AGEC 420

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AGEC 420

• Exam 1 Mon Feb. 25
• Review 7pm, Thurs 21 Feb, 41 Waters
• Topics today
• Trading
• Wheat position adjustments ??
• New position ??
• Spreads
• Volume and Open Interest

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Grain Prices 1990s
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Open Long Position - MidAm Wheat

• Fri., Feb 15
• Bot 1 MidAm May Wheat _at_ 2.82 Sell stop _at_ 2.74½
• Close /-
• Fri., Feb 15 2.81 ¾ -2.50
• Tue., Feb 19 2.83 ¾ 17.50
• Wed., Feb 20 ???
• Possible Actions
• Adjust sell stop Set profit objective OTO ??

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Spreads

• Simultaneously buying and selling 2 contracts in
  different
• Delivery months - most common
• intra-market or inter-delivery spread
• e.g., Dec corn, March corn
• Commodities
• inter-commodity e.g., Crude oil/ Heating Oil
  Gasoline
• Exchanges
• inter-market e.g., Chicago and KC wheat

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Example

• Today
• Sep wheat _at_ 2.90 Dec wheat _at_ 3.00
• Spread is 10, Dec over Sep
• You think the spread will narrow
• What do you do?
• Buy Sep _at_ 2.90, Sell Dec _at_ 3.00

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Spread - Example

• Buy Sep _at_ 2.90, Sell Dec _at_ 3.00
• Next week prices have risen
• Sep _at_ 3.02, Dec _at_ 3.08
• Spread has narrowed to 6
• Gain 12c on Sep lose 8c on Dec
• Profit of 4c/bu

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Or

• Buy Sep _at_ 2.90, Sell Dec _at_ 3.00
• Next week prices have fallen
• Sep _at_ 2.75, Dec _at_ 2.81
• Spread has narrowed to 6
• Lose 15c on Sep Gain 19c on Dec
• Profit of 4c/bu

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Spreads

• Doesnt matter whether overall prices rise or
  fall.
• Hedgers
• The hedge is locking in the price differential
• Examples
• Elevator locking in a return to storage
• Soybean processor locking in a margin on
  crushing
• Speculator
• The bet is on a change in the price
  differential.

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Grain Spreads 1990s
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Terminology

• Bull
• Someone who thinks prices will rise
• Bull market a period of rising prices
• Bear
• Someone who thinks prices will fall
• Bear market a period of falling prices

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Spread Terminology

• Buy Sep _at_ 2.90, Sell Dec _at_ 3.00
• Because you think the differential will narrow
• You think Sep will rise relative to Dec
• This is called a Bull Spread
• Bull Spread or Bear Spread
• refers to your position in the nearest leg
• Bull Long the nearby leg, Short the deferred
• Bear Short the nearby, Long the deferred

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Spread Orders

• Market order
• buy Sep, sell Dec, market
• willing to buy Sep, sell Dec at whatever spread
  is available
• Limit order
• buy Sep, sell Dec, Dec 10c or better to Sep
• willing to buy Sep and sell Dec only if she can
  sell Dec for at least 10c more than she pays for
  Sep.

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Volume Open Interest

• Volume
• Number of contracts traded (i.e., bought or sold)
  in a specified period (usually a day)
• Open Interest (OI)
• Total number of contracts that have not been
  offset
• Each open position has a buyer and seller but
  just count one side for OI (see example, HW 2)

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What do Volume Open Interest Indicate?

• Volume Up and Open Interest Down
• traders are exiting the market
• if price is up a short covering rally
• Volume Up and Open Interest Up
• traders entering the market
• if price is down bearish signal
• if price is up bullish

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Next topic

• Storage Hedge and Basis