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THE SPREAD TRADER
Prepared by
Prudential Securities, Inc.
Spread Trades Of The Week
DECEMBER/MARCH COPPER
Both outright copper prices and copper spreads have been under pressure for several weeks due to stock increases at warehouses for the London Metal Exchange (LME) and COMEX. After reaching June highs near $1.15 per pound, copper prices have been hovering in the mid- 90-cent area for weeks. Despite the supply increases, the copper market is approaching the time of year when prices tend to bottom. There is an extremely strong seasonal tendency for copper prices to rise from early November to the first quarter of the following year, mainly because of purchases by the automobile industry that are needed to fulfill production requirements for the upcoming year.
Therefore, we recommend buying December and selling March copper at 130 points March premiums with an objective of at least even money, risking 50 points front entry. Carrying charges of about 50 points per month should prevent the December discount from widening much beyond our trade's entry level differential.
JULY/AUGUST PORK BELLIES
Pork belly spreads have been extremely weak, primarily because large supplies and lackluster demand have sent outright prices to life-of-contract lows. The March/May spread, which we previously recommended, has attained the full carrying charge discount of about 715 points per month. The July/August relationship has come close to even money, which is unusual because August (the last month of the crop year) almost invariably goes under both the July contract and the cash market in order to give an incentive to remove the remaining supplies from warehouses.
We recommend buying July and selling August pork bellies at even and adding on to the position at a 50- point July discount. We would risk to 100 points July discount on both positions, looking for July to attain a 200-point premium over August.
Open Positions
LONG MARCH/SHORT MAY WHEAT
At 3 cents and 6 cents May premium, with an objective of 10 cents May discount, risking to 12 cents May premium.
LONG DECEMBER/SHORT FEBRUARY CATTLE
At 160 points February premium, with an objective of 100 points February discount, risking to 360 points February premium.
LONG AUGUST/SHORT SEPTEMBER SOYBEAN MEAL
At 30 points September premium, with an objective of 500 points September discount, risking to 300 points September premium.
LONG MARCH/SHORT MAY PORK BELLIES
At 125 and 140 points May premium, with an objective of 50 points May discount, risking to 220 points May premium.
LONG JULY/SHORT SEPTEMBER SOYBEAN MEAL
At 250 points September premium, with an objective of 300 points September discount, risking to 500 points September premium.
LONG MAY/SHORT SEPTEMBER SOYBEAN MEAL
At 450 points September premium, with an objective of 200 points September discount, risking to 800 points September premium.
LONG 2 OCTOBER S&P 790 PUTS/
SHORT 2 NOVEMBER S&P 760 PUTS
At 35 points credit, collected twice, with an objective of zero, holding the position as long as the market is above 760.
Closeouts
LONG 2 OCTOBER S&P 680 PUTS/
SHORT 2 OCTOBER S&P 750 PUTS
At 25 points credit, collected twice, expired worthless for a total profit of 50 points before commission.
October 20, 1997Don Selkin
Prudential Securities, Inc.
One New York Plaza, New York, New York
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