Spread within a spread.

[-oo0(GoldTrader)]

Spread within a spread.

When you are rolling up or adding a spread it may help to look at the “spread within a spread.” Traders that exchange email with me are familiar with the concept. Suppose you are in a seasonal spread. The time comes to add another spread with one side remaining the same. What you do is plot the “spread within the spread,” and use normal chart analysis to roll up or just initiate new positions in the side you are changing.

For example the “inner spread,” in seasonal KCBT wheat still favors shorting July instead of the less liquid May or March against December.

 

[H2O]

Spread within a spread.

When you are rolling up or adding a spread it may help to look at the “spread within a spread.” Traders that exchange email with me are familiar with the concept. Suppose you are in a seasonal spread. The time comes to add another spread with one side remaining the same. What you do is plot the “spread within the spread,” and use normal chart analysis to roll up or just initiate new positions in the side you are changing.

For example the “inner spread,” in seasonal KCBT wheat still favors shorting July instead of the less liquid May or March against December.

Can you be more specific in what you mean?
I assume you're talking about roll-overs here, but I'm not sure I understand what you're saying.

Any comments appreciated !

 

[-oo0(GoldTrader)]

Inner Spread

Hybrid Thread

The “inner spread,” can be seen when you take one leg of a spread and compare it to possible substitutes using a spread chart just as you did for the original spread. As always you are trading the relative differences between the contracts. Because you are only examining one leg, this is a spread within a spread.

I assume you're talking about roll-overs here, but I'm not sure I understand what you're saying.

Maybe someone else can chime in here with proper definitions. I was thinking rollovers are when you want to say, hold long gold for a decade or two. Because contracts with sufficient open interest may not be adequate for your needs that far out, you might be using current near contracts where the volume is. Before the near expires you can roll your position over by liquating the near and replacing it with the same contract further out when the market has the liquidity for a position of the size you are trading. That is a use of the term rollover that I am familiar with. Pretty much rolling over for more time.

You can usually see the effects of rollover on the different months by looking at the daily “open interest,” changes. When you see the open interest going down in one month and up in another, there is a good chance that the big boys are rolling from one to the other. We do not need to know why, just that they do, and when they do, and how to take advantage of that knowledge.

Because they have such big positions and usually a short time to move them, this can create abnormalities in these patterns. If they occur often enough, and consistent enough, patterns will appear on charts. The market needs the added liquidity so the premium paid to spread traders is just part of the cost of business.

Similarly when we trade a spread we are really taking positions in two separate contracts, correlated but separate. We may be going long one side in expectation of a rise, maybe due to declining supply as the material gets shipped out of silos, or just because people want it. We may be selling the other side, not because we expect it to go down, but just because we do not expect it to go up as much as our long side. A common reason for it not to go up is because the closer we get to some event the greater its likelihood of actually happening. Like next years crop prospects. Sometimes like the spring Meal trade you can make out on both sides.

Seasonals overlap

The point is that as seasons change, the best contracts to ride that seasonal pattern may change. If it is just one side of the spread, there may be no reason to liquidate both sides just to rebuy one side again with the new position. Keep your costs down, keep what needs keeping, and just change what needs changing.

So, if we are keeping one side for the long haul the other side could be rolled over into more attractive contracts as the volume and seasonal impact adjusts to time and climatic conditions. You could be holding one side and rolling the other. This is just fine-tuning. You are in essence still riding the same seasonal forces.

Is switching worth the opportunity cost of losing those additional commissions now?

Take the current KCBT wheat spread from the KCBT web-site. With the costs of a switch for just a few spreads you have minimum margin for a complete new spread. Taken at the right time you might return many times the commissions you otherwise would have lost doing a switch. So, instead of rolling what you already have, you might want to consider adding to your seasonal play partially with the costs you will have saved. Just add a new position instead of rolling over.

You cannot make a great amount without building up your winners. The idea is to be aware of the “inner spread,” as you select your next “contract pair,” to build your position.

Sure, if you must roll over for more time, then the inner spread will help you know when. But when you are adding more spreads you need to know which contract pairs will best take advantage of the seasonal trend at the time that you place your order. Trading the inner spread just as you would any other spread is a more efficient indicator than just guessing.

 

[-oo0(GoldTrader)]

Stochastics on "inner spread"

Hybrid Thread

This is the time of year KCBT wheat spreads tend to favor long Dec/ short May instead of the highly successful Dec/July contract combinations. In order to fine-tune the switch over, run a spread between both short sides in this case July/ over May (or even March the next one out according to the free KCBT web site.)

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What we want to know is which of the short sides in weaker. So far as we have already passed the optimal date and the July contract still has remained weaker than the May.

Relative to July, a trader putting more positions on to catch this seasonal or rolling over has more time before using May as the short side.

What we are doing is trading the inner spread the same as you would any other spread. Currently the spread within the Dec/July turnover to Dec/May spread has a Bearish divergence in Stochastics. This is not a buy signal. It soon could be, when Sto gets nearer to the terminal area below 20 or 15%, forms a bullish divergence with the Sept 5th low in %K, then turns up with %K crossing on the right hand side of the new trough in %D.

At that time there would be more potential averaging up using Dec/May instead of the current Dec/July which is already up over a thousand percent on margin (1,000% ROM) and has another month in its seasonal window.