Analysis of a soybean oil spread
21 January 2022
FOMC Meeting and Eur-Usd
27 January 2022
They are generally ignored by most commodity traders, but in my experience, they are the best spreads to trade. I am referring to multi-leg spreads. For a number of reasons, multi-leg spreads offer better conditions than common two-leg spreads.
Firstly, they are generally seen by brokers as less dangerous and therefore 'rewarded' with a lower margin requirement. Secondly, they are perfect for exploiting certain dynamics, such as Crush Spreads and Crack Spreads, or anomalies in the term structure. Moreover, in a period like this in which many seasonality are not respected, multi-leg spreads turn out to be the most reliable, precisely because of their characteristics.
Let me show you my last two trades with multi-leg spreads to give you a better understanding of the qualities of these types of spreads. The first operation concerns natural gas and more precisely NGJ22-2*NGK22+NGM22 (I published the analysis on the website "A multi-leg spread on natural gas"). Below you can see the chart with the bearish seasonality highlighted.
In the chart you can see not only the spread but also the underlying (NGJ22 in purple). It is evident the different volatility between the futures contract and the spread. Who follows the natural gas knows of the strong movements, both upwards and downwards, had from the commodity in the last months, with variations percentages also to double figure. With the spread, instead, these movements have not been there, the price has moved much more calmly.
The second trade is a Crush Spread, -ZSQ22+2.2*ZMV22+11*ZLV22. The start of the seasonality is between mid-September and mid-October and lasts until around the end of January. You can see the chart below.
Operation that initially went slightly against me (in the short term it is always the speculation to move the markets) but that then began the descent, as foreseen by my analysis (that I have not published but I have spoken about it in the Italian Telegram group to which I am subscribed).
At a time when we are seeing a lot of movement against seasonality among grains, Crush Spreads continue to respect certain dynamics, proving to be more reliable. However, traders tend to ignore this and other multi-leg spreads. They are probably seen as more complex, complicated or difficult to trade. In fact, they preclude themselves from making good trades with less risk.
They are generally ignored by most commodity traders, but in my experience, they are the best spreads to trade. I am referring to multi-leg spreads. For a number of reasons, multi-leg spreads offer better
I am a macroeconomic and financial analyst with over 30 years’ experience, including two years as a fund manager. I specialise in currencies and commodities, and I am the author of several successful books on trading, macroeconomics, and financial markets.
