Prepared by Ira Epstein & Company

According to the USDA's winter wheat report dated 12/1, about 75% of the crop going into dormancy is rated at “good/excellent.” With the wheat crop in the ground, much attention is given to the price of corn and its relationship to the price of wheat. The corn market has just gone through harvest from which the added supply, in my opinion, created selling pressure on the March contract which reached a season low of about 364¼ in October. With this seasonality in mind, I believe that purchasing corn and selling wheat is an excellent spread trade with a risk factor of about 10 cents ($500) and a margin requirement of $1053. At current prices (July wheat at 369 minus March corn at 280¾ this spread closed at 88¼ cents premium to the July wheat.

With the cash market at 67 cents and the December live cattle near that level, the next issue to address is whether packer demand can follow through creating higher prices. Even though cattle prices have been declining, the bull spreads have been working (the nearby months have gained on the deferred months). I believe that this scenario will continue for the near term.

I continue to recommend the spread of long February versus short April cattle at the market, using a 150 point stop. Current initial margin required is about $375.

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.

December 2, 1997Paul Kocelko

Ira Epstein & Company

223 West Jackson, 7th Floor, Chicago, Illinois

Options Opportunities In Options

Spread Trading
Consensus National Futures and Financial On Line Index

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