Here is a good example of how the market behaves when price reached a trading limit. Here we are looking at Corn after a USDA report. Old crop July went limit down right after the data and pretty much stayed there. New crop December also sold off, but stayed above limit.

Corn limit down

Now, the exchange spread between the two also continued to trade – and it continued lower.

Corn limit down 2

If you were calculating the spread between the two by taking one price away from the other, you’d get a different number from the exchange spread. That is because July was limit down and therefore not moving – while Dec was.

The exchange spread however is the true representation of where the market is.

Now this is really handy to know because it will give you an idea of where July should be trading if there were no trading limits. Or more importantly, it can give you an idea of where the market can re-open in the next session.

We know Dec is trading at 546.25 at the July-Dec spread is 111.75. To calculate what we can call a fair value for the July contract, we just add the two together. Simple!

546.25 + 111.75 = 658

A fair value of 658 is a way off the limit down price of 676.0.

So how can you trade that? Assuming the spread value holds over the course of close to next open, then an actual open too far away from 658 may provide a fast trading opportunity.

If for example, July opened around where it closed (limit down at 676), that would be a pretty low risk short.

Do I have to wait for a limit move? No, these kinds of things happen on a smaller scale all the time – and you don’t need a limit move for opportunity to present itself. What do you need is a market in which you can estimate a potential open that is somewhat reliable.

In the above example, we estimated where July should open based on the Dec price and the Jul-Dec spread.

In a way, looking at a calendar spread in a limit down scenario is a little like having two related markets such as the Tnote and the Aussie 10s with one of them trading while the other is closed.

While one market is closed (namely the Aussie 10s) the other can move about and affect where the other market ‘should’ open.

Given our Aussie bonds take lead from the US, a reasonable sized move in the Tnote means the Aussie 10s will gap in that direction when it opens and plays catch up.

How do you calculate that potential gap? For fixed interest, that’s where DV01s come in – and it’s all explained in our Bond Fundamentals book (see DV01 Gapper).


This article started out about Corn limits, but ended up talking about fixed interest markets. However there is a parallel there. A limit move can provide opportunity if you know what you are looking for (i.e. know how to calculate an expected re-open). Same goes for related fixed interest markets.

I bet there are other markets in which you could apply this concept…