Spread trading: relationship between spread and underlying

“Studying your book on spread trading "The Correct Method of Analysis", in the chapter "The Study of Seasonality" on page 21 line 9 you state that the SBV7-SBN7 spread has a bullish seasonality and then state in line 12 that "This means that I am basically bearish on sugar because I buy the furthest delivery is selling the nearest one". Could you help me understand this as these two statements seem conflicting?”

This question gives me the opportunity to make some clarifications in addition to emphasising the importance of the underlying in spread trading.

Generally, a spread is constructed with the nearest delivery first and the furthest delivery second. For example, ZSU23-ZSX23 has in the first leg the soya futures contract with October delivery (the nearest) and in the second leg the soya futures contract with November delivery (the furthest).

However, nobody prevents you from constructing the spread differently. Moore Research constructs the spread by putting the delivery to buy first and the delivery to sell second. By doing so, all spreads proposed by Moore are always to buy and never to sell. In this case, however, there is a risk of confusion, as with the example in the book.

The seasonality of the SBV7-SBN7 spread is bullish, but buying the spread, what do you do? You buy SBV7 (October, the furthest delivery) and sell SBN7 (July, the nearest delivery).

As explained in my books, nearest deliveries react more, for better or worse, to news, data or simple speculation. You can do an easy test of this yourself. Just take the various deliveries of sugar (or of any other commodity) and you can see that the nearest delivery will have gained/lost more percentage-wise than the second one. The second delivery is more than the third, the third is more than the fourth and so on until the deliveries have enough volume.

So, if in a spread you buy the nearest delivery, then as explained above, you are basically bullish on the underlying because a rise in the underlying will be greater for the nearest delivery than for the one furthest away. Conversely, as in the example with sugar in the book, if you sell the nearest delivery, then you are basically bearish on the underlying because a fall in the price of sugar will be greater for SBN7 (the nearest delivery) than for SBV7 (the furthest delivery).

In conclusion, it is true that the seasonality of SBV7-SBN7 is bullish, but the way it is constructed, by buying the spread you are bearish on the underlying (i.e. sugar) as you buy the furthest delivery (first leg) and sell the nearest delivery (second leg).