Grain Basket Spread: Change the Profit Target

The Grain Basket Spread

The blog initiated a hypothetical long position in the Nov-Dec 2016 Grain Basket spread on July 14th. The position consists of one long November 2016 soybean contract, one short December 2016 wheat contract, and one short one December 2016 corn contract.

The position was entered at approximately -61 1/2 cents (premium the sum of the wheat and corn). For the last few months, we have had a standing order to exit on a close at ‘even money’ or higher. This was due to the spreads previous excursions to where beans gained the premium over wheat and corn for a few days before it rolled right back over.

When Things Change, Be Flexible

Our standing target has not yet been hit. Since Memorial Day, the Nov-Dec 2016 Grain Basket spread has peaked just above -30 cents (premium the sum of the wheat and corn) several times and then rolled over. We have to acknowledge that this is working as a resistance area.

Nov-Dec 2016 Grain Basket spread daily

Nov-Dec 2016 Grain Basket spread daily

Furthermore, we initially bought the ‘red’ new crop Grain Basket spread when it was trading at a substantial price discount to the nearest-futures spread. The difference between the nearest-futures Grain Basket spread and the Nov-Dec 2016 Grain Basket spread has narrowed quite a bit since the summer. This gave away some of our edge. Therefore, we think it might be prudent to lower our target and look for a smaller profit.

Trade Strategy:

On the long position in the Nov-Dec 2016 Grain Basket spread entered at approximately -61 1/2 cents (premium the sum of the wheat and corn), exit on a close at -30 cents or higher instead of waiting for parity.

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