Soy Meal/Bean Oil Spread: Roll To July Contracts

Rollin’ Along

The IMC blog has been using a reversal strategy to trade the soy meal/bean oil spread for the last several months. At the summer highs, we figures the spread was either on the cusp of a breakout that would catapult it to the 2014 summer high of +$24,726 (basis the weekly nearest-futures) or else it was finally ready to start the journey toward ‘even money’.

The breakout to new contract highs in mid-July led to a choppy trading range for a couple of months. After failing to get some upside traction, the spread started to soften. The blog then entered a short position in December soy meal/bean oil spread at approximately +$13,284 on October 2nd.

The short sale is in the black as the soy meal/bean oil spread closed at a five-month low today. However, we have to roll out of the December contracts before the First Notice Day on Monday. There’s a seasonal pattern that indicates strength is likely between now and the end of the year (the spread rallied during this time window in 14 out of the last fifteen years), but we’re going to maintain a short position and ride out the turbulence.

Just Getting Started

The reason we are going to disregard the strong seasonal patterns over the next several weeks is because we are trading with a macro view. If the seasonal rally fails to materialize, we could miss out on a chunk of the downside move that we’ve been looking for.

SoyMeal Bean Oil spread (nearest-futures) weekly

Soy Meal Bean Oil spread (nearest-futures) weekly

The soy meal/bean oil spread has spent the last three years banging around at historic highs. In the past, reversal from this level has knocked the spread back down to ‘even money’ where the soy meal contract and the bean oil contract have the same nominal value. Therefore, the recent weakness after the failed summer breakout could be just the beginning of the move south.

Since the July 2016 spread is trading at nearly the same price as the December 2015 spread, we are going to go ahead and just roll to the summer spread. This gives us a good seven months before we have to worry about rollovers again.

Trade Strategy:

On the hypothetical short position in the December soy meal/bean oil spread entered at approximately +$13,284 on October 2nd, roll to the July 2016 spread at the market-on-close on Friday, November 27th.

Continue to run the reversal system to initiate a long position (long meal and short oil) on a close above +$15,500 and a short position (short meal and long oil) on a close below +$13k. Each price level will act as a stop and reverse point.

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