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Spread Scan Issue: January 30, 2008 - Volume 179
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Otherwise, welcome to this week’s issue of the Joe Ross Spread Trading Newsletter.
The Spread Scan weekly newsletter is designed to assist you in becoming a better more complete trader by showing you, within the context of the markets, how to trade spreads.
In this newsletter you will see applications of spreading in the futures and commodity markets. Spreads are applicable to all futures markets including currencies, commodities, financial instruments, and stock indexes. It is even possible to trade spreads in the all-electronic intraday market using day trading techniques.
Spreads are based on seasonality, correlation, backwardation, chart patterns and simple observation. Spreads follow the Law of Charts™ and can be implemented using the Traders Trick™ entry.
In each issue of Spread Scan, you will find an upcoming spread trade for your consideration in the following week. You will also find a review of an existing or closed spread so you can see and learn how spread trades are managed.
Spreads offer you the most efficient use of your margin account of any other way to trade. Many traders find they like them so much that spreading becomes their primary way of trading.
Each week we present spread trading examples and opportunities to help you become a more professional spread trader, and we provide you with helpful content of interest to traders:
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Be sure you receive all your issues of Spread Scan so that you can continue to enjoy learning through the best free educational trading information available, and so that we can keep you informed about additional educational services and products to help you grow as a successful and profitable spread trader.
Today we consider an inter-market spread: long May '08 Soybean Meal and short May '08 Chicago Wheat (100*SMK8 – 50*WK8). This spread has been in a trading range since September ´08 with an upper bound at around -$9,000 and a lower bound at around -$15,000. Now, between February 8 and April 1, seasonality comes into play. Will this help to move the spread back up to -$10,000 or even higher? This spread entails a lot of risk because of high volatility in Soybean Meal and especially in Wheat.
Traders may want to enter the spread at a spread value of -$12,370. Initial margin is $3,848 (no reduced margin). Suggested risk is $2,300. Initial projected objective is $2,300, then higher. Basis is seasonal (app. 2/8 – 4/1) and a 1-2-3 low. Comment: it will probably not be possible to give a spread order in the electronic market; you have to leg into the spread with two separate market orders. Because of the different values of each unit move of Soybean Meal and Wheat, we have to multiply the buy side by 100 and the sell side by 50 to get the right equity chart. The spread is 1:1.
On November 13 we told subscribers of our professional daily spreads & position trading newsletter Traders Notebook, "Consider entering a currencies spread ADZ7 – CDZ7 at a spread value of -14.38. Initial margin for the spread is $1,490 (reduced margin). Suggested risk is $1,800. Initial projected objective is $1,800, then higher. Basis is seasonal (app. 11/4 – 1/10) and a 1-2-3 low. Comment: Suggest entering into the elec. contracts. We have to roll into March on about 12/10."
Here's how we suggested managing this trade:
11/14 Suggest entering MOC tomorrow.
11/15 In? Suggested stop at -14.80.
11/28 Suggest moving stop to -14.25.
11/30 Suggest moving stop to -13.25.
12/04 Suggest moving stop to -12.65.
12/06 We roll from the December into March contracts on Monday.
12/07 Suggest moving stop to -12.50. After roll into March on Monday suggested stop at -13.00.
12/10 Suggest moving stop to -12.80 (now March contracts).
12/12 Suggest moving stop to -12.10.
12/14 Spread hit suggested stop. Suggest exiting MOC on Monday of not already out.For more information about our daily newsletter, visit our Spread Website to find out more about Traders Notebook
Questions or Comments? Please email us: support@spread-trading.com
Student's Question: "Andy, I know how to calculate and how to chart an equity spread like long Soybeans and short Soybean Oil. I just multiply each side with its unit value in US$ (50*S – 600*BO) and I get an equity chart. But is it possible to give a limit order for equity spreads?"
Normally you cannot give a limit order for an equity spread. I say “normally” because it depends, of course, on your broker. Perhaps he would be willing to use an alert to simulate your limit order, but the pits no longer support limit orders for equity charts. You have to talk to your broker about it. You can use a simple spread limit order for the FC-LC spread. Feeder Cattle (FC) has an unit value of $500 and Live Cattle (LC) of $400. The difference between the two contracts isn’t much and therefore you get almost the same result using a limit order for 500*FC – 400*LC or FC – LC.
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Disclaimer:
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!