Long Chicago Wheat butterfly spread and short RBOB Gasoline calendar spread
SpreadEdge Capital specializes in seasonal spread trading across a wide variety of commodity markets. A spread trade is the simultaneous purchase and sale of the same commodity with different delivery dates or of related commodities with the same or different delivery dates. SpreadEdge publishes a weekly Newsletter that provides several seasonal spread trade opportunities every week.
Every SpreadEdge Newsletter includes a “Watch List” of trades that meet our strict screening criteria. Included in the Watch List are the markets, commodity symbols, entry and exit dates, win %, average profit, average drawdown, best profit, worst loss, and risk level (using a 1-5 scale). All information is based on the most recent 15 years of historical data.
This week there are several trades on the Watch List that are scheduled for client and personal accounts. This article will focus on the short Lean Hogs butterfly spread.
HYPOTHETICAL PERFORMANCE RESULT HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
Chicago Wheat has been retracing ever since the highs in March of 2022 that occurred at the beginning of the Russia, Ukraine conflict. The markets have just now returned back to more normal levels.
Relative Price and Positioning
Relative Positioning – Oversold versus Overbought on the horizontal axis. COT current net position compared to the COT data over the past 24 months.
Relative Price - Cheap versus Expensive on the vertical axis. A comparison of the front month current price compared to the front month price over the past 24 months.
Chicago Wheat continues to be amongst the most “Cheap and Oversold” markets in the Ag complex. Markets can stay depressed in relative price and position for extended periods, but I expect a bounce during the holding period of this trade.
CTA Momentum and Relative Strength
The CTA Positioning and Momentum Score is an accurate measure of current momentum and trend-following trader positioning using a (+10 / -10 scale). Momentum and trend following traders represent a large percentage of trading and can move markets significantly higher or lower. Relative Strength is a momentum oscillator that measures the speed and change of price movements. RSI has a 0 to 100 scale.
Note that Chicago Wheat has a minimum (10) score indicating that CTAs are minimally invested and have lots of trading capital to cover shorts or add to existing longs. Note also that the RSI score is 37 just above the 30-reversal level.
Commitment of Traders
Commitment of Traders data (commonly referred to as COT) is generated by Peak Trading Research using data published every week by the CFTC. Hedge funds are price drivers in the agriculture markets. Peak uses machine learning algorithms to provide daily fund position estimates and context around how extended long (red) or extended short (green) the funds are on the date listed.
Chicago Wheat has a 6 score out of a maximum 100 “Net Position Percentile” for Managed Money Hedge Funds (shown above) and a 10 score for Non-Commercial Hedge Funds (not shown). Clearly funds have tons of ‘dry powder’ and can propel prices higher when they start to buy.
Spread Charts represent the difference between the front and back month contracts and are simply the front month price minus the back month price. Spreads that are sold profit when the price gets more negative or less positive. Spreads that are bought profit when prices get more positive or less negative.
To trade Chicago Wheat, I will buy the March, May, July butterfly spread. Based on the historical data, entering this trade on Monday is optimal but any entry this week will work.
For a video of this trade.
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BTW, for more information on spread charts, my website “SpreadEdgeCapital.com” has a video entitled “Anatomy of a spread trade".
The SpreadEdge Weekly Newsletter is published every weekend and provides a broad overview of the important seasonal, technical, and fundamental indicators within the Energy, Grains, Meats, Softs, Metals and Currency markets. In addition, spread trade recommendations and follow-up on open trades is also provided. For a free copy of the Weekly Newsletter, please send an email to info@SpreadEdgeCapital.com
SpreadEdge Capital, LLC
SpreadEdge Capital, LLC is registered as a Commodity Trading Advisor with the Commodity Futures Trading Commission and is an NFA member. Past performance is not indicative of future results. Futures trading is not suitable for all investors, The risk associated with futures trading is substantial. Only risk capital should be used for these investments because you can lose more than your original investment. This is not a solicitation.
On the date of publication, Darren Carlat did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.