Soy Meal/Bean Oil Spread: Roll To The May Contracts

Soy Meal/Bean Oil Spread

Friday is the First Notice Day for a slew of March futures contracts, including the grains. We certainly don’t want to take delivery of any of this stuff, so it’s best to swap out to some longer-dated contracts for our current spread positions.

Incidentally, those horror stories that you hear about somebody’s brother-in-law getting 50,000 bushels of corn dumped on their front lawn or a truck full of live cattle pulling into the driveway is a bunch of hogwash. If you forget to rollover and get put on delivery notice, you have ample time to retender. It’s going to cost you more commissions and some trade slippage, but your brokerage firm is going to make sure you get it done. As a matter of fact, it’s quite a process to take delivery of the contract even when you want to! I have been involved in taking delivery of futures contracts before and there are several steps involved. Bottom line: Always try to roll before First Notice Day, but don’t freak out if you are a day late. You can get it fixed.

May Soy Meal Bean Oil spread daily

May Soy Meal Bean Oil spread daily

Remember, the blog is currently using a reversal system to trade the soy meal/bean oil spread. The objective is to maintain a continuous spread position on either the long side or the short side. We are keeping the trade parameters in place to initiate a long position (long meal and short oil) on a close above +$17k and a short position (short meal and long oil) on a close below +$15k. Each price level will act as a stop and reverse point. For example, if a long position is entered on a close above +$17k then a close below +$15k will trigger a signal to liquidate the long position and initiate a short position. If a short position is entered on a close below +$15k then a close above +$17k will trigger a signal to liquidate the short position and initiate a long position.

Soy Meal Bean Oil spread monthly

Soy Meal Bean Oil spread monthly

The soy meal/bean oil spread initially caught our attention as a candidate on the short side. The value of a soy meal contract has only reached a premium of +$15k or more over the value of a bean oil contract a handful of times in the last five decades. It has always collapsed. However, with the May soy meal/bean oil spread currently around +$15k, an upside breakout could allow for a run of several thousand dollars if it returns to the double top on the monthly timeframe between the 1973 high of +$26,580 and last year’s record high of +$26,920. Therefore, we decided a reversal system could allow us to take advantage of either a historical outlier move to the upside or the bearish reversal that we ultimately expect to see.

Trade Strategy:

For the short March soy meal/bean oil spread entered at approximately at +$14,354 (premium meal) on November 19th, roll the one short 100-ton March soy meal contract and the one long 60,000 lb. March bean oil contract to the May contracts at the market-on-close on Wednesday, February 25th. Risk the short May soy meal/bean oil spread to a close above +$17k.

Also, keep the trade parameters in place to reverse and go long on a close above +$17k. If filled, continue to keep the trade parameters in place to reverse and go short on a close below +$15k.

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