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Quality And Location Spreads Provide Fundamental CluesMy introduction to commodity markets came in the 1970s when I was invited to work for the summer for the world’s leading commodity merchant company. In the 1970s, Philipp Brothers’ headquarters were in the heart of New York City. The company had offices all over the world. Where it did not have an office, it had a network of agents. Philipp Brothers bought commodities from producers and provided financing for raw materials production and sold to consumers. In an era of rising inflation in the late 1970s, the company was so profitable that it bought the leading Wall Street, privately held bond trading and investment banking firm, Salomon Brothers. My first job was delivering telex messages to trading and traffic departments. Traders were the kings, earning millions in profits. The traffic department arranged the logistics of moving raw materials around the globe from production points to consuming locations. The telex messages contained information about proposed transactions and completed ones. I read each one with great interest. Those messages turned out to be an invaluable education in the business. The high school job turned into a lifelong career. The excitement of markets and the global nature of the commodities business was a powerful force that caused me to forgo law school for a career as a commodity trader. Market structure- We looked at processing spreads and term structure Location-location-location is the real estate mantra- It applies to commodities too Different qualities command premiums or discounts Another part of market structure that can provide valuable clues and makes the pieces of the puzzle form a picture I view the commodity markets as a jigsaw puzzle with many moving pieces. Each market has idiosyncratic characteristics. Quality and location are parts of each market’s structure and can provide insight into the path of least resistance of prices. Market structure- We looked at processing spreads and term structure Over the past two weeks, I highlighted processing spreads and term structure, two critical puzzle pieces. In the future, I will cover substitution spreads and the essential technical factors that held uncover a picture of the path of least resistance for prices. Processing spreads tell us about the demand for one commodity that is a product of another. Crude oil crack spreads and soybean crush spreads were examples. Term structure tells us about the supply-demand balance as backwardation where deferred prices are lower than nearby prices for the same commodity indicates supply shortages or concerns. Contango, where deferred prices are higher, suggests plenty of nearby supplies to satisfy demand or a market is in equilibrium with supply and demand balanced. This week, we will look at location and quality spreads covering the same commodity’s regional dynamics and different compositions. These spreads shed light on areas of the world where a commodity may trade at a significant differential or where other forms or variations of the same commodity are at premiums or discounts, which could signal price changes. Location-location-location is the real estate mantra- It applies to commodities too A location spread reflects the price of the same commodity for delivery in one location or area versus another. The most recent example of substantial location differentials has been in the natural gas market. The natural gas futures contract on the CME’s NYMEX division reflects the price of the energy commodity for delivery at the Henry Hub in Erath, Louisiana. The chart shows that in October 2021, the futures reached the highest price since February 2014 when they traded to a high of $6.466 per MMBtu, only 2.7 cents below the 2014 $6.493 high. Meanwhile, shortages of natural gas in Asia and Europe pushed the energy commodity price over five times higher than the NYMEX futures price. Since natural gas in liquid form travels the world via ocean vessels, the high prices in Asia and Europe have a bullish impact on US prices. Meanwhile, prices in the US can vary dramatically from the NYMEX Henry Hub price, which is a benchmark. Following the price action in natural gas swaps between one US region and others can provide clues about the energy commodity’s price path. Commodity production tends to be localized in areas of the world where the earth’s crust contains reserves or the soil and climate support crop growth. Consumption is widespread as people worldwide require essential staples. When local shortages occur, prices can rise to substantial premiums to benchmarks. In glut conditions, they can fall to significant discounts. Monitoring these location differentials in all commodities provides valuable information about supply and demand characteristics. Different qualities command premiums or discounts A quality spread is the price differential between one form or composition of a commodity and another in the same raw material. An example is the price differential for one hundred-ounce bars of gold and four hundred-ounce bars of gold. Each COMEX contract calls for 100 ounces of the precious metal, the US standard of trade. The London gold market is a far more active wholesale market, where the standard of trade calls for the four hundred-ounce bars. Price differentials reflect the price and time to process one form of gold into the other. Significant premiums or discounts of either size bars, or different sizes such as kilos bars, one-ounce bars, or others, can tell us about retail or wholesale gold demand. When we drink a cup of coffee, we rarely think of the origin of the beans that are ground into the caffeinated beverage. Arabica coffee beans trade in the futures market on the Intercontinental Exchange. The Arabica beans tend to be most popular in the US. Starbucks, Dunkin Donuts, and most US establishments offer Arabica coffee to consumers. Brazil is the world’s leading producer of Arabica beans. Meanwhile, Vietnam is the leading product of Robusta coffee, which is the beans required for espresso coffees. Robusta coffee futures trade on the Intercontinental Exchange in Europe. A weather event in Vietnam or Brazil can cause supply issues for Arabica or Robusta beans, leading to a price change in one or both variations of the soft commodity. There are many other examples of quality spreads where one form or size of a commodity can experience supply or demand changes that impact the overall price action in the raw materials. Another part of market structure that can provide valuable clues and makes the pieces of the puzzle form a picture Location and quality factors can reveal underlying fundamental trends in a commodity. Comparing current levels to historical ones and explaining the changes often leads to an improved understanding of previous price trends and can help predict the future path of least resistance of prices. Location and quality differentials are parts of a market’s overall structure. Combined with the other structural factors, they can uncover opportunities that improve the odds of success. --- Use the links below to sign up for the Monday Night Strategy Call this week. You can also access the full article for free using the other link below. Trading advice given in this communication, if any, is based on information taken from trades and statistical services and other sources that we believe are reliable. The author does not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects the author’s good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice the author provides will result in profitable trades. There is risk of loss in all futures and options trading. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This article does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.
NYMEX:NG1!Education
by Andy_Hecht
2
Market Maker Sweet Spot CalculationsIWM Market Maker Sweet Spot Calculations NOVEMBER 2, 2021 How do we get to the Sweet Spot Derived from the amount of OPEN INTERESTS multiplied with 100 shares per contract times mid price gives us a good estimate what money is at stake and where the Market Maker will make the most money, or better said will lose the least! This is the spot where the market maker wants to be every Friday when there is Option Payday. The further text will not fit here since this introducing broker has no money to implement a nice editor or allows content provider to publish content without paying. Also for violating their rules some of my blogs got hidden. You will find me on Twatter.
AMEX:IWMShort
by Option_Crusader
Processing Spreads Provide Fundamental CluesSome futures markets offer contracts that are related to others and are processed products of the commodity. Understanding the price relationships, history, and paths of least resistance of the processed product versus the original input can provide valuable insight into supply and demand fundamentals. Moreover, these relationships shed light on other related assets. Market structures are the pieces of a jigsaw puzzle Processing spreads are real-time supply and demand barometers The soybean crush spread Gasoline and distillate crack spreads Monitoring corporate profits There is so much data at our fingertips, but we need to understand how to use and interpret the information. Processing spreads are invaluable tools as they are critical variables for market calculus when forecasting the path of least resistance of prices. The crude oil and soybean futures markets offer liquid futures contracts in products that can reveal significant trends, warning signs, and calls to action. Anyone who undertakes a home improvement project knows that the job will not go well without the correct tools. Trying to hammer in a nail with a screwdriver is far from optimal. Tightening a bolt with an ax is a disaster. The best tool leads to the optimal result. The processing spread is one of the most critical tools in my investment and trading toolbox. Market structure are the pieces of a jigsaw puzzle In the world of commodities, market structure are integral pieces of a puzzle. When put together, they provide clues about the path of least resistance of prices as they reflect and can be real-time indicators of supply and demand fundamentals. A commodity’s market structure includes: Term structure- Price differentials for nearby versus deferred delivery periods. Location differentials- Price differentials for delivery of a raw material in different regions. Quality differentials- Price differentials for differing grades, sizes, or composition of the same commodity. Substitution spreads- The price comparison of one commodity for another that can serve as a substitute. Processing spreads- The margin or differential for refining or transforming one commodity into its products. Together, the various pieces that comprise a market’s structure create a picture that often points to higher or lower price paths. Processing spreads are real-time supply and demand barometers The processing spread is one of the valuable tools in an analysts’ toolbox. It tells us if demand for the products is rising or falling. Consumers often require the processed product instead of the raw commodity. The differential between prices of the input, the commodity, and the output, the product, is a critical fundamental measure. Narrowing processing spreads signal falling demand while widening spreads are a sign that supplies are not keeping pace with requirements. Since futures contracts prices are constantly changing, processing spreads can be volatile. When the commodity and product trade in the futures market, the differentials provide a unique supply and demand perspective for traders and investors. There can be many reasons for price variance in processing spreads. However, comparing them to historical levels can serve as real-time indicators of fundamental forces that determine the underlying commodity’s price direction when exogenous factors are not impacting the overall refining or treatment process. Many commodities do not offer futures contracts in the products. The soybean and crude oil markets are exceptions. The soybean crush spread Soybean futures trade on the CME’s CBOT division. Soybean products, soybean meal, and soybean oil also trade in the futures markets on the CBOT with separate and independent futures contracts. Soybean meal is a critical ingredient in animal feed, while soybean oil is cooking oil. Both have other uses. Processors crush raw soybeans into the two products; the oil is the liquid from the crushing process, while the meal is the solid substance. The soybean crush spread can be highly volatile. The monthly chart shows the soybean crush spread over the past fifteen years. The spread traded to a low of a quarter of one cent to as high as $2.1950. The low was in 2013 when soybean futures were trending lower from the all-time high in 2012 at $17.9475 per bushel. The high was in October 2014 when soybean futures were consolidating at lower levels. The move to the high was because consumers bought soybean products at lower prices around the $10 per bushel level. More recently, the crush spread signaled that soybean futures had run out of downside steam. After trading to a high of $16.7725 per bushel in May 2021, the oilseed futures fell below $12 in October. When soybeans were on the high in May, the crush fell to a low of 52.75 cents. At high soybean prices, consumers backed off buying the oilseed products, leading to a price correction that took the price below the $12 per bushel level in October. Meanwhile, falling prices caused demand for products to return. The crush spreads traded to the most recent high at $1.9050 during the week of October 18. The rising crush spread was a sign of robust demand that lifted the raw soybean futures from the recent low. The November soybean futures chart shows the rise from a low of $11.8450 to the $12.50 level. The price action in the crush spread was a signal that demand for products would lift the soybean futures price. The processing spread action signaled the price bottom over the past weeks. Gasoline and distillate crack spreads Crude oil refiners process the raw energy commodity that powers the world into products, gasoline, and distillates. The NYMEX futures market trades contracts in crude oil, gasoline, and heating oil. Heating oil is a distillate fuel that is a proxy for other distillates, including jet and diesel fuels. Refineries process crude oil into the oil products by heating them to different temperatures in a catalytic cracker. The price differential between the input, crude oil, and the output, the products, are “crack spreads.” Rising crack spreads point to increasing demand for oil products. When they fall, it is a sign of oversupply or weak demand. Crude oil futures reached lows in April 2020 during the height of the global pandemic’s impact on markets across all asset classes. The NYMEX crude oil futures weekly chart highlights the bullish trend since April 2020 as the energy commodity has made higher lows and higher highs. The weekly chart of the gasoline crack spreads highlights the bullish trend since March 2020. Gasoline is a seasonal commodity that tends to reach highs during the spring and summer months and decline during the winter as drivers tend to put more mileage on their cars during the warm months. However, at the $17.63 per barrel level at the end of last week, the gasoline crack spread was appreciable higher than the peak in October 2020, when it reached $11.62 per barrel. The gasoline crack spread has provided bullish validation for the path of least resistance of crude oil’s price. The weekly heating oil or distillate crack spread chart also displays a bullish trend. Distillates tend to be less seasonal than gasoline as jet and diesel requirements are year-round. At the $22.53 per barrel level at the end of last week, the heating oil crack was far higher than its October 2020 peak at $9.96 per barrel. The crack spreads have supported the rising crude oil price as they point to robust product demand. Monitoring corporate profits While processing spreads can provide insight into the path of least resistance of prices for commodities that are inputs, they are also real-time earnings indicators for companies that refine or process the raw commodities into the products. Refiners or processors tend to buy the input at market prices and sell products at market prices. The refiners and processors make significant capital investments in refineries or other processing equipment. They make or lose money on the processing spread. When they widen, they experience a profit bonanza; when they fall, times can get rough. When the spreads rise above the cost of the process, profits rise. Low processing spread levels can lead to losses. Valero (VLO) is a company that refines crude oil into oil products. The chart shows that the high in October 2020 was at $44.88 per share. In October 2021, VLO was over the $80 level at the end of last week. Rising crack spreads have lifted profits for the oil refiner. Archer Daniel Midland (ADM) and Bunge Ltd. (BG) are leading agricultural processors. Soybean processing is one of the many business lines for the two companies. The rising soybean crush spreads have lifted profits for the companies. In October 2020, ADM shares reached a high of $52.05 per share. At the end of last week, the stock was at the $66.22 level. BG shares reached a high of $60.50 in October 2020 and were trading at the $88.33 level at the end of last week. The rise soybean crush spreads at least partially supported rising profits and higher share prices for ADM and BG. Processing spreads are real-time indicators for the demand of the commodities that are the inputs. They are also real-time earnings barometers for companies that process commodities into products. Any tool that improves your ability to analyze markets is worth keeping in that toolbelt. --- The full article and spread charts are available using the link below. You can also sign up for the Monday Night Strategy Call below. Trading advice given in this communication, if any, is based on information taken from trades and statistical services and other sources that we believe are reliable. The author does not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects the author’s good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice the author provides will result in profitable trades. There is risk of loss in all futures and options trading. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This article does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.
NYSE:VLOEducation
by Andy_Hecht
3
GBP/USD EUR/USD Spread trade Spread between GBP/USD and EUR/USD is at high rate right now. Since Brexit 2016 the spread between these two has been between 0.1 (18th March, 0.07093).and 0.2 (14th February, 0,22174). In this strategy you bet money on the decrease of spread between these two currencies. GBP/USD and EUR/USD are correlated = 0.81 This means that they will most likely move together. In this trade we go long on EUR/USD and short on GBP/USD. If the EUR/USD will rise it should rise much more than GBP/USD. If GBP/USD falls it should fall much more than EUR/USD. The spread between these two needs to go down in this moment to be profitable.
by itshimon
The intraday spread of ETH/BTC is bottoming soon!The spread between ETH/BTC serves as a risk on / risk off barometer for the crypto markets. The market is bullish if ETH outperforms BTC and vice-versa. It seems like the spread is doing some ending diagonal pattern for its primary wave C that would end with a ratio of exactly 0.055 ETH for 1 BTC. In my previous post, I forecast ETH to fall around the 1400-1500 level this week. This gives a forecast for BTC of 25,400-27,200. This would mark the end of the whole correction that began in April. July could indeed be a bullish month!
BITSTAMP:ETHUSDShort
by quantmaven
AUD/JPY BUY IDEAHey tradomaniacs, still testing my new style but we with AUD/JPY I see a great potential to move up! A bit concerning as always could be the upcomign RBA Statement - I think it is likely to see a more hawkish statement and that the RBA will talk about a tighter policy in the future. Risky setup - But overall deliecious in terms of risk-reward! LEAVE A LIKE AND A COMMENT - I appreciate every support! =) Peace and good trades Irasor Wanna see more? Don`t forget to follow me
Long
by Trading2ez
2
This Corn Spread Can PopThis is a good spread to trade. If you’ve not traded Corn before, just read on, because this style of spread trading is interesting. It has both technical and fundamental aspects and is built on a history of good stats. Corn has an annual crop cycle. It’s planted in April/May, subject to weather issues in the following months, then harvested for first delivery on the Dec futures contracts. The Dec contract is based on what they call the ‘new crop’. But before then, there are other contracts still banging about. Corn futures have March, May, July, Sep and Dec maturities. So any active contracts before Dec are based on the ‘old crop’, the stuff that was harvested last year. So early to mid-year, we have a situation where some of the futures contracts are based on known supply and others (Dec and beyond) are based on the stuff that is still green. That young and growing crop is subject to uncertainty of weather and other growing conditions. Spreads are great tools in which to trade shifting certainty. And with something like an annual cycle of growth and harvest, you build a database and look for what they call seasonal patterns. The Trade: Selling the Sep and buying Dec for a hold of several months, in the past has proven to be a very reliable trade. In fact, optimized for timing, an entry during May and an exit early August has been profitable 95% of the time in the last 20 years. For 2020, I like this spread now given the market is in backwardation. That means the near (short) month is trading above the back (long) month. Corn has had a great run up over the past few months and pull back might see that backwardation reverse to contango and move with the seasonal trend. Stats: 19yrs out on 20yrs profitable. That’s selling the spread in May and buying back in August. Optimized timing of course, but still the numbers are good. In the last 10yrs, profit has averaged about 10 cents, or $500 per spread. Drawdowns have been three figures also, aside from 2011-2013 when things went a bit crazy. Trading; This one has an exchange listed spread so entry, exit and GTC stops are easy. For something like this, I would tend to start with a 3*ATR for a stop and see where it goes. Entries by way of selling into rallies. Check your broker offers SPAN margining. If not, get a new broker. Alternatives: The same spread can be achieved by selling July instead of Sep. Some years that is a better option, some not. More often than not, it would carry more volatility (up and down).
CBOT:ZCU2021Short
by TheTradarien
4
Important bps spread on WBTC/BTCI was looking into the WBTC/BTC spreads fully expecting to see BTC trade at a premium over WBTC. Yes, WBTC is a well-known product with serious custodians (Anchorage) and audited but still, there is risk there. When you buy WBTC, you buy a liability. There should be a discount. Right? Well, not really no. The WBTC/BTC arbitrage play is crowded enough that as the timeframe (1W, 1D, 3H, 1H, 30min, etc.) expands the spread is smoothed out by arbitrageurs doing their jobs. Thank you arbitrageurs! But what stands out to me, is that the only time the WBTC/BTC to dollar spreads are positive (BTC premias) is following large spot moves. WBTC is useful.
W
by finengx
Crude Oil Spreads: A Quick Intro.Spreads are complex instruments. This is just an introduction and some ideas to get our brains ticking over. I had started writing a guide to understanding these three types of spreads, but it just got a little long. It might be easier to do it this way: What do you see above? Here are some observations to get started: 1 All spreads topped out well before June Crude Oil topped out. From about 17th Feb, those spreads stopped gaining. Could spreads be a way to take a contrary position as a trend exhausts itself, and have a little room for error? It certainly is here (although not always the case). 2 Look at the ATR for each. Spreads show lower volatility. 3 Correlations (the CC shows the spread correlation to the underlying June contract). Correlations seem strong during a trend then do their own thing at other times. Change creates opportunity. Constant correlations are not as fun. 4 Basic spreads: bull and bears – are directional. That is, they move closely with the underlying. More complex spreads, like the fly and condor seem to be suited to shifting sentiment along the forward curve. 5 Flies and condors are very similar. The condor tends to have a little more volatility than the fly. In this case, it’s not much. - It can be a complex subject, worthy of something closer to a book, than a comment here, but it’s a start. Just a warning – going down the spread trading path might change everything. - A couple of futures markets where flies and condors are often traded: Crude, Natural Gas, Grains, Eurodollars (and most other STIRs). Options - that's a totally different chat....
NYMEX:CLU2021Education
by TheTradarien
Cattle and Corn: An Obscure Spread With Interesting NumbersAn interesting spread here. I’ve traded this one on and off over the years. It’s a long-term hold and some years this spread just has a nice smooth trend. Think of this spread as a cost of carry, in a way. Or perhaps: wholesale versus retail is a better way to look at it. Feeder Cattle (young moo cows) + Corn (food) + time equals Live Cattle (grown up ones). It’s like that math parents do when say “do you realize how much it costs to have a teenager and send him/her to college?” In futures we can trade that, for cattle and corn at least. We can see where base cost of production is over or undervalued and with a bit of patience, these kinds of trend trades reveal themselves. This one has a great seasonal pattern. That is, it tends to repeat itself each year. Not every year, but most years. Research says selling Feeders and Corn and buying live Cattle can be quite profitable. On average, an entry late April and exit late Sep has been profitable every year since 2005. From 2006 onwards: 100% strike rate, average profit $3374 for one spread. Formula: (+2*400*Live Cattle) – (1*50* Corn) – (1*500 * Feeders) Essentially it says one contracts of feeders (50000lbs) plus one of corn (5000 bushels) makes about two live cattle (80000lbs). Some also trade a 1 Corn: 2 Feeders and 4 Live Cattle. Its’ essentially halving the corn requirement from above. Remember, there are no rules in spread trading. Our job is to find the correlations and trade them. Risk: Hmmm, there are two ways to look at that. The stats say the worst drawdown in the last 15yrs in $5400 and that is about double of most other years in that time. So it’s not a small risk trade. The other way is to eyeball a chart. That recent move from +2000 to 0 did not take long at all. Unless get a well-timed entry, then stops will have to be wide - a few thousand at least (about 3.3 times ATR). It’s one where you would start with a wide stop and bring it in should you see some equity. Entries and exit need finesse since it’s not an exchange traded spread. Experienced spreaders only, with knowledge of seasonality. In you are new to these kinds of spreads, mark it down as market knowledge and come back for a look later on.
CME:LEJ2022Long
by TheTradarien