Prepared by Ira Epstein & Company

LONG JANUARY/SHORT MAY ORANGE JUICE

This past mild hurricane season, attributed to the El Nino by some meteorologists, was just one of many reasons for the orange crop abundance, and consequent low prices. With the onset of time, the threat of frost becomes a concern, and usually leads to some price support. This is most recently evident as the January '98 orange juice reached a 13-week high today (8125). News sources also attribute strong fund buying as being responsible for today's rally.

I believe the most effective trading strategy is to: Buy January orange juice; and sell May orange juice, at the market. With a margin requirement of $250, I would use a risk factor of $225 (150-point stop) which makes me believe this a very reasonable trade.

As go the economies, so go the currencies. Germany's Bundesbank raised its lending rate, thus attracting an influx of capital and higher price for the D-mark. I also believe, the inverse to be true in reference to Japan's economy. This is evident by the decrease in price of the Japanese Yen.

To best optimize these two separate market scenarios, I recommend buying the December D-mark; and selling the December Japanese Yen as a spread.

Upon reaching overhead resistance at the —2580 price; the long D-mark; short Japanese spread traded in a consolidation range of 200 points (from about —2575 to —2775). Having penetrated overhead resistance the market might meet optimum parameters (near —2530, 6-day moving average). A 75-point stop is recommended after entry. The optimum profit object would be approximately —2250 DM << JY (D-mark 2250 discount to J-Yen).

At the slightest hint of concern about the equities markets, cliches like “flight to quality” begin rumbling throughout the investment community. I believe the best way to take advantage of such tumultuous conditions is the TED (long T-bill; short Eurodollar) spread.

The TED involves buying U.S. Treasury bills and selling Eurodollars. The TED spread is a spread position of 90-day interest rate instruments guaranteed by the U.S. Treasury versus Eurodollars that are not guaranteed. This is considered to be a quality spread. When quality concerns increase, regardless of the cause or justification, conservative investors shift funds to investments perceived as being safer. Therefore, the T-bills should always carry a premium over the Eurodollars. Margins on this particular spread are $225. I recommend entry at current market levels, and suggest using a stop of 12 points ($300) or greater.

November 11, 1997Paul Kocelko

Ira Epstein & Company

626 West Jackson, Chicago, Illinois

OPTIONS

Spread Trading
Consensus National Futures and Financial On Line Index

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