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Spread
Scan Issue: July 04, 2007 - Volume 151
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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 a calendar spread: long August 07 Soybeans and short March 08 Soybeans (SQ7 – SH8). The spread has been trading mainly sideways for the last few months. After making a new extreme low in June 07, the spread seems to be ready for its seasonal up move (app. 6/29 – 7/9).
Traders may want to enter the spread at MOC. Initial margin is $270. Suggested risk is $250 (reduced margin). Initial projected objective is $250, then a move higher. Basis is seasonal (app. 6/29 – 7/9) and a 1-2-3 low.
On June 26 we told subscribers of our professional daily spreads & position trading newsletter Traders Notebook, "Consider entering an inter-market spread LCQ7 – LHQ7 at a spread value of 17.35. Margin for the spread is $882 (reduced margin). Suggested risk is $1,000. Initial projected objective is $1,000, then a move to 20 or higher. Basis is seasonal (app. 6/15 – 7/20) and a RH."
Here's how we suggested managing this trade:
06/27 Suggest entering MOC tomorrow.
06/29 Suggest moving stop to 17.60. I personally would take some profits from the table if possible. The spread is trading at the May high, and you never know what will happen next!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, do you think seasonality for spreads has changed over the years?"
Andy: Because markets change, seasonality also changes. When looking into seasonality, you should always look at different time frames. For example, compare seasonality over 15 years with seasonality over the last 5 years, and you will see if there are any important changes. Right now I can see drastic changes in seasonality in the nearby month of the spreads, influenced primarily by index funds. This means that, when you search for seasonal spreads, you better skip the nearby month, because this is where you find all the activity of the big index funds rolling from one contract month into the next, thus messing up the seasonality.
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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!