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Am I going to take the bull spread on corn?

23 Oct 2017,

Market with corn is currently extremely oversold, and traders are “lurking” for growth. The question is, whether this is a good opportunity for me. First, let’s have a look at the market situation.



COT analysis

The current market sentiment indicates high tension in market. First, let’s look at the COT index of positions. In the group of big speculators, the high tension is obvious – the index curve is very close to the minimum (the group is extremely net short). In the past, similar market has indicated an upcoming growth or, at least the movement of the price to the side.



The group of hedgers has not yet reached the peak around -0.10. But you will certainly agree with me that the curve is closer to the maximum than to the minimum. The probability of price increases is therefore higher.



Other COT indicators are also very interesting. For example, the traders index for both groups suggests too low corn prices because the index curves reached extreme values ​​…




So the COT analysis clearly indicates the future growth of corn prices. Let’s go further …

 Technical analysis

After a sharp summer price fall, the price has stopped on the very strong support level 345 cents. This level could  not be breached for almost two months. Space is narrowing. There is a short downtrending line that pushes the price from the top, so the breaching of this price either up or down is just matter of time.




Commodity spreads

Now you might be expecting that I will write about the plan to expand my spread portfolio with buying bull spread on corn. Yes, the COT rate is a strong indication for me, but still, I am not interested in corn. As I am telling to my students, bull spreads are very rarely traded in such situations.

Consider for example the behavior of ZCH18-ZCN18 in recent years. We might have found a small growth tendency, especially at the turn of the year. But it is nothing interesting for me. The risk / reward ratio is not interesting.



The reason, why I don’t trade bull spreads on corn even in the case of a heavily tensed market is the market structure. There is a strong contango here. Proof of this is the contango histogram, where you can find the calculated percentage of the contango for given time period. The following charts refer to the last 5 years.



As we can see directly from the chart and also from the numbers, the market is in the vast majority of cases in the contango. This environment is not ideal for bull spreads.

When we display the chart of the spread together with Full Carry Chart, we will find that even the maximum risk is still high – about 10 points (distance from full carry). Therefore the spread has fairly large amount of space to drop.



A few words at the end …

Please take it as my own point of view. Of course, I’m not saying that this opportunity will not work. There are traders (and even my students) who trade bull spreads for corn without any problems. There are situations when bull spreads can make it on this market. But I’m just an observer and bull spreads on corn do not fit into my portfolio.

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