The Futures Markets offer many opportunities. One strategy that experienced traders sometimes use is to trade inter-commodity spreads instead of strict directional bets on an underlying. The April 1st, 2016 segment of Closing the Gap (Futures Edition) “Slipping Through The Cracks” explained how one can trade the refining process of Crude Oil into Gasoline and Heating Oil. That is known as the “Crack Spread”. The agricultural equivalent of that is the “Crush Spread”, which is the difference in price between Soybeans and the products produced when the beans are processed, Soybean Meal and Soybean Oil. All three contracts have good liquidity, So how do we trade the Crush Spread and why should we do so?
Pete Mulmat, our in-house Futures expert, started by displaying a chart of Soybean Futures (/ZS). The graph showed the past prices and also the one Standard Deviation Profit/Loss implied range over the next 5 days and 30 days (courtesy of our own Dr. Data). The amount that can be gained or lost is substantial and the future is unclear so some traders like to trade the Crush instead. Pete displayed a chart of the Soybeans, Soybean Oil (/ZL) and Soybean Meal (/ZM) and it showed how they generally trade together but there are some differences. The chart showed Soybeans increasing faster than its byproducts lately which has resulted in the spread widening out. A table provided the contract specifications for each. The difference in amount is an important part of the Crush calculation. Spread traders calculate the spread in terms of price per bushel. The formula is /ZM x 2.2 + /ZL x 11 - /ZS.
Pete next showed a 2 year graph of the price of the Crush Spread. The graph showed a large rise of 300% in the spread in the last 2 months. Peter explained that the Standard Crush Spread is long Soybeans and short Oil and Meal. The Reverse Crush Spread is short Beans and long Oil and Meal. Pete introduced a possible trade idea to Tom and Tony. A table of a Standard Crush Spread Trade was displayed. The table included the futures contract, Futures Symbol, position, contract multiplier, current price and buying power reduction (BPR).
For more information on Soybean Futures see:
Closing The Gap - Futures Edition from September 4th, 2015: “Soybean Futures and the Crush”
Closing The Gap - Futures Edition from April 22nd, 2016: Soybeans vs Corn: Who’s Hungry For Opportunity?”
Watch this segment of Closing The Gap - Futures Edition with with Tom Sosnoff, Tony Battista and Pete Mulmat for a look into the highly liquid Soybean Crush Spread and a possible trade idea.
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