities?

Chad Geraigiri, president, Optimus Capital Management: When commodity options first launched in the 1980s, a broker called me out of the blue and said he expected sugar to explode. I had some money set aside, so I bought some sugar options, and they tripled in value. That piqued my curiosity, so I started to dig in some more.

What I realized was that I had gotten lucky. Real lucky. So I started studying the market to look for disciplined ways to trade the market: signs of where to enter positions, where to exit, where to establish stop/losses, etc. Over the years I've developed three different methodologies to access the space.

HAI: How do the systems work?

Geraigiri: The core system is basically a trend-following system with a volatility filter. We look for strength (or weakness) in individual commodities, and we exploit those trends while considering the level of volatility in the marketplace.

Our first goal is capital preservation - every trade we make, we consider the risk parameters on that trade. The goal is not huge returns; it's realistic returns while managing risk.

HAI: What do you think of the current environment?

Geraigiri: There are enormous opportunities these days in the commodities market, considering the growth in worldwide demand for things like grains and foodstocks. Energy demand is surging. Metals have made new highs and are currently testing support; I believe they will trade higher in the future.

I'm fairly bullish on the dollar going forward, too, even thought it usually moves in the opposite direction as the metals. But it looks oversold from here.

HAI: How does a short-term trading platform mesh with these long-term supply/demand trends?

Geraigiri: We trade both the long and the short sides of these markets. There are plenty of opportunities on both sides.

HAI: How long do you hold the average position?

Geraigiri: Most positions are held for a very short period - one or two days, or maybe up to a week or two. Normally, we'd prefer to hold positions longer, but because the markets have gotten so volatile, the time window has collapsed. Each position is reviewed on a daily basis as if it were a new trade, and if market conditions change, we move up our stops and enter/exit positions as needed.

HAI: How do you decide on price points to enter/exit positions?

Geraigiri: We have a volatility filter that looks at the highs and lows of various commodities over the past 10 days. With continued large moves in the market, you have to be prepared to exit a market very quickly.

If you look at soybeans, it may move 60 cents a day. That's a $3,000 move. If you're on the right side of the market, that's great. If not, you're going to get taken out fairly quickly.

HAI: Is the flood of institutional money into commodities changing the market?

Geraigiri: Absolutely. The volatility of the market has increased because of the huge inflows of capital. The stock market has been fairly flat and people are looking for new opportunities, and they are finding them in commodities. All that money has to go somewhere.

If you look at corn, corn has open interest in the front month of 600,000 contracts. A few years back, it was less than half of that. The volume has increased the volatility.

HAI: Is indexing an appropriate strategy for the commodities market?

Geraigiri: I don't think so. The volatility is so large that you cannot just buy and hold. It's not the same as equities. If you buy a stock, it may go through gyrations, but if the fundamentals are sound, the long-term trend will be up. With commodities, the moves can become detached from the fundamentals quickly.

Look at wheat. It's a perfect example. We have tremendous wheat shortages right now. Australia had a drought, governments are hoarding wheat ... and yet, wheat is currently down 40% over the last few months. Fundamentally speaking, the wheat market should be much higher, but it's been on a downtrend for a couple of months now.

Same thing with crude oil. You could have bought it a year ago and sat on it, and it would have done well. But in the meantime, it's had a lot of ups and downs.

Do you want to sit there and watch that happen? Or do you want to profit on both sides of the equation? We use technical indicators to find entry and exit points, to capture both up and down moves in the market.

HAI: Gold has historically been seen as a "safe haven" asset, but recently, the volatility on gold has been huge. Why is that, and will that trend stay in place?

Geraigiri: Yes, I believe it will stay true. A lot of it is basic supply/demand. The demand for gold is going up and the supply is staying flat, and that creates an imbalance.

Gold is always the "flight to safety" asset. When you look at what's been going on in recent years, there's been a tremendous amount of uncertainty in the market: the war in Iraq, the war in Afghanistan, real estate, etc. Just about every aspect of our lives has become more uncertain.

Gold is also an inflation fighter, and whatever the government's telling us, when you or I go to the supermarket or fill up the gas tank, we know that prices have gone up. The value of the dollar has gone down. The government says inflation is low, but I have no idea where they are getting those numbers. People realize this and they want access to gold.

The Asian economies also rely on gold, and as they get richer, they're demanding more and more of it. And people are finding more and more industrial uses for gold and silver all the time.

So in the end, you have major increases in demand and few increases in supply, and that means volatility and higher prices.

HAI: Do you include the impact of backwardation and contango in your analysis?

Geraigiri: Absolutely.

Backwardation is a bullish signal. When a market is in backwardation, it's a psychological signal showing that people want to own the commodity now. They don't know what's going to happen tomorrow. They want that commodity now.

Contango is more of a neutral signal. It could be bullish or bearish. But backwardation is always a good sign.

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There is a risk of loss in futures trading. Past performance is no guarantee of future results.