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commodity spreads
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Created: by brentf Attachments:15

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commodity spreads

  #11 (permalink)
Trading Apprentice
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Thanks for the comment

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  #12 (permalink)
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What are you chaps trading predominantly, inter-commodity spread, or calendar spreads?

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  #13 (permalink)
Trading Apprentice
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Most of the time I trade intramarket (calendar) spreads, but I watch all strategies in SeasonAlgo and sometime I also trade intercommodity spreads - if I see a really nice seasonal movement and it moves at support, around historical lows.


Last edited by Kurtas; May 16th, 2014 at 01:35 PM.
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  #14 (permalink)
Market Wizard
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Kurtas View Post
I would try to enter into Buy ZS X/ U ... it's looks more safely than X / N combination, also there is a seasonal move, selected seasonal window have 80% win in last 15 years according to SeasonAlgo
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Hey Kurtas, nice chart thank you.
First question, why do you show X-U rather than the more traditional U-X?
I'm not sure I want to rely on information on what happened in this spread over the last 10 years, never mind the last 30 years. A lot have changed in both market structure and fundamentals in that time.
I reran your charts, looking at days 100 to 20 before expiry, with just the last 5 years data.

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And looking at the averages of all 5 years plus the 3 years most like this year...

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I agree that looking at these charts, having this spread at or above 50, or even better 60 looks like a good risk/reward trade, at least historically
A 16 point move (56->40) equates to $800/contract which is over a 100% return on the current margin requirement of $742/spread.

My question on a trade like this, is how do you manage the risk.
Assume you enter 1 contract on at 56. If it widens to 60 your probably comfortable adding a second contract. But what about if it then widens to 65 or even 70. Temptation would to be to add more, but adding to losers is a recipe for disaster.
If you enter at 56, add 60s, 65s and 70s, at 70, you then have 4 contracts at an average 62.75, which equates to a $1450 loss (@70).



brentf View Post
Yes there is seasonality in the bean spreads, that is an advantage over other commodity futures. However, the seasonality of the bean spreads is changing as a result of the large increase in SA production. US calendar spreads no longer have to reflect a rationing of product throughout the entire year, only until SA becomes available to market, about late jan/feb. Having said that the old crop/new crop bean spreads are at large inverses because China double booked US and SA beans this year, not sure they will make that mistake again. All I'm saying is that the seasonality that have characterized bean spreads now have to take into account SA production. Re U beans, referred to as the "bastard month" because it is now always clear whether it is representative of old crop or new crop. This should be taken into consideration if trading this spread.

Thanks for the comment brentf.
So your saying that the fundamentals of this spread have potentially changed in the last 12 months?
Is there anything though that would change further in the next 20-40 days that would effect the fundamentals of this spread?

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  #15 (permalink)
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@SMCJB:


Quoting 
First question, why do you show X-U rather than the more traditional U-X?

It's simple, because I use "allways buy" rule - it means that I'm allways open the spread with BUY order and I'm close the spread with SELL.
Is it because I want to have clear in portfolio. I don't need to think if I have to close the spread with SELL or BUY order. So it's reason why I swap the legs.


Here is trading plan:
- risk per trade 2-5% (less risky = more risk), for this Soybean spread I will use 3%
- I allways open the spread position with BUY only at MAJOR SUPPORT LEVEL, I add another contracts when position goes against me, but with respect to risk per trade. (so in this case I have first buy limit at -65, last at -72 / SL -74)
- I simply skip this spread, when it don't reach major support level (entry)
- I use 1/2 of contracts for "scalping", where I take profit around 50-200$ per contract - then I'm waiting for retracement back to entry level where I buy whole position once again.
Spreads moves slowly most of the time and you can observe local ranges at intraday charts, by this way I can collect nice profits. It covers commissions and also sometime it may cover whole expected SL, then I have risk free trade.


You can argue that by this way I can miss some nice spreads, but I don't need to trade every seasonal moves.
SeasonAlgo has hundreds of seasonal strategies for each month and using their scanner I can simply find other spreads which currently moving in ranges.

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  #16 (permalink)
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Re fundamental over short term, U/X bean spread traded today at 52 1/4, the large inverses between old crop/new crop reflects the historically tight carryover. If producers get beans planted early, U contract will be perceived as a new crop month and there will be little/no reason for U to maintain a large premium to X. If however beans are planted late, tight supplies will continue through to X.

I trade both inter commodity and intra commodity spreads. One of the main reasons for trading spreads is the leverage it offers. Can be a double edged sword, the leverage it offers can lead to "opportunities". Secondly buying intra commodity spreads (long nearby, short deferred) allows me to quantify my risk, there is no other way of doing this using only futures. Given the increased consumption of grains/oilseeds over the past 15 years, one way to capitalize is being long spreads. Better than the "long only " model used by some funds (could never figure that one out).

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  #17 (permalink)
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brentf View Post
Re fundamental over short term, U/X bean spread traded today at 52 1/4, the large inverses between old crop/new crop reflects the historically tight carryover. If producers get beans planted early, U contract will be perceived as a new crop month and there will be little/no reason for U to maintain a large premium to X. If however beans are planted late, tight supplies will continue through to X.

Thanks brentf. What would be considered early vs late? Looking at the charts, if this trade is going to work, it's best chance of working is in the next 10-15 trading days.


brentf View Post
I trade both inter commodity and intra commodity spreads. One of the main reasons for trading spreads is the leverage it offers. Can be a double edged sword, the leverage it offers can lead to "opportunities". Secondly buying intra commodity spreads (long nearby, short deferred) allows me to quantify my risk, there is no other way of doing this using only futures. Given the increased consumption of grains/oilseeds over the past 15 years, one way to capitalize is being long spreads. Better than the "long only " model used by some funds (could never figure that one out).

I personally believe that spreads follow fundamentals (aka behave) better as well.

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  #18 (permalink)
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Ohh.. I did sell a 52.75 today. Only sold 1 - hoping to sell more at a better (higher) level.

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  #19 (permalink)
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When you look at a spread like this you have to look at the deliverable stocks vs. open interest. The planting progress report issued on Mondays will give you an inkling of the deliverable stocks in Sept. If seeding progresses ahead of schedule and market is not threatened by weather to a large degree, there is little reason for large inverse. Other consideration is composition of open interest. Funds are currently large long, mostly in N. You have to assume that 1) they will not stand for delivery 2)liquidation of N by funds will put pressure on spreads. This will come into play over the next few weeks as first delivery day for N approaches.

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  #20 (permalink)
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@brentf

If I understand, you are using COT analysis for your spread trading decisions?

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