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SPREADS TRADING
Prepared by Ira Epstein & Company
COTTON
Upon reviewing the Crop Condition Index (CCI) issued by the USDA the overall condition of the cotton crop is rated at 368. On a scale of 0-500, this categorizes approximately 98% of the cotton crop at a rating of fair to good.
After testing support levels, the cotton market appears to be headed higher. Short covering coupled with reports of Brazilian purchases added to the markets upward impetus. Other bullish considerations are flooding in Pakistan and Chinese buying. I am recommending a spread of buying December cotton versus shorting May at the market, using a 50-point stop.
Soybean Spread
LONG JANUARY VERSUS SHORT MAY SOYBEANS
By purchasing January and simultaneously selling May soybeans, margins are substantially reduced. Instead of an initial margin requirement of $1500 on a single contract, the initial margin requirement on a spread is $405. Therefore, less equity is tied up initiating this particular trade.
I am recommending entry at the current level, purchasing January soybeans at a discount of 12 cents or greater to the May soybeans.
A stop close only of 8- 10 cents should be used.
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).
Intracommodity Seasonals
THE “SUGAR BEAR” SPREAD
I believe this spread is a prudent consideration when October sugar trades at a discount to (or cheaper than) March sugar. Margins should be about $220. I believe you should enter now, at the market, using a stop of approximately 20-point stop ($230).
LONG OCTOBER 98 SUGAR; SHORT MARCH 98 SUGAR
The basic market posture of this spread is bearish, as is evident by you being short the front market (short March) versus the deferred (long October).
October 21, 1997Paul Kocelko
Ira Epstein & Company
223 West Jackson, 7th Floor, Chicago, Illinois
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