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THE SPREAD TRADER
Prepared by
Prudential Securities, Inc.
JULY/SEPTEMBER SOYBEAN MEAL
We have officially entered into this trade at a 250-point July discount. This is a similar strategy to our previous recommendations this year of being long May/short September and long August/short September. The reasoning behind all of these trades is basically the same: Nearby soybean meal contracts have held strong inversions over the deferred months all year because of strong demand in the face of tight nearby supplies. It would appear that being long old- crop (July) and short new-crop (September) at a level close to the full carrying charge discount of about 150 points per month is an extremely attractive risk/reward situation because any continuation of strong nearby demand will cause front months to rise more rapidly than the back months.
We will risk to 500 points July discount on this trade, with an objective of at least a 300-point July premium.
DECEMBER WHEAT/CORN
Contrary to normal seasonal patterns, wheat has been losing ground steadily to corn for several weeks. Traditionally, wheat gains on corn in the second half of the year because wheat supplies become less burdensome after harvest ends in July. Also, corn harvest in the early fall usually pressures prices as supplies come into the market.
This year has been veered from the norm in both markets, sending the spread to an 80-cent-per-bushel wheat premium after some traditional brief summer rallies had lifted the spread to 120 cents wheat premium.
Burdensome wheat supplies and ongoing export cancellations have pressured wheat, while corn has undergone a contraseasonal rally based on stories of Chinese export cancellations, which would increase demand for U.S. corn.
The lower the wheat premium falls relative to corn, the more attractive trading opportunity this spread becomes. As the long-term chart shows, there have been a few occasions when wheat traded at a discount to corn, although it has always returned to a premium from these extremely low levels.
Therefore, we recommend buying wheat and selling corn only on technical evidence that this spread has bottomed.
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 2 OCTOBER S&P 680 PUTS/
SHORT 2 OCTOBER S&P 750 PUTS
At 25 points credit, collected twice, with an objective of zero, holding the position as long as the market is above 750.
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.
October 13, 1997Don Selkin
Prudential Securities, Inc.
One New York Plaza, New York, New York
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