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Spread
Scan Issue: December 19, 2007 - Volume 175
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This week we look at March Silver – February Gold
Today we consider an intermarket calendar spread in the metals complex: long February 2008 Silver and short March 2008 Gold. You can take this trade in the Chicago markets at the CBOT, or in the New York markets at the NYMEX. The symbols will differ.
After being in a trading range for a number of months, the spread has dipped to recent lows, and it seems the spread has now stopped its downmove. We might get a 1-2-3 low in the next few days. The time window for a possible seasonal up move goes from 12/21/07 to 01/04/08. This means you might have to hold the spread over Christmas and the New Year.
Initial margin for the spread is $1012 (reduced margin). Suggested risk is $500. Initial projected objective is $500, then higher. Basis is seasonal and hopefully a 1-2-3 low. Comment: if we get a 1-2-3 low, consider entering on a Traders Trick if possible.
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Questions or Comments? Please email us: support@spread-trading.com
Student’s Question: “Andy, I just researched an MRCI seasonal spread, and there is a strange chart. I think the chart is not generated properly, which leads to wrong information for the trader.
"Here it is: WHEAT JUL – MAR:
Wheat JUL07 - MAR07
Wheat JUL08 - MAR08
"The above strategies are similar, the difference is the year only. But Seasonal Charts published by MRCI are definitely different.
"The spread curve is the same, but the spread value level is definitely different. In 2007, the spread reached about 30 by the end of Feb, but in the 2008 trade the spread value will reach about 275.
"How can it be like this, since from 30 to the 250 level is so far away?
"I also looked at the weekly & monthly spread charts. They never go beyond 50. How can MRCI plot JUL08 - MAR08 with such high spread value?"Andy: A seasonal chart is an average over several years. It is meant to show you only the direction of a seasonal move. The values you see on a seasonal chart are related only to the current chart, NOT to the seasonal chart. What they do is to plot the seasonal chart over the current chart. Therefore you see different values for the seasonal chart.
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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!