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Spread
Scan Issue: June 20, 2007 - Volume 149
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Today we consider an equity spread: long December 07 Soybean Meal and short November 07 Soybeans (100*SMZ7 – 50*SX7). The spread has been in a down trend since September 2007. Seasonality tells us there is a good chance the spread could change its direction in the time from 7/10 till 7/30. More aggressive traders might want to enter already at the 1-2-3 low; more conservative traders might want to wait for the next Ross hook.
Traders may want to enter the spread at a value of -19,180. Margin for the spread is $540 (reduced margin). Suggested risk is $700. Initial projected objective is $700, then a move to -16,000 or higher. Basis is seasonal (app. 7/10 – 7/30) and a 1-2-3 low. Because of the different values of each unit move of Soybean Meal and Soybeans, we have to multiply the buy side by 100 and the sell side by 50 to get the right equity chart. The spread is 1:1.
On June 07 we told subscribers of our professional daily spreads & position trading newsletter Traders Notebook, "Consider entering an inter-market meats spread 400*LCZ7 – 500* FCQ7 at MOC tomorrow 06/08. Margin for the spread is $2,633 (no reduced margin). Suggested risk is $1,000. Initial projected objective is $1,000, then a move higher. Comment: Seasonality of this spread is showing into the other direction. The trading idea is counter seasonal. Probably not everyone’s taste."
Here's how we suggested managing this trade:
06/08 In?
06/13 Spread is close to the first suggested target. Suggest taking profits tomorrow if possible.
06/14 Spread hit first suggested target. Suggest moving stop to break even.
06/15 Suggest moving stop to -16,100.For more information about our daily newsletter, 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 you tell us something about commodity index funds?"
Andy: Commodity Index Funds are “long only,” which means they don’t hold a short position. To see their position in some markets, go to http://www.cftc.gov/dea/options/deaviewcit.htm and have a look at the column called “Index Traders”. In the same way a stock index fund tries to compete, for example with the S&P index, the commodity index funds try to beat the Goldman Sachs Commodity Index (GSCI). Because the traders are always long, they have to move their long position on the roll over (or even before) into the next active contract month (called “Goldman Sachs Roll”) and, as you can imagine, this can move the spreads a lot.
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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!