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Spread
Scan Issue: January 24, 2007 - Volume 128
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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 an inter-market meats spread: long June 07 Live Cattle and short March 07 Feeder Cattle (400*LCM7 – 500*FCH7). After testing -$12,200 several times in November and December 2006, the spread finally made it higher and rallied in January 2007 up to almost -$10,000. The spread has retraced the last few days, giving us a chance to enter. Seasonality normally starts around 01/17 and ends around 03/07.
Traders may want to enter the spread at a value of -$10,290. Margin for the spread is $2,969 (no reduced margin). Suggested risk is $1,200. Initial projected objective is $1,200, then a move to -$6,000 or higher.
On January 17 we told subscribers of our professional daily spreads & position trading newsletter, Traders Notebook, "Consider entering an inter-market grains spread MWH7 – WH7 at a spread value of 27 ¾. Margin for the spread is $1,663 (reduced margin). Suggested risk is $400. Initial projected objective is $400, then a move to 60 or higher. Basis is seasonal (app. 1/1 – 2/25) and a RH. Comment: Last week the spread broke out of its trading range. Minneapolis Wheat is sometimes a bit tricky. I would suggest to wait for a break out of the hook and try to enter the next day via limit order."
Here's how we suggested managing this trade:
01/18 Suggest entering tomorrow at 30 limit. Spread is moving fast. If not already in, suggest using a risk of $500 per spread.
01/19 It was possible to enter at 30. Suggested stop at 25.For more information about our daily newsletter, visit:
http://tradingeducators.com/studentsonly.htm
Questions or Comments? Please email us: support@spread-trading.com
Student's Question: "Andy, can you tell me what happens at the rollover? Is it something that happens automatically, or do I have to do something about it?"
Andy: The rollover is the time when most traders get out of one month to get back in into another month. On the rollover, the volume moves from one month into another (not necessarily the next contract month). Even if there is a specific day when the rollover starts, it normally takes a few days until most traders have moved their positions into the new month. If you want to roll from one month into the next, you either have to do it on your own or tell your broker to do it for you. When you are long, he will sell your position and buy it back in the new month. When you are short, he will do it just the opposite. If you want to do it on your own, ask your broker about the rollover. He will notify you a few days before the rollover starts.
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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!