Spread trading strategies in commodities

Trading Commodity Spreads

 

spread trading strategies in commodities

Pair trading, also known as statistical arbitrage or spread trading is a strategy which allows the trader to use anomalies, as well as fairly strong differences between prices of two stocks or baskets while maintaining neutrality of the market. The basis of the strategy is to identify correlated stocks and use moments when prices converge or. Free Seasonal Spread Trading Strategies With High Probability of Winning. Explore new way for commodity trading. Seasonality in combination with futures spreads, can give us a solid edge and base for building profitable trading strategies. One of the biggest advantages of commodity futures spread trading is the lower margin requirements to enter and maintain a position. The price of a spread position is the difference in prices between the near-term contract and the latter contract, with the margin requirements being 5 to 10% of the contract price.


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Our goal here is to layout the basics of spreading so you will have a solid foundation of knowledge in this essential trading strategy. One example of this is Corn vs.

The trade would buy Corn and sell Wheat. The trader spread trading strategies in commodities not care if the prices of Corn and Wheat go up or down; the trader only wants to see the price of Corn appreciate over the price of Wheat.

If the grain markets sell off, the trader wants to see Corn hold its value better than Wheat, spread trading strategies in commodities. If the grain markets are bullish, the trader wants to see Corn advance farther than Wheat. Corn and spread between different months i.

July Corn vs. December Corn. The trader will be long one futures contract and short another. In order to be in an Intra-Commodity Calendar Spread, the trade must be long and short the same market i. July vs. Bull Futures Spread A Bull Futures Spread is when the trader is long the near month and short the deferred month in the same market.

You buy May Corn and sell July corn. You are long the near month and short the deferred month May is closer to us than July. It is important to note that the near months for futures contracts tend to move farther than faster than the back months. If corn is in a bull market, May spread trading strategies in commodities month should go up faster than July deferred month.

That is why this strategy is called a Bull Futures Spreads. Since the front spread trading strategies in commodities tend to outperform the deferred months, a trader who is bullish on corn would buy the near month, sell the deferred month, and would like for the near month to move faster and farther than the deferred months.

That is why when you are long the near month and short the deferred, it is called a bull futures spread. The spread should go in your favor when prices are rising. This is the opposite of our Bull Futures Spread.

You sell May Corn and buy July Corn. You are short the near month and long the deferred month. This is a bear spread because the near months ten to move faster and farther than the deferred months. If Corn is in a bear market, May near month should go down faster than July deferred month. That is why when you are short the near month and long the deferred month, it is called a Bear Futures Spread. This spread should go in your favor when prices are declining.

Futures Spread Trading Margins Margins for individual contracts may be reduced when they are part of a spread. If you are long or short corn between different crops year July vs.

The crop year for corn is December through September. The exchanges reduced the margins because the volatility of the spreads is typically lower than the actual contracts. A futures spread slows down the market for the trader.

If there is a major external Corn market event, like the stock market crashes, the fed raises interest rates, a war breaks out, or a foreign country defaults on its bonds half way across the earth, both contracts should be affected equally. It is this type of protection from systemic risk that allows the exchange to lower the margins for spread trading.

Futures Spread Quotes When pricing spreads, you always take the front month and subtract the deferred month. If the front month is trading lower than the deferred like our first May vs. July examplethe spread will be quoted as a negative number. If the front month is trading higher than the deferred month like our second May vs. July examplethe spread will be quoted as a positive number. Futures Spread Tick Values Tick Values are the same for spreads as they are for the individual contracts.

The tick values are the same for spreads as they are for their individual contracts. Contango Markets A market is in Contango when the front months cost less than the deferred months. In normal markets, the deferred month should cost a little more than the front month due to the cost of carry, which is made up of storage costs, insurance spread trading strategies in commodities stored commodity, and interest rates payments for the capital needed to own and store the commodity. Backwardation When markets are in Backwardation, the near months are trading higher than the deferred months, spread trading strategies in commodities.

Backwardation typically occurs during bull markets. When there is a substantial supply issue or increase in demand, spread trading strategies in commodities, the front months of a commodity will start to go up faster than the back months. The front months are more sensitive to changes in supply and demand because the front months are the commodity months that are coming to the market for deliveries. There is not much the market can do about the supply from March to September, when Corn is being planted, grown and harvested.

The corn that is made available during these months is coming out of stocks and storage. However, the market does have some control over December and the months going intolike using more farming acres for Corn.

New acres devoted for corn will help the new crop keep prices stabilized for the deferred months. The near months will still increase because corn can not be harvested until the fall, spread trading strategies in commodities, but the deferred months should be able to help with demand and will not go up as fast as the near months.

Futures Spreads and Seasonality Many commodities markets have seasonal periods of supply and demand. Some commodities are in spread trading strategies in commodities demand during the summer, like Gasoline and Crude Oil, while some have a higher demand in the winter, like Natural Gas, Heating Oil and Coffee. Commodities also may have seasonal periods of supply, like the grain markets. The Corn market has the greatest supply right after harvest in the fall, spread trading strategies in commodities, which can lead to lower prices during that time of year.

Traders will use spreads and try to take advantage of these seasonal supply and demand changes. They look at the performance of spreads over the year during specific time frames to estimate the risk, spread trading strategies in commodities, reward, and probability of success.

Subscribe to Guide to Futures and Spread Trading Guide to Futures and Spread Trading - This comprehensive ebook, compliments of Guy Bower, is designed to help you understand and master the fundamentals of futures spread trading. Learn more about Craig Turner.

This material is conveyed as a solicitation for entering into a derivatives transaction. This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.

Daniels Trading, its principals, brokers and employees may spread trading strategies in commodities in derivatives for their own accounts or for the accounts of others. Due to various factors such as risk tolerance, margin requirements, trading objectives, short term vs. Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and spread trading strategies in commodities assume responsibility for the risks associated with such investments and for their results.

Please consult your broker for details based on your trading arrangement and commission setup. You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources, spread trading strategies in commodities. You should read the "risk disclosure" webpage accessed at www. Daniels Spread trading strategies in commodities is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service.

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Basics of Futures Spread Trading | Daniels Trading

 

spread trading strategies in commodities

 

One of the biggest advantages of commodity futures spread trading is the lower margin requirements to enter and maintain a position. The price of a spread position is the difference in prices between the near-term contract and the latter contract, with the margin requirements being 5 to 10% of the contract price. Futures Spread Trading Margins. The margin for a single contract of corn is $ However, if you are long and short in the same crop year, the margin is only $ If you are long or short corn between different crops year (July vs. Dec) then the margin is $ The crop year for corn is Author: Craig Turner. Pair trading, also known as statistical arbitrage or spread trading is a strategy which allows the trader to use anomalies, as well as fairly strong differences between prices of two stocks or baskets while maintaining neutrality of the market. The basis of the strategy is to identify correlated stocks and use moments when prices converge or.