Cocoa/Sugar Spread: Roll To The July Contracts

Cocoa/Sugar Spread

The blog entered a hypothetical short position in the cocoa/sugar spread on October 3rd. We rolled from the March contracts to the May contracts back in February, so the spread is currently short from the equivalent of +$12,098 (premium cocoa).

Friday is the First Notice Day for the May cocoa contract. Although we have a couple more weeks for the sugar contract, let’s just keep things simple and roll both sides of the spread right now.

Keep in mind that the spread rallied above the +$15k level last autumn. This is at the top end of the range for the last three decades. Whenever this has happened in the past, the cocoa/sugar spread ultimately rolled over and went back down to ‘even money’.

Cocoa Sugar spread weekly

Cocoa Sugar spread weekly

Initially, it appeared that the decline off the September peak was the start of the bearish trend change. That’s why the blog went short. However, the February surge put the ball back in the bull’s court. If the July cocoa/sugar spread breaks out to new highs, the short position should be abandoned. That’s just prudent risk management. The strategy, however, remains intact: A new bearish trend change signal after a new contract high would justify getting back in on the short side.

Trade Strategy:

For tracking purposes, the blog will roll the May cocoa/sugar spread to the July cocoa/sugar spread at the market-on-close on Tuesday, April 14th. Cancel the ‘add-on’ order for the May spread. Risk the July spread to a two-consecutive day close above +$15k.

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