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PRUDENTIAL SECURITIES
SPREAD COMMENTARY
Prepared by
Prudential Securities, Inc.
Spread Trades Of The Week
OCTOBER/MARCH SUGAR
Sugar is not a storable commodity, so does not operate as a carrying charge market. Rather, the market typically is inverted, with the nearby months at higher prices than the deferreds. Recently, October fell to a 25-point discount to March. Although this structure in sugar is rare, it is difficult to determine when a nearby discount is too deep because there are no physical market influences that limit monthly carrying charges. The long-term chart shows that there have been instances when October has fallen to a discount of as much as 100 points versus March.
The spread has shown some narrowing tendencies since October's discount reached 25 points and has come in to about a 12-point October discount, perhaps indicating that the lows in this relationship have been seen. Therefore, we recommend buying October and selling March on a pull-back toward the 25-point October discount level, risking to a 30-point discount and looking for an eventual October premium of between 10 and 20 points.
FEBRUARY/MARCH PORK BELLIES
This new-crop spread has been gyrating (on a closing basis) from a February premium in excess of 150 points to a February discount of about 30 points. Because February has recently fallen closer to March, we are advocating buying February and selling March at even, adding to the position at February discounts of 30 and 60 points if offered. Trade execution at these settlement prices may be a bit difficult, although liquidity in the March will build as positions in the August contract are closed out over the balance of this month. This is a low-risk trade because carrying charges should limit the February discount to no more than 100 points. Our objective is a February premium of 150 points. We will risk to a February discount of 90 points.
Open Positions
LONG 2 AUGUST S&P 660 PUTS/
SHORT 2 AUGUST S&P 670 PUTS
At 30 points credit, collected twice, with an objective of zero, holding the position as long as the market is above 670.
LONG 2 AUGUST S&P 675 PUTS/
SHORT 2 SEPTEMBER S&P 700 PUTS
At 25 points credit, collected twice, with an objective of zero, holding the position as long as the market is above 700.
LONG 2 AUGUST S&P 690 PUTS/
SHORT 2 SEPTEMBER S&P 725 PUTS
At 25 points credit, collected twice, with an objective of zero, holding the position as long as the market is above 725.
LONG 2 AUGUST S&P 680 PUTS/
SHORT 2 SEPTEMBER S&P 720 PUTS
At 25 points credit, collected twice, with an objective of zero, holding the position as long as the market is above 720.
LONG 2 SEPTEMBER S&P 650 PUTS/
SHORT 2 SEPTEMBER S&P 755 PUTS
At 25 points credit, collected twice, with an objective of zero, holding the position as long as the market is above 755.
Closeouts
LONG SEPTEMBER/SHORT NOVEMBER HEATING OIL
At 170 points November premium, closed out at 120 points November premium for a 50-point profit before commission.
August 11, 1997Donald M. Selkin
Prudential Securities, Inc.
One New York Plaza, New York, New York
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