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Spread
Scan Issue: January 10, 2007 - Volume 126
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Today we consider an inter-market metals spread: long March 07 Silver (CBOT) and short February 07 Gold (CBOT) (5000*ZIH7 – 100*ZGG7). The spread has been in a long term up trend since July 2006, with strong pull backs in September and December. Can seasonality help the spread to climb back up to its December high? Suggest waiting for a strong break out of the trading range before entering the spread. This spread can also be initiated at the CMX. The ratio of the spread is 1:1.
Traders may want to enter the spread at $1,570 or higher. Margin for the spread is $1,981 (reduced margin). Suggested risk is $1,700. Initial projected objective is $1,700, then a move to $6,500 or higher. Basis is seasonal (1/11 – 2/15).
On October 23 we told subscribers of our professional daily spreads & position trading newsletter, Traders Notebook, "Consider entering an intra-market wheat spread WZ7 – WH7 MOC on Monday. Margin for the spread is $1,350 (reduced margin). Suggested risk is $1,000. Initial projected objective is $1,000, then a move to break even or higher. Basis is seasonal (app. 10/25 – 02/30) and a RH. Comment: Wheat is moving up like crazy. I personally would try to get into the trade at least with 2 lots. I would get rid of the first lot pretty quick, and would leave the second for a long term trade."
Here's how we suggested managing this trade:
10/23 In?
10/30 Spread is having a hard time. It just doesn’t want to move up. I personally would exit if the spread doesn’t move up to my first target by Friday.
10/31 Spread is close to the first suggested target. Suggest moving the stop to –54^4.
11/01 Suggest taking some money from the table if not already done.
11/03 Spread hit first suggested target.
11/07 Suggest moving the stop higher to –49.
11/09 Suggest moving the stop higher to –40 ½
11/13 Suggest moving the stop higher to –35 ½.
11/21 Suggest moving the stop to –28.
11/22 Suggest moving the stop to –22.
11/24 Suggest moving the stop to –19 ¾ (if you think the stop is too close, leave it farther away).
11/27 Spread hit suggested trailing stop. Suggest exiting MOC tomorrow.
11/28 Maybe you are still in the trade after such a nice up move. Suggest keeping the stop at the same level.
12/06 Suggest moving the stop to –15 ¾.
12/08 I personally would move my stop closer (-9), because it will go flat by end of next week. If you want to stay in the trade you might want to use a wider stop.
12/11 Suggest moving the stop to –3 ¾.
12/12 Suggest moving the stop to 1 ¾.
12/13 Suggest moving the stop to 3.
12/21 Suggest exiting if not already out.Open equity on remaining contracts: $2,700 per contract. Please keep in mind that we already realized profits of about $1,000.
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Student's Question: "Andy, in your spread recommendations you give us a time window (i.e. 01/10 – 02/22) whenever the trade is seasonal. Do you recommend to enter the trade only between these two dates?"
Andy: Seasonality doesn’t always start and end at a precise date, and therefore the seasonal time window can be only a rough guess. Sometimes seasonality starts a month earlier or later, and sometimes you don’t get the seasonal move at all. But if you want, you can do the following: start looking for an entry 10 days before and 10 days after the statistical entry date, and move your stop closer whenever you get close to the statistical exit date. Most important: Always look at the current chart. All statistics or charts about seasonality are only an additional help, but you can never base a trade only on the information of the past. Always trade what you see on the current chart!
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The Commodity Futures Trading Commission has asked us to advise you that trading spreads is complex and carries a high degree of risk. While there is opportunity for incredible wealth building, there is also the risk of losing even more than you invested. Of course, that's not unlike most other businesses. But informed traders are the best traders!