Current Spreads Journal

[fastnet]

Dear all,

I would really like to start a discussion about current/live spread trades.

There has been a bit of this in the past but I suppose the duration of these trades does not lend itself to day-to-day discussion. Maybe the best thing is to follow the lead of FTSE-B and have a few sub-threads for a series of live trades that we can follow?

My enthusiasm has been boosted by the fact that my account is now live and I'm ready to place the first trade. It has for a week or so actually but there doesn't seem to be many attractive trades just yet.

Here are a few I am considering with planned entry levels and targets:

1) July 05 Lean Hogs - August 05 Lean Hogs
Get in 1.5 target 5

This seasonal should be well in its way by now but hasn't really taken hold yet. I wont enter until it shows clear evidence of doing so. This is true of all these trades BTW

2) Buy Sept 05 Crude Oil - Sell Mch 06 Crude Oil
Get in at 0 with a target of 2.5

3) Buy Aug 05 Soyabean Meal - Sell Mch 06 SB meal
get in @ 10 with an initial target of 40 then 60.
this trade should also have kicked off by now.

All charts are available in the spreads section of www.britefutures.com for free.

I have limited ,argin in my account so could only take on 3-4 trades at a time. I would like to diversify as much as possible but am not sure about the relative correlation of these markets.

Anyone any comments on either the trades or the correlation issue?

Thanks and regards,

FN

 

[Beach Runner]

fastnet,

For what it is worth (knowing very little about the above but unable to resist writing). Re: correlation - hogs consume about a quarter of the world's soybean meal. But whether this would limit the diversification that I assume you are looking for with these three trades I would not know. At a glance, you are looking at three different markets: energy, livestock and grains. I'll be interested to see if anyone advises against trading both soybean meal and lean hogs for any reason?

 

[fastnet]

Thinking about this again I'm not sure why spreads would be correlated. The markets themselves might well be in sync but why would it follow that that spreads would be?

If we're talking about simple seasonals then the two directional trades that make up the spread might well be in phase with other correlated markets. However why would the difference between these buy/sell legs that make up the spread also be correlated with the difference between legs of other correlated markets?

Maybe GT or ERA might be able to help us out here?

Cheers,

FN

 

[ERA]

Hi Fastnet,

Your diversification looks fine there, if all were grains or energies it would be too correlated I think.

Looking at those spreads. The LHN/LHQ is looks quiet good with a nice consollidation between 1.5 and 0.5. Looking at the weekly and monthly charts it is very interesting to see that par for the spread has been broken only 2 times with any gusto in the last 15 years. So par for the spread looks like a good area of support over the years. With risk of 1.5 an entry could be made here and a mental stop comfortably below the 0 line.

Looking at the CLH5/CLU6, it's showing some signs of reversing the recent down trend as it breaks through the down trendline along those lower highs, could have an entry soon with a pull back. I think with crude prices where they are this one could get a bit wild.

The meal spread looks a lot like the the hogs with par offering some good support since early April.

Fastnet, have you considered the Eurodollar U6/U5 spread to get your feet wet, nice up trending chart , low margin and generally less volitility.

Also recently found these great free spread charts at www.expressfutures.com/marketdata.stm
Click on the java charts. Great thing is it is possible to weight the different contracts where needed like for FC/LC and S/SM spreads and the like, where the contract specs are different. Something not possible with brite charts.

Good Luck to you, I am interested to see how things go.

cheers

era

 

[fastnet]

Thanks ERA - I'll take a look at the Eurodollar spread. I've been a bit shy of financial spreads preferring commodities. Not sure why. There's something a little bit intimidating about the abstract nature of these spreads when compared to pigs, cows or gold ingots . . ...

I'll take a look. Didn't realise that the margins were less - I always imagined (inexperience again) that the margin and volatility would be much greater.

Thanks for the comment on my trades. Still sitting on my hands waiting for the signals. I wonder if there's anything wrong in theory in waiting long after the date that theses spreads would usually spring into action? If they pass this date and nothing happens does it mean nothing will or that they will suddenly pitch up and try to make up for lost time!

Cheers, FN

 

[ERA]

That eurodollar spread margin is around $338 at the moment.

Better to sit on the hands and wait for your technical signal, looks like in the hog spread you are looking for a break above the consolidation at 1.5, that a good signal. Wait till you are comfortable and all looks right. Only problem is if it breaks out sharply to the upside there is always that feeling ' damn have I missed my chance here'.

It's anyones guess with these seasonal spreads, some start early, late, never, go counter seasonal.

If you are using moores, look back at an oct04/dec04 hog spread , enter 05/09 exit 29/09.
The first half of the period it did nothing, then all of a sudden the seasonal kicked in and it ran 5c very quickly, you never know.

 

[r3volver]

If you look at the hog market right now, July and August are both showing abysmal RSIs for a while now, and are on extended down legs. We're also riding at previously established supports. I don't know whether to expect a rally or not, but I don't think it'd be a large one.

But what's interesting is the longterm trend of the hog market. It's been in a very obvious strong upward channel since the middle of 2002. But recent months are challenging the channel and I feel the trend will be broken. There was also a large triangle completed in May to further support that. We may be seeing 50-60 cent lean hogs before too long, which is where they should be.

That's just what I see from technical analysis. I'm still learning so I don't know exactly how that affects your spreads trade.

 

[fastnet]

Hi r3volver,

I'm not precisely sure how it affects my spread trade either but I would imagine not at all.

The spread charts are (theoretically) driven by the seasonal repeating differences between futures in the same market but with different expiry dates. The actual, absolute value of those futures should not matter at all.

However there are some on these boards that are much better qualified to comment.

Best regards,

FN

 

[Beach Runner]

fastnet,
The eurodollar spreads are worth looking at. As ERA has mentioned the margin is very attractive and in my limited experience they are not particularly volatile. Although I don't know about U6/U5. I've only traded the first three months (with little success but I think that was down to my style!) and the back months (with better results but taking only one or two ticks). In the last few months I've found them too difficult as they have moved very little.

I'm assuming as you are planning on trading soybeans that you are not with IB (as I don't think you can trade this contract with them) but if so, there may be difficulties with viewing the GE (eurodollar) spread at the moment. I've gone into this in frustrating detail on elite so do not want to repeat it here. But as Eurodollars was mentioned I wanted to support the ERA's view on this contract.

There is also a thread on this board started by the now banished BBB on Eurodollars that is well worth reading.

 

[Kato]

Hi fastnet

I'm in a similar position to yourself; waiting for a decent set-up for my first spreads trade.

I also have been following Jul05 Lean Hogs - Aug05 Lean Hogs waiting for a breakout, we have the quarterly hogs & pigs report due out on Friday (2pm CDT) which might shake things up a bit but I am now reluctant to take an entry prior to this report.

Two other spreads I like the look of are:

Oct05 Live Cattle-Dec05 Live Cattle: Shows a good seasonal move up through late June into mid July on the 15 year historical pattern chart although the move on the 5 year has not been as impressive. Potential 1-2-3 low currently forming if you follow Joe Ross' entry patterns.

Dec05 Wheat-Dec05 Corn: One of MRCI's seasonal selections. Historically shows a good move up late June to late July, I'm waiting for a break of the downtrend line formed between the peaks of 15th March & 27th May

Let me know what you think.

Regards
Kato

 

[fastnet]

Thanks Kato - sorry for delay in reply but my ''day-job'' has been getting in the way again!! EOD trading as necessity is one of the reasons I'n drawn to spreads i/o outright position trading.

I'll take a look at the cattle spread but I'm going to restrict first trades to straight seasonals within same contract. Partly to reduce the complexity at first until I get used to placing orders etc and partly to enjoy the reduced margin.

I'll get chance to update charts this w/e.

It's great to know there are others stood on the edge waiting to jump in!

Cheers,

FN

 

[fastnet]

Okay - Oct 05 - Dec 05 - Live cattle.

Any reason why you have gone for the further out contract i/o Aug 05 - Oct 05 for example? This is a genuine question - I have no opinion either way.

What I like about your Oct - Dec is that he spread has spike down below -4 on only two occasions in the last 15 years (last 02) but has not reached -5 during this period. However it has spiked up to +2 on 13/15 occasions and 4/15 reached +4 and once in 2003 spiked up to +11 although this can be discounted.

This gives a pretty clear sop loss of -4.5. I'd sit on this until early August (for +2) or even mid-August looking for +4.

Spread currently at -1.75 - missed the best entry unfortunately. Initial stop at -2.4 all out at -3.5. In fact it shouldn't come back to -2.4 now.

What do you think?

FN

 

[Kato]

What caught my eye on the LC V5 - LC Z5 chart was the relatively accurate correlation of this spread's behaviour to it's 15 year historical pattern and it's upside potential for the seasonal reversal mid June.
I totally agree with what you highlight from the monthly chart, it's currently sitting pretty just above support at about -3 (bearing in mind it has made the occasional foray in the past to about -4) with serious potential to hit at least par and hopefully a move to resistance at about +2 if not beyond!
The Aug/Oct spread historically shows a similar seasonal move mid June (Long Oct/Short Aug) but is already trading at about +2.5 with some pretty heavy resistance coming in at +3, in an effort to maintain an edge in probability I would reject this spread based on limited potential reward to risk, this is not to say however that the spread cannot move through to +4.5 as it has done in a few previous years, just that in my opinion probability favours a ceiling at +3.
I know what you mean about missing the best entry, picking the double bottom at about -2.4 would have been nice, I might take an entry if the high at -1.575 gets taken out in the next few days.

Apparently there is a second case of a cow testing positive for mad cow disease in the U.S, I think the rumours were confirmed as true after the close on Friday so we'll see how the market digests this on Monday (no pun intended :cheesy: ) seasonality might go out of the window.

Regards
Kato.

 

[fastnet]

Hi Kato - I agree with your views above.

However, (and not sure whether any of the more experienced ''spreaders'' would be able to comment) but I really have doubts about applying TA to spread charts.

My understanding of TA shows it to be built on the psychology of traders/participants. Folk buy retracements and sell on new highs of trends. They also see value at previous lows creating support and vica versa at past highs.

However these are single directional contracts. How can you apply TA to a chart if the DIFFERENCE between two contacts. Who is trading the difference apart from spreaders? And, if spreaders are the only ones trading the difference their influence is surely a drop in an ocean of traders taking positions in one or other of the directional contracts?

I think TA is useful when applied to providing a structure and discipline to trading spreads and especially in setting stops. However I would argue against using risk:reward ratios to the same degree as you might an outright contract.

Have a clear stop-loss in yr mind by all means and don't enter where probability would suggest there is not sufficient reward in the trade. However, take care cutting losses too early on theoretical levels that are not based on the actions of market participants but on TA imported from the trading of straight contracts where such relationships can be proved.

Regards,

FN

 

[Kato]

Hi Fastnet

I take your point regarding traditional TA, I do think that horizontal support/resistance levels do have a part to play in trade selection however.
I believe a pronounced support level on a monthly spread chart, especially intramarket commodities, represents a physical limit to the tightening of the spread attainable under "normal" market conditions (yeah I know, what's normal?) the cost of carry i.e. storage, handling & insurance costs of the commodity itself plus interest on loans puts the the distant contract at a premium to the nearby one, activity in the distant contract from commercial interests should there be a short-term price advantage ensures demand/supply is maintained in the distant contract and the spread does not widen further.
I guess similar market activity could be responsible, again under "normal" conditions for resistance levels which on some charts are intriguingly regular.

I would only apply the above on charts in which such a price level is obvious, (maybe "support" & "resistance" are misleading terminology to use on these spread charts?) and as always market circumstances can blow all efficient order away. July Corn - Sept Corn is a good example, approx -8 seems to be the natural limit to the tighening of the spread, 1988 is the year in which the s**t hit the fan and the spread crashed through to about -23 due to whatever calamity hit the corn market that year.

Please excuse any ignorance or inaccuracies on my part in my explanation, I'm trying to piece together the various parts of the puzzle from discussions with a couple of traders already familiar with spreads as well as the usual books, web-sites etc... and would welcome any thoughts and corrections on the above.

Regards
Kato.

 

[fastnet]

Yours noted.

I suppose an alternative way of trading spreads would be to simply wait until the spreads reached extreme points then trade to benefit from the almost certain return to the norm. There is a brilliant MRCI chart that shows the ''spread or dispersion of spreads over the past 15 years.

This style of trading would call for patience. There'd be a lot of waiting and regular chart updating interspersed with a few trades.

Low risk/high prob but takes a special trader to sit on his hands for months and still remain involve enough not to miss the trade when it comes round.

There will always be calamitous events. As long as you have some sort of ''disaster stop'' in place the good trades should easily make up for the bad.

FN

 

[fastnet]

FIRST SPREAD TRADE

Okay - the time for standing on the edge is almost over. Time to get involved.

Buy Sept Soybeans Sell Nov Soybeans SU5-SX5

Some of you may recognise this from JRs ramblings. It seems as good as any.

I'd look to get in arnd -9.5 and wait for a seasonal move up thru 0 to +10 and beyond If this doesn't happen within the next fortnight then it probably wont.

However, and this will sound very naive, but I have a BIG question to ask first. Without an answer I can't place the trade.

Soybeans are quoted as (y'day close SX5) 715.6. down 50.0 from day before. But what does this mean? I ask because in my contract spec sheet is says that 1 cent = $50 and that the daily trade limit is 30 cents or $1500.

I assumed that the contract had fallen $50 from $765.6 to $715.6. But what is the dollar value of this move in terms of the contract SX05? It can't be 5000 cents. . . . . . this would be $250K!!

All I can imagine is that the contracts are quotes in cents and y'day this contract was down 50 cents or $2,500. However where does that leave the max move per day of 30 cents??

Can anyone help me get my 'ed around this??

Yours confused,

FN

 

[fastnet]

Okay - daft question above resolved and I'm now in at -9.75.

 

[fastnet]

Now at -7.75 - if there's a little more movement in the right direction this pm considering adding next brick to the pyramid. Strictly just one at a time.

Anyone else watching the spread? Any advice/comment? Always welcome.

Regards,

FN

 

[bigba]

looking at sx5/cz5, there is a good signal going short on a macd at the moment and the spread is historically expensive: any thoughts?