If you’re interested in buying something, whether it’s food or electronics, you’re definitely looking for a quality at a good price. The same applies to trading. I am personally looking for “quality” inter-delivery spreads at the best price. And sometimes we can actually find situations that meet both these conditions at the same time. At the moment I’m working on such an interesting spread, namely the bear spread on corn.
The bear spreads on corn are best traded when they are within one harvest. The most popular combination is the first and last contract of one harvest. Expressed by the spread terminology – July and December of the previous year (ZCN19-ZCZ18). Let’s see how the spread is developing so far.
Yes, the spread is still falling. Perhaps you are wondering why it should be interesting because it can decline even further. Yes, of course, this is true. But this type of spread is good for us, because the more it falls, the less expensive it becomes. This can be seen in the chart of storage cost analysis. Specifically, you can see the ratio of the spread and the full carry.
The current spread is marked by the blue curve. As you can see, it has reached 30-35%. We can definitely see this area as undervalued compared to previous years. What does it mean? Spread is simply cheap.
Here, however, it is necessary to realize that the chart with the storage cost analysis does not limit the lowest level of the spread! Spread can easily reach the area below 20%, as was in the case of ZCN17-ZCZ16. That is why it is very important to manage the position and the risks. Spread has a very good success, but the risk is not limited.
Building a position
Gradual positioning is a good choice for this type of spread. It has proven to be successful for my trades in the past. I have basically explained the reason. In the event of a further drop of the spread, it would be a pity to have all contracts in. On the other hand, we never know exactly when the growth will occur. That is why I enter gradually. The entries are distributed at lower levels. Of course, I have a strict stop loss I will not go under at any cost.
Finally, let’s take a look at my favorite COT analysis. The market is overbought, mainly because of hedgers. This does not mean, of course, that corn will start to fall immediately. Future prospects for bear spreads are favorable.
The analysis needs to be understood as my subjective point of view on the market, and therefore it is not investment recommendation.