wmeubank@ocp.kcmo.com
SPREAD TRADING
Prepared by Ira Epstein & Company
The stock market appears to be resilient!
After weathering a 550+ point sell off, it rallied back sharply and gained 325+ points “on over 1 billion shares of trading,” a record volume.
At the slightest hint of concern, cliches like “flight to quality” begin rumbling throughout the investment community. I believe the best way to take advantage of such tumultuous conditions is the TED (long T-bill; short Eurodollar) spread. “In God we trust, all others pay juice,” can be the rally cry for TED Traders.
The TED Spread Strategy
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).
Cotton
With the supply side accounted for in cotton, we next have to look at the demand side of the equation which in my opinion looks strong at this point in time. One concern that should be addressed is the recent Commitment of Traders report shows that funds are net short, which is not evident by aggressive selling. Perhaps their perceptions are changing.
After testing support levels at 7200, the cotton market now appears to be headed higher. Adding to the market's upward impetus is Chinese buying. I am recommending a spread of buying December cotton versus shorting May at the market, using a 50-point stop.
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 points 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 29, 1997Paul Kocelko
Ira Epstein & Company
223 West Jackson, 7th Floor, Chicago, Illinois
Added to the WWW 10-31-97
Last updated on 10-31-97
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