Here is a simple version of how the spreads work in Grains..(from Bright Futures.com) A spread is the simultaneous purchase and sale of the same or similar commodity in the same or different contract months. Spread trading is usually considered to be a lower risk strategy than an outright long or short futures position, and therefore margin requirements are usually much less than an outright long or short futures. For example, if the price trend of soybeans is currently up and you are in a soybean spread, (short one month and long another) the gain on the long position would likely offset the loss of the short position, and vice-versa. One side of the spread typically hedges the other, therefore the lower margin requirements. Keep in mind that spreads are not guaranteed to be less risky, there is risk of loss in all trading. You must be asking "How do I make money if I am long and short the same commodity?" The answer is you are hoping to profit from the difference in the two contract months, not from a trend higher or lower in any particular market. With a spread, you follow the relationship, or difference between the contracts, without having to pick a market direction. ....For example, if July Soybeans were trading at $5.10/bushel and November Soybeans were at $5.35 the spread would be said to be at .25 to the November side. If you entered a July/November bean spread (your broker would simultaneously buy a July and sell a November contract) and soybeans rallied, what would happen? Well, let's say July settled one day at $5.70 and November settled at $5.75, the spread would now be .05. In this example July rallied 60 cents (you were long a July contract so you made 60 cents on it) and November rallied 40 cents (you were short a November contract and lost 40 cents on it), you would have a net gain of 20 cents on the spread. Your broker could exit the spread and you would have made 20 cents/bushel * 5000 bushels = $1,000. This example is known as an intra-commodity spread, buying one month and selling another in the same commodity. An inter-commodity spread is buying a commodity month in one market, and selling another related commodity in the same or similar month... Best advise is to watch a seasonal chart to plan you entries. My next entry for the Beans Spread will be in Dec 09. For now the spread price is already near it's apex, so no use trading the spread now. Plan ahead for the next market , instead of chasing the one you missed, is what I go by in commodities.
I am interested in this question as well. I find your discussions on grain spreads extremely interesting, but cannot find the unifying thread in your trades. It seems every trade is different for you while I like to have a basis, a recurrent pattern that leads my investments. What is the main reason of your trades? seasonality? supply and demand? Where can I learn about it? Thanks.
Thanks a lot RTrader, I will look at mrci.com I will PM you for specific explanations when I will have learnt basic spread concepts. Can someone recommend a good book on ag spreads? The only one I read was "spread trading" by Keith Schap and I found no value in it. Thanks again.
All very good sources to explain mechanics of spreads, Futures Spread Trading: The Complete Guide by Courtney D. Smith http://www.amazon.com/Futures-Sprea...=sr_1_2?ie=UTF8&s=books&qid=1245165160&sr=1-2 The Encyclopedia of Commodity and Financial Spreads (Wiley Trading) by Steve Moore, Jerry Toepke, and Nick Colley http://www.amazon.com/Encyclopedia-...=sr_1_6?ie=UTF8&s=books&qid=1245165160&sr=1-6 & lastly.... buy this one used. Spread Trading: Low Risk Strategies for Profiting from Market Relationships by Howard Abell http://www.amazon.com/Spread-Tradin...=sr_1_4?ie=UTF8&s=books&qid=1245165160&sr=1-4 Hope this is of assistance, J-Law