Continuing from yesterday’s post, today we’ll look at the CBOT wheat / CBOT corn spread. Right now, the December corn contract is trading near a $2.00 discount to wheat. If you think corn will appreciate faster than wheat and invert like the May (K) contracts have, you can go long corn and sell wheat against it.
Trading rule / warning: trade only 1 spread if your normal contract position size is 1 contract. Don’t over-leverage your account because you see the potential for $10,000 potential profit per spread by December or because you’re afforded lower spreader margin. That can become deadly very fast and you can lose money on both legs – both can go against you.
You trade this at your own risk and this is not a trading recommendation.
Michael, good post, especially on the intracies of the spread trade. As you caution, the spread trade can be dicey becuase of the lower margin, and both legs can move against you, often sharply.
Corn is setup nicely here on the long side IMO.
Michael, I noticed that to get the CBOT margin rebate you’re required to have a 2:1 corn/wheat ratio. Essentially, on one side it requires you to trade double the position you might usually trade than with an outright which might add extra vol to your account – is that right? Alternatively, perhaps a long Dec short May spread could make sense, no? I’m mindful of how much you write about the importance of defensive play.
You don’t trade spreads “to get” the lower margin. There are no rebates that
I know of. Dec/May spread is a no-no in my book. For one, you are thinking
about crop years. Two, when the front month becomes the spot month, daily
trading limits are removed. That means your May contract can become very
problematic for you.
Awesome post! Inter-market spreads are my ‘bread & butter’ so I always enjoy your insights.