A Pairs Trade is placed by a trader not interested in picking direction. The equivalent of this in grain Futures is the Soybean Crush. Pete Mulmat joins the guys to explain how the Soybean Crush works, review the Soybean market and explain the details of the trade. He also presents his simplified version of the Crush. So what is this all about?
A chart was displayed of the soybeans and it included the projected range, based upon a one Standard Deviation (SD) move over 5 days (+/- $1040) and also 30 days (+/- $2500). Instead of risking that much a trader can play the Soybean Crush instead. Most Soybeans aren’t consumed in their natural form. Instead, the Soybeans (/ZS) are processed into Soybean Meal (/ZM) , which is used to feed cattle, hogs, etc. and Soybean Oil (/ZL) which is used to fry foods and in such things as salad dressing and mayonnaise. Each of these contracts is quoted in a different form. The Soybean contract is 5000 bushels, Meal is 100 tons and Oil is 60,000 pounds. They all have different tick sizes. For crush purposes traders convert everything to bushels. Pete displayed a table with the details how it is done and then a chart that listed the formula while showing the movement of the spread.
A graphic displayed both the standard Crush spread of long Soybeans while short both Meal and Oil and the Reverse Crush of short Beans and long both Meal and Oil. Pete suggested doing the latter. Pete further explained that although the exact spread would call for using 10 contracts of Soybeans and 11 and 9 of the products that we could simply use one of each and it would be close enough and would require not nearly as much capital. He displayed a table laying out the trade details, including a Buying Power Reduction (BPR) figure of $6435. A final chart showed the 10 P/L ranges. Some were quite large ($4K) but most were around $1K. Tom and Tony liked the trade and put it on. They looked at it in a later segment and saw that it had quickly gone about $300 in their favor and decided to take a quick profit.
For more on the Soybean Futures and the Soybean Crush see:
Closing The Gap - Futures Edition from September 4, 2015: "Soybeans Futures and the Crush"
Closing The Gap - Futures Edition from April 22, 2016: "Soybeans vs Corn: Who's Hungry For Opportunity"
Closing The Gap - Futures Edition from May 27, 2016: "Soybean Crush Spread"
Closing The Gap - Futures Edition from July 29, 2016: "Crude Oil vs. Soybean Oil"
Watch this segment of Closing the Gap - Futures Edition with Tom Sosnoff, Tony Battista and our Futures expert, Pete Mulmat, to learn all about the Soybean Crush and for a trade idea in it that you may want to try.
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