Arabica/Robusta Coffee Spread: Roll To the May Contracts

Arabica Coffee/Robusta Coffee Spread

The blog entered a hypothetical short position in the March Arabica coffee/Robusta coffee (x4) spread at -$6,447.50 (premium the sum of the Robusta contracts) on October 20th. Due to the approaching First Notice Day for March contracts, the position needs to be rolled to the May contracts.

The ratio between the value of one 37,500 lb. Arabica coffee contract and one 10-tonne Robusta coffee contract was near 4:1 back in October. Therefore, we traded four Robusta coffee contracts against one Arabica coffee contract to keep things equalized.

Arabica Robusta Coffee ratio daily

Arabica Robusta Coffee ratio daily

Today the Arabica/Robusta ratio dropped just below 3:1 for the first time in nearly thirteen months. Therefore, we would advise adjusting the spread position to trade three Robusta coffee contracts against one Arabica coffee contract to keep a balanced weighting on the spread.

Trade Strategy:

For tracking purposes, the blog will liquidate the short position in the March Arabica coffee/Robusta coffee (x4) spread and simultaneously initiate a short position in the May Arabica coffee/Robusta coffee (x3) spread at the market-on-close on Tuesday, February 17th. (Notice the May spread will have three Robusta contracts instead of four). Risk the May spread to a two-consecutive day close above +$8,800.

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