Long Soybean Oil Butterfly Spread and a Long Crude Oil 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. SpreadEdge publishes a weekly Newsletter that provides several seasonal spread trade opportunities every week.
Watch List
The 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 hypothetical and is based on the most recent 15 years of historical data.
This week there are 2 trades that are planned for client and personal accounts. This article will focus on the long Soybean Oil butterfly spread.
HYPOTHETICAL PERFORMANCE RESULTS 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.
Technical Analysis
Soybean Oil has been grinding lower and lower since late August 2023. Technically there does not appear to be and end in sight but several other indicators point to higher prices.
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.
Soybean Oil is the most “Cheap and Oversold” market in the agriculture complex.
Commodity Carry and Roll
Carry and roll calculate the percent carry yield which is determined by looking at the difference between the current front month contract price compared to the same month a year ago. The difference is divided by the current month notional value.
Soybean Oil is consistently a positive carry market which is sometimes attractive to buy and gives the investor the opportunity to profit when futures prices “roll up” to spot cash prices. This week Soybean Oil registered its lowest % carry yield score for the past 2+ years at (4.9).
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.
Soybean Oil has a 6 of 100 “Net Position Percentile” for both Non-Commercial and Managed Money Hedge Funds.
CTA Ladder
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.
Soybean Oil has a (9) score out of the minimum (10) CTA momentum score. This indicates that CTAs have little or no dry powder to add to existing shorts.
Finally, Soybean Oil has a 30 relative strength score which is widely believed to be reversal territory.
Spread Chart
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 Soybean Oil, I will buy the August, September, October butterfly spread. The optimal entry is Thursday May 9, based on the past 15 years of historical data.
Videos
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More Information
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
Darren Carlat
SpreadEdge Capital, LLC
(214) 636-3133
Darren@SpreadEdgeCapital.com
Disclaimer
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.
