Over the past 6 months, it appears that the biggest factor in the intermarket wheat spreads has been the direction of the outright price of wheat. I'm not really looking for a way to speculate on the outright price. So what I've been looking for is ways to mitigate the effects of "directional" moves in the wheat market on the intermarkets spreads I am holding.
Over the period, the CBOT has clearly been more volatile; the obvious answer then is to underweight the CBOT position vs MGEX. And I've been doing that recently. Less obvious would be to buy a few outright CBOT wheat calls against the CBOT short position.
Another strategy may be to balance intermarket spreads with calendar spreads likely to hedge an adverse move in the outright market. For example, while Dec CBOT is more volatile than Dec MGEX, the Dec MGEX is more volatile than the July CBOT--so a long Dec MGEX position is more neutral against a basket of Dec and July CBOT than against a straight Dec CBOT hedge. At this stage, I find any long front/short back month spreads in CBOT wheat to have too much downside as they move to full carry. My solution, for the moment, is too substitute a long Dec/ short March Corn spread as a general hedge against a spike in grain prices that still has a very small downside.
Too confusing? Poorly thought out? Any comments?
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Agree with putting a ratio or a basket on the intermarket wheat spreads.....seems like a lot of guys are doing that now to create a smoother spread market.
ReplyDeleteBig offer in z/h today (+h....floor always quotes the spreads backwards so will start quoting it that way to prevent confusion between what I see and what I post here). 1000 @ 30 and then then 500 trade at 29.75 on close. Would imagine for the time being this 30 level will be a good lean as we can expect another squeeze ahead of roll.
Back month spreads starting to go into carries as well....im cautious to press them too much but for now the trend is definitely wider carries in the back.
I remember you talking about the oat/corn spread, while I don't trade that spread I don't know if you paid attention to the z/h oat spread. Its came in from around 10 carry to even and now back to 5 carry. Unfortunantly I puked my bearspreads in there yesterday but will look to put em back on. Will be lots of deliveries again spread should go back out. Probably just whitebox not showing an offer to GM and making em panic a bit along with locals loaded up on the wrong side.
Forgot to mention.....not sure if you heard but KC is now moving to a VSR structure starting with the sep11 contract I believe. Looks like only a matter of time before minney goes that direction too and probably corn and beans in the future.
ReplyDeleteI think this is a HUGE mistake by the exchanges. We are already seeing huge volatility and extreme lack of liquidity in the CBOT spreads due to VSR, so I can only imagine how wild and dangerous Minney and KC will be with a VSR structure.
I did watch the the Z/H Oats spread...I thought it was a low risk way to play the upside in the grains. I only took a couple lots in position, but that got me to watch it and I did see what looked like some gamesmanship--orders shown for 100 contracts to buyZ/sell H at -.02 spring to mind. I don't think anyone who actually wants those spreads executed would show it that way in a market that only trades a few hundred contracts/day.
ReplyDeleteOn the VSR issues, can you link me to the source for the KC info? I haven't seen any news items on KC changing their rules-though it seems highly likely.
I don't see it as a huge mistake by the exchanges because they have to do something to address the convergence problem. I'm not convinced it is the best solution, but I think it is better than nothing. When you have as the delivery mechanism a shipping certificate that does not compel buyers to load out , there has to be some constraint on the ability of buyers to defer delivery indefinitely.
BMH,
ReplyDeleteI would appreciate if you would provide some color on Whitebox's involvement in the oats market. What I've heard is that they basically aquired a very large physical position in oats with the goal of benefiting from that market's large carry. Any detailed information you can provide me would be much appreciated (just to satisfy my own curiousity)! Thanks
Nick
ReplyDeleteSorry didnt see your post or would of replied sooner. I am definitely not an oats trader by any means (usually only have stuff on around roll) but whitebox usually always has control of the receipts and general mills always seem to be the major stopper during deliveries so it usually always seems to be just a battle between whitebox and GM in the futures market. If whitebox doesnt have much of an offer in the cash or doesn't let go of their receipts very easily then that creates a short term tightness in the spreads.....usually the stuff always gets put out though and spread trades back to a large carry.