This Corn Spread Can Pop
This is a good spread to trade. If you’ve not traded Corn before, just read on, because this style of spread trading is interesting. It has both technical and fundamental aspects and is built on a history of good stats.
Corn has an annual crop cycle. It’s planted in April/May, subject to weather issues in the following months, then harvested for first delivery on the Dec futures contracts. The Dec contract is based on what they call the ‘new crop’.
But before then, there are other contracts still banging about.
Corn futures have March, May, July, Sep and Dec maturities. So any active contracts before Dec are based on the ‘old crop’, the stuff that was harvested last year.
So early to mid-year, we have a situation where some of the futures contracts are based on known supply and others (Dec and beyond) are based on the stuff that is still green. That young and growing crop is subject to uncertainty of weather and other growing conditions.
Spreads are great tools in which to trade shifting certainty. And with something like an annual cycle of growth and harvest, you build a database and look for what they call seasonal patterns.
The Trade:
Selling the Sep and buying Dec for a hold of several months, in the past has proven to be a very reliable trade.
In fact, optimized for timing, an entry during May and an exit early August has been profitable 95% of the time in the last 20 years.
For 2020, I like this spread now given the market is in backwardation. That means the near (short) month is trading above the back (long) month. Corn has had a great run up over the past few months and pull back might see that backwardation reverse to contango and move with the seasonal trend.
Stats:
19yrs out on 20yrs profitable. That’s selling the spread in May and buying back in August. Optimized timing of course, but still the numbers are good.
In the last 10yrs, profit has averaged about 10 cents, or $500 per spread. Drawdowns have been three figures also, aside from 2011-2013 when things went a bit crazy.
Trading;
This one has an exchange listed spread so entry, exit and GTC stops are easy.
For something like this, I would tend to start with a 3*ATR for a stop and see where it goes. Entries by way of selling into rallies.
Check your broker offers SPAN margining. If not, get a new broker.
Alternatives:
The same spread can be achieved by selling July instead of Sep. Some years that is a better option, some not. More often than not, it would carry more volatility (up and down).
Corn has an annual crop cycle. It’s planted in April/May, subject to weather issues in the following months, then harvested for first delivery on the Dec futures contracts. The Dec contract is based on what they call the ‘new crop’.
But before then, there are other contracts still banging about.
Corn futures have March, May, July, Sep and Dec maturities. So any active contracts before Dec are based on the ‘old crop’, the stuff that was harvested last year.
So early to mid-year, we have a situation where some of the futures contracts are based on known supply and others (Dec and beyond) are based on the stuff that is still green. That young and growing crop is subject to uncertainty of weather and other growing conditions.
Spreads are great tools in which to trade shifting certainty. And with something like an annual cycle of growth and harvest, you build a database and look for what they call seasonal patterns.
The Trade:
Selling the Sep and buying Dec for a hold of several months, in the past has proven to be a very reliable trade.
In fact, optimized for timing, an entry during May and an exit early August has been profitable 95% of the time in the last 20 years.
For 2020, I like this spread now given the market is in backwardation. That means the near (short) month is trading above the back (long) month. Corn has had a great run up over the past few months and pull back might see that backwardation reverse to contango and move with the seasonal trend.
Stats:
19yrs out on 20yrs profitable. That’s selling the spread in May and buying back in August. Optimized timing of course, but still the numbers are good.
In the last 10yrs, profit has averaged about 10 cents, or $500 per spread. Drawdowns have been three figures also, aside from 2011-2013 when things went a bit crazy.
Trading;
This one has an exchange listed spread so entry, exit and GTC stops are easy.
For something like this, I would tend to start with a 3*ATR for a stop and see where it goes. Entries by way of selling into rallies.
Check your broker offers SPAN margining. If not, get a new broker.
Alternatives:
The same spread can be achieved by selling July instead of Sep. Some years that is a better option, some not. More often than not, it would carry more volatility (up and down).
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