Friday, June 27, 2008
Thursday, June 26, 2008
With stocks down more than 200 points, and commodity markets moving significantly higher across the board today, the Federal Reserve's credibility at fighting inflation is rapidly waning, if not already dead. The Dow today has set a new low for the year 2008, and sentiment is poor. Even with economic data released today that was fairly good, stock index futures sunk even lower. Despite the similarity to the 15 minute chart above, this second chart (below) is the daily one for the Dow. It reveals the true gravity of the situation.
Nearly every commodity chart today, from crude oil to corn, is substantially higher following what is now perceived as yesterday's weak Fed inflation-fighting statement. This last screen capture shows the daily chart for the broad-based Rogers Commodity TRAKRS futures, which reached a new all-time high price today.
Wednesday, June 25, 2008
My long treasury futures trade has been amplified, as investors are fleeing into treasury futures. Go treasuries!
Other commodity prices moved higher also. Both gold and crude oil recovered somewhat off of an otherwise down day.
The grains have been fairly active today, but without huge moves in either direction. Since the Fed decision is released at the same time that grains trading closes for the day session, the impact will likely be felt first this evening.
I have been trading primarily treasuries and soybeans today. Good day for both. Treasuries, for some reason, trade more sedately than most other futures. I like them because they tend to more more smoothly and gradually, and I can place larger trades because of the smaller margin requirements. Treasuries (I trade the 10-year) are my favorite futures vehicle to trade after soybeans. I also like treasures because, since they tend to move more slowly than other futures, I can monitor and day trade other futures at the same time.
The stock market index futures have risen upon the weekly release of the EIA crude oil inventory numbers that indicated a larger-than-expected rise in crude oil inventories. Crude oil has sold off forcefully, dropping nearly $5 a barrel on the news. Needless to say from these two charts, they are directly correlated.
Tuesday, June 24, 2008
I admit that I know nothing about spread trading. I am planning to educate myself more so that I can take advantage of spreads to increase my own trading profits. Anyone who would like more information can contact Rick by clicking on the links in his article.
I have no affiliation or financial connection of any kind to Rick's firm, Common Sense Capital. I receive no remuneration or referral fees from him, either. I just wanted to have him write so that I could learn, and in so doing, perhaps benefit other people also.
Other writers may also appear on this blog from time to time also. If you or someone you know would like to submit an article, feel free to contact me.
I hope regular readers will enjoy Rick's article. Good stuff!
Futures Spread Trading
by Rick Dawson
Futures spread trading has always been a popular method of trading futures. However, many beginning traders focus exclusively on buying and selling futures outright. Spread trading is the preferred approach for many professional traders. By adding spread trading, traders can increase their opportunities and better manage their risk.
This article will focus on futures spreads instead of options spreads. A futures spread is the purchase and sell of futures contracts in related markets. (A spread is also created when a trader or hedger takes a futures position opposite an existing or potential cash or physical position. However, this type of trading – basis trading - is outside the scope of this article.) The two positions must have an economic relationship to qualify as a spread.
Futures may be spread between different:
Points of time. This is also known as a calendar spread. The same commodity is bought and sold in different months. An example of this would be an old crop / new crop grain spread where you're short July corn and long December corn. If you're short the nearby month it's called a bear spread. If you're long the nearby month it's called a bull spread.
Commodities. An example of this would be a long December corn / short December wheat spread. I would also include spreads between a commodity and its products in this category, such a soybeans versus soymeal and bean oil (crush spread) and crude oil versus gasoline and heating oil (crack spread).
Markets. An example of this would be a long September Minneapolis / short July Kansas City wheat spread. In this example, you're long spring wheat which trades on the Minneapolis grain exchange and short hard red winter wheat which trades on the Kansas City board of trade. (Note that September is the first new crop month in spring wheat whereas July is the first new crop month in winter wheat.)
Note that a spread may fit in different categories. For example, a spread between December Minneapolis wheat and May Chicago wheat would different markets and points of time. A spread may not easily fit in a specific category. For example, is a spread between 10-year and two-year notes a commodity spread because two commodities are involved or is it a calendar spread because it's really a trade involving interest rates at two different points of time? It really doesn't matter as long as there is an economic relationship between the two contracts. In other words, a spread created via a correlation study between orange juice and pork bellies doesn't qualify as a spread. Correlation is not causation.
Why Trade Spreads?
The components of “legs” of a spread tend to move together. This makes sense when one considers the fact that if there's an economic relationship between the two legs then the same market forces will push both up and down. The implication of this that when you spread trade you give up a certain amount of opportunity. But the compensating factors still make spreads an attractive trading approach.
A certain amount of opportunity is lost
A stop order isn't available on except with a broker willing to take the order – probably on a “not held” basis.
Commission costs may be greater because multiple contracts are involved.
Usually less volatile than an outright long or short position
Tend to have lower margin requirements
More amenable to fundamental analysis
Good trading vehicle for positional trading
Offer additional “trending opportunities”
I would like to focus on the last benefit of spread trading. Speculation wisdom usually emphasizes the importance of trading with a trend. The problem is that futures markets tend to spend a lot of time in consolidation or trading ranges. It's interesting in note that two markets may not show a pronounced trend but if you spread one against the other then a trend will emerge. For example, if you had sold July '08 cotton on the close of 20 March 2008 at 73.83 and covered on 29 April 2008 on the close at 69.25 would have gained 323 ticks for a $1615 profit on futures contract with an initial margin requirement of $2520. (See the chart below.) However, during this time July cotton had a high of 82.23 for a potential loss of $4200. If you're honest with yourself, would you have stayed in this trade? Probably not. And even if you did, would the stress and frustration been worth it? Most traders would not think so. A chart of December '08 cotton shows a similar story.
(please click on chart to open up larger version in separate window.)
However, once you spread December Cotton long against July Cotton short a much more tradeable trend emerges. On March 20th and April 29th this spread closed at 5.45 and 8.45 respectively for a 300 tick gain or $1500 on a spread with an initial margin requirement of only $420. Consider the chart below. Any trader would admit that this trade would be been a lot less stressful for a gain not much different than an outright short would have been.
(please click on chart to open up larger version in separate window.)
The components or “legs” of a spread tend to move together. This makes sense when one considers the fact that if there's an economic relationship between the two legs then the same market forces will push both up and down. Spreads tend to underperform strongly trending markets. However, markets tend to spend a lot time in consolidation ranges during with times spreads can offer more trends and opportunities.
Rick Dawson is a registered Commodities Broker with Common Sense Capital. See the website for contact information. Trade ideas and setups are available at the Pattern Report. There is a risk of loss in futures, options, and spread trading.
Here is a link to Common Sense Capital's website.
Generally, I trade only on a short-term basis (day trading). However, over the past few weeks, a very strong bullish trend was under way in the grain markets, so I took some longer-term positions, which I have now liquidated.