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Spread
Scan Issue: December 5, 2007 - Volume 173
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Today we once again consider a calendar spread in the soy complex: long August 2008 Soybeans and short March 2008 Soybeans (SQ8 – SH8). The spread has been trading sideways since late September '07, testing the level around -13 several times (see dotted line). Does it mean the spread has found its bottom? The seasonal window goes from 11/30 until end of February 2008, and there is a good chance the spread will not move much lower.
Traders may want to enter the spread at -12 limit. Initial margin for the spread is $135. Suggested risk is $300. Initial projected objective is $300, then higher. I personally would take the trade in the electronic market (ECBOT).
On November 27 we told subscribers of our professional daily spreads & position trading newsletter Traders Notebook, "Consider buying March Wheat (elec.) at 853¼ stop market (if pit open <= 853). Initial margin is $2,025. Suggested risk $600. First suggested target at 860, then 896. Basis is a TTE in front of a Ross Hook. Comment: I would recommend this entry only to those who are able to watch the market in real time (because of the low risk and close first target)."
Here's how we suggested managing this trade:
11/28 Long at 853¼. Trade hit first suggested target today. Suggested stop at break even. I personally would shoot for a target at 896 or even 906 (if the market is very strong).
11/29 Out at 896 or 906.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, nowadays almost all markets are electronic. Do you use the electronic or the open outcry market when you trade spreads, and how do you enter/exit your spread trades?"
Andy: I usually use electronic markets when I trade spreads. There are only a few markets in which the volume in the pit contract is higher than in the electronic market. The meats at the CME are one such market. But when the volume is higher in the electronic market, I prefer the electronic market over the open outcry. There are several advantages to using electronic markets:
- You have constant information about the bid and ask prices. In open outcry you seldom get this information (and if you get it, you cannot be sure it is correct).
- You get your fills immediately. It is just a matter of a second for you to get your fill confirmation. In some open outcry markets you sometimes have to wait up to an hour or even more for your fills and/or confirmations.
- Commissions are much lower for the electronic markets.
- You don’t have to call your broker or trading desk to place your order. You can do everything online. (Please note: you have to be careful whenever you use the electronic platform, especially in the beginning. There is no one double-checking your orders.
When trading spreads using the electronic contracts, I prefer to enter and exit my spread trades around the close of the pit session. In the open outcry market I used to give MOC (market on close) orders because of good liquidity around the close. But that type of order doesn’t exist in electronic markets. Therefore, we have to “simulate” MOC orders by giving market orders in the last 3 minutes before the close.
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The Commodity Futures Trading Commission has asked us to advise you that trading spreads or outright futures 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!