Adding Here, Reducing There...

A couple of days ago we were adding to our CBOT short July11/long Dec11 calendar spread position, today we took some off. We have been taking off intermarket hard wheat vs soft wheat spreads, today we added some long MGE/ short CBOT exposure. I don't think these are random adjustments, though it is hard to say how much value is being added.
The CBOT forward curve and the hard wheat vs soft wheat spread are moving together in response to directional moves in the outright wheat market. Being long MGE and KC vs short CBOT has had a very similar risk to betting on a steeper CBOT contango; they are both bear market spreads in this environment. So I try to limit the aggregate exposure we have across the two, intermarket spreads and calendar spreads. This results in days like today where we were able to add to the intermarket July10 MGE vs CBOT position at recent levels (43-44 cents premium MGE), while reducing the July11/Dec11 exposure at a 3-4 cent profit from last week (selling Dec11 at 32 cents premium)--even though I think the July11/Dec11 premium will continue to climb and I am not suddenly more bullish on MGE wheat vs the CBOT. I try to take what the market gives us on any given day.

The long ethanol/short gasoline trade we attempted last month was "one that got away." I had the right fundamental view on valuation, but did not properly size the risk and lost patience. My thinking was that we could be wrong for 5%, but not 10%. However, I found out that I couldn't tolerate even a 3-5% move without looking for the exit. A missed opportunity.