Analysis of Usd-Jpy… a bit peculiar
15 February 2023
An important free educational resource
24 February 2023
Over time I got to know many traders, with some I became friends and we started exchanging opinions and analyses. Among them is Cristian, who is inventive and very imaginative. He is not the classic trader who follows the crowd, who trades following the two or three rules dictated by courses and books (excluding mine, of course).
He does not adapt his person to trading but trading to his person. He studies spreads that suit his characteristics as a trader, and today I show you a couple of them, in the hope of making other traders want to "experiment" as well.
The first is a Condor spread on sugar, SBH24-SBK24-SBV23+SBN24 to be exact, and below you can see the chart with the 5-, 15- and 30-year seasonal patterns.
I will not write the full analysis, that is not the purpose of the article. I will simply reiterate how multi-leg spreads are definitely the best spreads to trade. Not only do they limit volatility by making certain commodities (such as natural gas) "quieter", but they are truer to seasonality. In this case, you can see for yourself how the three seasonal patterns are not only bullish but also well correlated.
This is precisely Cristian's aim, to work with spreads that are not too volatile and that follow seasonality very well.
I do not know your broker; if you have Interactive Brokers, it will not allow you to trade on this spread. Not bad. Actually, better because it gives me the cue to explain in more detail how the spread is constructed.
I said “not bad” because you can split the Condor spread into SBH24-SBK24 and -SBV23+SBN24 (commissions do not change). Since the Condor spread has a bullish seasonality, both spreads have to be purchased. To make you understand the reasoning behind the construction of this spread, I show you the two charts with their seasonal patterns.
If you are thinking, "why to buy both spreads, wouldn't it be better to buy the first and sell the second?" you are forgetting what spread trading is. That is, being bullish and bearish on the same commodity (or two related commodities). By buying the first spread (SBH24-SBK24) you are bullish on the closer delivery (SBH24) and bearish on the farther delivery (SBK24). If you sell the second spread (-SBV23+SBN24) you would be bullish on the nearest delivery (-SBV23, here the math kicks in, two negatives make a positive) and bearish on the furthest delivery (SBN24). So, you are no longer "hedging" the position but would be directional on the sugar (bullish).
Instead, if you also buy the second spread, you will gain more with the first spread (SBH24-SBK24) than you will lose with the second spread (-SBV23+SBN24) if sugar rises. In the event of sugar falling, with the second spread, you will limit the loss accrued with the first spread considerably.
In short, with this spread, you have a double hedge, given not by two futures contracts (as in a normal two-legged spread) but by two spreads. This further reduces the effect of the volatility of the underlying (i.e., sugar), making the trade smoother.
Along the lines of the sugar spread is the next one. It too is a Condor spread, but this time with two commodities: KEK23-KEN23-ZWN23+ZWU23. Below, you can see the chart with the 5- and 15-year seasonal patterns.
In this case, the seasonality is very short (about two weeks). I do not usually trade such short seasonality but, nevertheless, there are traders who think differently from me. The basic concept behind this spread is always the same as above, to limit volatility, which in an Intermarket spread is definitely higher than in an Intramarket one (and the margin required by the broker is a confirmation).
As already stated, it is very likely that your broker will not allow you to trade this spread. Again, without a commission surcharge, you can split the Condor spread into two two-leg spreads, KEK23-KEN23 and -ZWN23+ZWU23. Below, you can see the charts.
The considerations are the same as with the Condor spread on sugar. Since the spread has a bearish seasonality, both spreads have to be sold. If, as the seasonality suggests, Kansas City wheat (KE) will appreciate less than Chicago wheat (ZW), the first spread (KEK23-KEN23) will lose more than the second will gain (-ZWN23+ZWU23), bringing a gain to your trade. If, on the other hand, the Kansas City wheat appreciates more than the Chicago wheat, with the second spread you will limit the loss you suffered with the first spread.
This is certainly a very clever way of making Intermarket spreads less risky. My thanks to my friend Cristian for sharing his studies with me. In the next edition of the book "The Best Seasonal Spreads for 2024/2025" to be published in December, the best of these spreads studied by Cristian will be included (and this will not be the only new feature).
Over time I got to know many traders, with some I became friends and we started exchanging opinions and analyses. Among them is Cristian, who is inventive and very imaginative. He is not the classic trader
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.
