Trading weather options and futures

[JYarsh]

I was wondering if anyone on here has any experience trading weather options and/or futures on the Chicago Mercantile Exchange (CME).

For those who are not aware, the CME allows people to trade Heading Degree Days (HDDs), Cooling Degree Days (CDDs), snowfall futures, rainfall futures, etc. for weekly, monthly, or seasonal time periods. The idea is that roughly 30% of the market relies on weather, and many companies are interested in hedging risk. An example would be a company that sells salt would be interested in hedging risk by purchasing seasonal snowfall options.

Anyway, this is an emerging market, and my understanding (which is still limited) is that some of the products are more liquid than others. Does anyone have experience trading these, and if so, which products? Were you successful? Is it even doable from the standpoint of a weather speculator or is it still at the stage of purely risk-management? If you used a brokerage firm, which one is best for this type of OTC trade?

This question may be a little too OT for this thread, but I can't think of anywhere else to put it

[am19psu]

I know there are some people on this board that know a lot about weather derivatives, though I don't know how much they are willing to share. Let's keep it here for now and we'll see if it goes OT or not.

[Thunder Road]

some of the products are more liquid than others.

Typically rain futures are more liquid than snow futures.

(Sorry I had to )

[weatherdude]

HDD and CDD contracts are traded for the months ahead and for seasons for many cities across the US and for other big city locations around the world as well. The most liquid cities to trade in the USA are LGA, New York, and ORD, Chicago. Generally the balance of the current month is the most active, until near the end of the current month and then the next month takes the focus.

ICAP, Evolution, and TFS (Tradition Financial Services) are the three largest brokers for weather derivative trades.

Usually trades are executed in 50 lot blocks because each lot is 20 dollars per hdd or cdd, so 50 lots brings it to a liquid value of 1000 dollars per cdd/hdd above/below the trade level. An individual could conceivably trade one lot pieces so the risk would only be 20 bucks per degree day, and if you waited until the last part of the month, clearly the volatility/risk would be lower. However the brokerage fees for such a small deal might prove insurmountable.

Here is the latest list of trades from the CME, and for today July 7th as I post this, it had nothing to do with LGA or ORD, but was all about Des MOines, Dallas and Atlanta, and the volume and size were very low, especially considering this is the entire market of block trades in the nation for these products today. At times it is very active and it times the weather market is a complete snooze-fest!

http://www.cmegroup....er-cooling.html

[GaWx]

I traded one contract of dd's in the late 90's. Then the liquidity was poor (bid/ask spread very wide due to very low volumes). I'm assuming that liquidity is at least a little better. However, unless it is a lot better, I wouldn't rec. them for spec. purposes for now.

Edit: If one still wanted to spec. with wx futures, I certainly wouldn't be aggressive...i.e., I'd place a low bid or high offer to enter. If the market doesn't come to your price, stay flat. That would at least negate much of the liquidity risk if one were to actually enter.

[Riptide]

It's interesting that alot of weather enthusiasts/forecasters are also involved in trading.