Cocoa/Sugar Spread: Adjust the Ratio

Recalibration

The IMC blog is still positioned on the right side of the bear market in the cocoa/sugar (x2) spread.  Currently, we are short a March cocoa/sugar (x2) spread from the equivalent of +$37.20 (premium cocoa) that was entered on September 30th of 2015!  We added a second ‘add-on’ position at the equivalent of -$3,319 (premium sugar) on February 18th and then we added a third ‘add-on’ position at the equivalent of -$6,528.40 (premium sugar) on April 19th.

The spread continued to decline so much that when our next setup to add more occurred, we decided to spread one cocoa contract against just one sugar contract instead of two sugar contracts this time.  So on November 21st, the blog sold a fourth ‘add-on’ position at +$1,550.40 (premium cocoa).

cocoa-sugar-spread-nearest-futures-weeklyWhat we did not do, however, was recalibrate our older spread positions to reflect the current ratio of approximately 1:1.  Given the fact that the prior bear market declines in the cocoa/sugar spread did not end until one cocoa contract had a premium of +$4,000 or more over one sugar contract, it makes sense to adjust our position to reflect the current ratio of the cocoa/sugar relationship and stay short.

Since there’s no time like the present, we want to go ahead and get that done.  We are going to make this our last act of 2016!

Trade Strategy:

On the short positions in the March cocoa/sugar (x2) spread entered at the equivalent of +$37.20 (premium cocoa), the equivalent of -$3,319 (premium sugar), and the equivalent of -$6,528.40 (premium sugar), exit one of the two sugar contracts in each spread at the market-on-close on Thursday, December 29th.  This will change the ratio for each spread to 1:1.  Risk all four spreads to a two-consecutive day close above the declining 100-day Moving Average, basis the nearest-futures.

 

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