Trading spreads in ag futures

C

Cutten

I was wondering if anyone here has much experience in spread trading agricultural futures. I've been participating in corn and wheat over the last year or so, but reviewing the market move, I could have got an even better risk/reward early in my trades by using spreads (long old crop short new crop). It would seem to lower the risk of "sitting" long the commodity, before the move has really gotten underway. Once the move has gone a certain distance, the spread starts to trade like an outright long and so the risk is much higher - but until then, it seems like a good way to buy & hold while you wait for the momentum to pick up. It seems almost like a call option but without the time decay. Am I missing something here or is this a good approach?

Anyone tried this approach to trading the agriculturals & soft commodities? Wheat, grain & beans, but also stuff like OJ, Cotton, Sugar etc.
 
I find spreads to be very appealing. They represent the true supply and demand of a product without all the crazy erratic moves that are hard to explain sometimes. They also are free from limit moves which is always nice and keeps your hair its natural color.

The new crop/old crop spread is like getting the most bang for your buck. The margin on spreads is small but the price movement is of the same degree of an out right position usually on the old/new crop spreads.

Spreads are usually a good indication of where the out rights are headed. Say nov beans go up hard but the spreads havn't done shit then you know it was a technical move that is likely to come back down. If the spreads moved big time with the outright then it was a fundamental move that will likely continue. When dec/dec corn or dec/dec wheat start to turn one way you can usually bet that the outrights are soon to follow.

The downside to spreads is that you usually have to know the paticular market you are trading fairly well as spreads usually don't move for any other reason than supply and demand of the physical commodity. Most of the massive players in spreads are the commercials that actually use or have the commodity so they are concerned with the big picture not a tick or 2.

Hope this helps out!:)
 
Any good books or online sources to learn about spreads and seasonality of spreads? Don't tell me you are going to start talking about Joe Ross. :p
 
Who is Joe Ross? Some guru? I can't think of a book right now as most of my experience with spreads and trading in general has been the advantage of knowing the grains in and out because I live on a farm in Iowa and the school of Hard Knocks!

Im sure I have a few books lying around somewhere but if I do they are just basic explanations of spreads not about some really cool system to make money off of spreads (remember everbody has a system that doesn't work)

stupididiot how is your wheat playing out? I know I was prob one of the guys that really gave you a downside bias about that market and I hope you havn't got bloodied up too bad. I myself have been basically selling dec/march for a while now. PM me if you want to talk about the wheat more and I will give you the info that I know so far.

Best of Luck
 
As a rule of thumb the fronts will trade at a higher volatility than the backs. A spread obviously cuts your beta.

Often new crop vs. old crop is apples and oranges.

News that will most often toast you or enrich you will effect the fronts.

Most the time these spreads do nothing more than mimic the front month. Hence most the time you're best off just trading the fronts outright but with reduced size.

Re-read Bruce Kovner's interview with Schwager about Kovner's 1977 Jul-Nov Soybean spread. Here's a link to the charts.

http://www.tfc-charts.w2d.com/historical/SB/1977/B/linewchart.html

You'll see the "spread" was just a de facto naked July. Weirdly though, Cook Grain who was a major Memphis commercial, blew out on that spread in 1977.

Quote from Cutten:

I was wondering if anyone here has much experience in spread trading agricultural futures. I've been participating in corn and wheat over the last year or so, but reviewing the market move, I could have got an even better risk/reward early in my trades by using spreads (long old crop short new crop). It would seem to lower the risk of "sitting" long the commodity, before the move has really gotten underway. Once the move has gone a certain distance, the spread starts to trade like an outright long and so the risk is much higher - but until then, it seems like a good way to buy & hold while you wait for the momentum to pick up. It seems almost like a call option but without the time decay. Am I missing something here or is this a good approach?

Anyone tried this approach to trading the agriculturals & soft commodities? Wheat, grain & beans, but also stuff like OJ, Cotton, Sugar etc.
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