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Spread
Scan Issue: January 31, 2007 - Volume 129
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Joe Ross Spread Trading Newsletter.Each week we present spread trading examples and opportunities in order to help you become a more professional spread trader.
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Today we consider an inter-market spread: long May 07 Soybeans and short 2 May 07 Corn (SK7 – 2*CK7). Only in 1996 did the spread move below –100 (data goes back to 1971). Along with a strong seasonal up move in February and March, the spread seems to be attractive. Important report (Crop Production & WASDE Report) on 02/09.
Traders may want to enter the spread at a value of –94 ¼. Margin for the spread is $3,780 (no reduced margin). Suggested risk is $1,600. Initial projected objective is $1,600, then a move to 50 or higher. Basis is seasonal (app. 2/5 – 3/15) and a 1-2-3 low. Please note, the ratio of the spread is 1:2.
On January 22 we told subscribers of our professional daily spreads & position trading newsletter, Traders Notebook, "Suggest entering an intra-market meats spread LHJ7 – LCJ7 at a spread value of –27.45. Margin for the spread is $1,695 (reduced margin). Suggested risk is $1,000. Initial projected objective is $1,000, then a move to –20 or higher. Basis is observation (see comment) and a Ross Hook. Comment: LH is in an up trend and LC in a down trend. Seasonality also shows into the right direction – up!"
Here's how we suggested managing this trade:
01/23 Suggest entering MOC tomorrow.
01/24 In?
01/30 Suggest moving the stop to -27.225.For more information about our daily newsletter, visit our website:
http://tradingeducators.com/studentsonly.htm or visit our Spread Website to find out more about Traders Notebook
Questions or Comments? Please email us: support@spread-trading.com
Student's Question: "Andy, can I place spread orders at the e-CBOT or any other electronic market?"
Andy: I don’t know if this is true for all electronic markets, but I will try to explain the basic information for spread orders in electronic side-by-side markets.
Intra-market spreads (i.e. W - W or ED - ED) are possible. Depending on your trading platform, you can execute the order directly at the exchange or via your broker. Other platforms (for example RefcoExpress) will allow you to send the order to the order desk, and someone there will place your order into the electronic trading system. In this case, even if your order is placed into the electronic market, you will have delays on your fills or any other confirmations. It is important to know that your spread order will also be executed if both legs of your spread are able to get filled. For example, you want to sell the spread X – Y at a premium of 10. If the exchange trading system can make sure you get filled on both sides with a difference of 10, it will lock in both trades for both legs and execute them simultaneously.
You will probably run into problems when you try to place an inter-market spread like S – W. So far, most trading systems will not allow inter-market spreads; others will allow you to place the order, but it will not be recognized as a spread until the end of the trading session. You will need to "leg in," that is place the order for each leg separately, in such an inter-market spread.
It is a always a good idea to talk with your broker regarding how to place these orders in the electronic markets.
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Disclaimer:
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!