I would like to run a trade idea by you. I hope that is OK. With all the craziness in the soybean market and the calendar spread rallying strongly, I have been monitoring the Nobember13 versus November 14 spread in Soybeans. I noticed a couple interesting things.
On the daily charts, there are a few technical overbought/reversal signs in the Nov13 contract. For Nov14 (and more on weekly than daily), it’s not overbought at all and not near any past highs.
In other words, the near term contract looks ready to reverse whereas the deferred contract does.
Does this present an opportunity to short Nov13 – Nov14 spread? Is it a better spread opportunity than getting short a closer spread, say Nov13 versus May14?
Firstly, comparing the two spreads: It’s a different trade in the sense of crop cycles.
- Nov3-May4 is same crop.
- Nov3-Nov4 is new crop versus a crop not even thought about.
Both spreads however are directional and shorts will benefit from a drop in X3.
In that respect, it’s a very similar trade. Nov3-Nov4 however has had a heck of a ride – about double the move compared to the Nov-May spread. I’d say that means it has harder to fall.
The reason by the way the spread has rallied more is simply because Nov4 has no reason to rally as much as Nov3 (Nov4 being a crop nowhere near planting). So if we see Nov3 fall, the spread will also fall given Nov4 will not move the same amount.
Question: Is it a better spread? I’d say not better, not worse. It just has a bigger risk profile. Bigger risk and bigger reward. With some common sense added, if you were to trade the Nov3-Nov4 spread instead of the Nov3-May4, you would trade fewer contracts, thereby adjusting for the risk difference.