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SPREADS TRADING
Prepared by Ira Epstein & Company
Intercurrency Spreads
DEUTSCHEMARK/JAPANESE YEN
Recent economic events, namely the possibility of an interest rate hike in Germany coupled with trade surpluses in Japan, suggest to me that traders should be buying D-marks and selling Japanese Yen.
Technically, this spread has widened from a 2300-point difference to about 3400 points in a span of 12 weeks. In the last four weeks alone the spread has gained 600 points. I recommend opening this position by buying December D-marks at a discount of 2700 points or greater to the December Japanese Yen. Use a stop of 80 points or greater from your point of entry.
Short-Term Interest Rate Spreads
THE TED 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 will 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 here, using a stop of 10 points or ($250).
Energy Spreads
INTERCOMMODITY HEATING OIL/
UNLEADED GASOLINE SPREAD
The American Petroleum Institute's figures on gasoline stocks showed an increase of 5.53 mb. This combined, with very strong fund buying has, in my opinion, given strength to the energy complex. I now believe the price of heating oil will outpace the price of unleaded gasoline.
This was made recently evident by the December heating oil briefly going premium in price to the December unleaded gasoline. If this trend continues, a spread opportunity should present itself.
A word of caution to all!
Due to the chaotic conditions in the energy markets, stops on spreads are not currently accepted. The position must be liquidated with a market order.
LONG NOVEMBER HEATING OIL/
SHORT MAY HEATING OIL
Commodity spread margins, within the same commodity, are relatively lower ($540), however straight stops cannot be used. Coming out requires a market order. In my opinion a risk factor of 150 points would be appropriate for this spread.
One Of My Seasonal Intercommodity
Favorites
LONG DECEMBER CATTLE/SHORT DECEMBER HOGS
On a seasonal basis, the market posture of December hog futures appears bearish to me. In my experience a solid close above the 70-cent level is needed to give this market a bullish bias.
In the live cattle market I believe the reverse to be true, that is the 4th quarter is when prices tend to firm. I think this a prudent time to consider purchasing December cattle and selling December hogs. Use a minimum of a 150- point stop.
Simple Bull Corn Spread
LONG DECEMBER VERSUS SHORT MARCH CORN
Foreign demand coupled with American domestic buying leads me to believe that this is an excellent time to initiate new trades. “Bull Spreading,” buying the front month (December) and selling the back month (March), using a 4- to 5-cent stop, makes this in my opinion a good trade recommendation.
September 23, 1997 Paul Kocelko
Ira Epstein & Company
223 West Jackson, 7th Floor, Chicago, Illinois
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Last updated on 09-27-97
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