SPREAD TRADING
Prepared by Ira Epstein & Company
Bear Belly Spreads
LONG MAY PORK BELLIES VERSUS SHORT FEBRUARY PORK BELLIES
The entire pork complex seems to be somewhat range bound, however, a bearish bias appears prevalent. Specifically, the February pork bellies have traded within a 55 to 59 cents trading range during the past 4 weeks. With this observation in mind, I believe that bear spreading (also known as back spreading) appears to be a viable trade. Purchasing May bellies and selling February at 60 (12/15 close) points premium to May would require a stop at 120 point premium to the February contract according to my analysis. If the February contract decreases in price the premium (greater price) should be reflected in the May contract.
Sugar Bear
With near-term technical support at the 12-cent level, some investors believe the sugar market is headed for higher levels. I believe the opposite to be true. The fact that two different sources are drawn upon for supplies keeps this market in check. If the warmer regions of the globe have trouble with sugar cane crops, the Northern region sugar beet farmers gladly take up the slack.
I recommend bear spreading the sugar market. Namely buying October sugar and selling March sugar at 55 cents or better premium to the March contract. A stop of 30 points from entry ($336) is recommended. Margin requirements for a sugar spread are $210.
Corn-Wheat Spread
Much attention is given to the price of corn and it's 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 currently of $1053. At current prices (July wheat at 355½ minus March corn at 271¾) this spread closed at 83¾ cents premium to the July wheat.
December 15, 1997 Paul Kocelko
Ira Epstein & Company
223 West Jackson, 7th Floor, Chicago, Illinois
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