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commodity spreads

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  #41 (permalink)
brentf
winnipeg canada
 
Posts: 17 since Apr 2014
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N/X bean spread has narrowed to $2.06 over as funds liquidate N.This is an example of the value of COT that I was trying to make earlier.

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  #42 (permalink)
PropArb
Chicago Illinois
 
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brentf View Post
N/X bean spread has narrowed to $2.06 over as funds liquidate N.This is an example of the value of COT that I was trying to make earlier.

Well, from my experience with pair calendar spreads that include a prompt front month - it seems that they are typically quite directional with the front month. So it's just like trading the outright front month it seems.

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  #43 (permalink)
 
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 SMCJB 
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I agree. So unless I have a strong opinion on the prompt I try to avoid prompt spreads.

I think in this case brentf did have an opinion on the prompt based upon COT analysis.

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  #44 (permalink)
lsandersj
Bradenton, FL
 
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I'm not sure i can agree with the prompt front month concept. It seems to me the historical relationship of the two contracts is the controlling factor.

For example, if both contracts prices go down I don't care, just as long as the spread relationship I am trading goes in my favor. I've found myself in the dilemma of trying to place a stop order for a spread based on one of the contracts. If you think about it you have to say if my long month goes down I want out, but wait, what if my short month goes down even more.

The self-hedging aspect is one of the things I like about spreads versus an outright. Influences outside of the reason you are trading the spread for example affects all contracts generally in the same direction. This is not always true of course but warranted or not I sleep a little better knowing that if something out of the blue happens I am better off than if on the wrong side of an outright.

IMHO

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  #45 (permalink)
PropArb
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lsandersj View Post
I'm not sure i can agree with the prompt front month concept. It seems to me the historical relationship of the two contracts is the controlling factor.

For example, if both contracts prices go down I don't care, just as long as the spread relationship I am trading goes in my favor. I've found myself in the dilemma of trying to place a stop order for a spread based on one of the contracts.

IMHO

If you look at the energy complex the past few years, the front month to second month and most of the other prompt/ near term calendar spread differentials ( esp. Pairs) you can overlay onto the front month flat price future price action. Now, this is not a constant, and it is not universal, even within the energy complex on a historical basis.

My only point is that it is something you should model for and be mindful of.

Moving further out on the curve and trading more complex intermarket spreads is one good solution.

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  #46 (permalink)
lsandersj
Bradenton, FL
 
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I'm not sure of what you mean with" you can overlay onto the front month flat price future price action. Now, this is not a constant".

I'm also not restricting myself to front month/second month. Maybe this year next year. I also look at inter as well as intra commodity spreads. My main approach is wherever there is a historical probability first and then current conditions as a filter. (Which would take into account COT.)

Would like to increase my perception by understanding your point.

Thanks

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  #47 (permalink)
Griffith
Los Angeles, CA
 
Posts: 5 since Jun 2014
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Hey Spreaders! Lately, I've become more interested in your corner of the market.

Can anyone recommend a good learning resource to get more exposure to some of the fundamentals and strategies of commodities spreading?

thx

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  #48 (permalink)
lsandersj
Bradenton, FL
 
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I like MRCI.com. It is a subscription site but there is a lot of free stuff also. With the statistical data I get for $50/month I pay my subscription many times over.

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  #49 (permalink)
brentf
winnipeg canada
 
Posts: 17 since Apr 2014
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With respect to the nearby month and fundamental analysis, the correlation between the deliverable stocks and the open interest is the single most important influence on a grain spread. In a situation where stocks are perceived to be tight and deliverables negligible, (as in the case of he N/X beans), the nearby will invert. The size of the inversion is correlated to the severity of the shortage.Essentially the market is willing to forgo carrying costs on order to secure supplies for the immediate future. In a case where deliverable supplies are adequate/burdensome relative to the open interest. the nearby will typically trade at a discount to the deferred months. In this case the market is unwilling to pay more than carrying costs to secure supplies. This is the case for 2014/15 bean spreads as inventories are replenished. Moving forward with the 2014/15 bean crop, the market uses the carryout as a proxy for deliverable stocks. Right now the market is using something close to a 350 carryout (125 this year). enough to keep spreads at a carry.

Going back to the N/X bean spread, I suggested that it would weaken as first delivery day approached, the shortage of deliverable stocks was well documented but given that funds were long half the open interest of the nearby, there would be less deliverables required than at first blush. Also, beans imported from SA increased the deliverable supply.

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  #50 (permalink)
brentf
winnipeg canada
 
Posts: 17 since Apr 2014
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USDA report this am increases bean acreage, very negative for X beans, expect new crop bean spreads to weaken given increased carryout.

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