The Best Seasonal Spreads
By: George Angell
The following is an excerpt from George Angell's Money Miracle
In the fall of 1980, I published a book devoted entirely to seasonal spread trading. Five years later, I went back to my computer studies and again re-tested the successful spreads. Amazingly, some of them didn’t miss a year of profitability! One of the conclusions that the statistical studies made clear is that the “bear spreads” (long the back month, short the nearby), made much more consistent patterns relating to seasonality than did the “bull spreads”.
With this in mind, let’s take a look at some of the more reliable seasonal spreads. In each spread, studies were performed to determine not only the point of entry, but also when to take off the spread, and the percent of profitability as well as maximum adversity during the period when the spread was held. In all, the spreads listed here offer an excellent risk-to-reward ratio. Moreover, they are ideal for newcomers to the market in that they reward patience, keep transaction costs to a minimum (they are often held for months at a time), and give one a taste for commodity trading first hand without a lot of exposure to risk. Here are some of the best spreads (all with the same calendar year):
Buy December Cotton – Sell July Cotton: Buy December cotton and sell July cotton on February 12. Liquidate the spread on June 30.
This spread was 75 percent correct over a period of 12 years, earning in that period almost $10,000 on a one-contract basis. The studies show that the spread works well because, regardless of the price level of cotton when the spread is being placed, the nearby July contract tends to weaken prior to expiration. The resultant gain in the nearby July contract tends to offset the loss in the back-month December contract. This weakness is especially noticeable after May 28, suggesting you can often place the spreads with good prospects for profitability after February 15, and right up to expiration around the first week in July. For reasons of safety, you should exit prior to the delivery month. In the 12 years studies, the spread has a maximum profitability at liquidation of $2,755, yet the maximum loss was just $380 – a solid performance record by any standard.
Buy December Corn – Sell July Corn: Buy December corn and sell July corn on October 15. Be certain to spread the distant December, more than a year out, against the nearer July contract. Liquidate the spread on April 15.
Like other grains, corn has a very well defined seasonal pattern based upon the commodity growing season. The corn crop year runs from October 1 to the following September 30. While corn has a very complex pricing mechanism, the major components of the supply/demand equation consist of the weather on the supply side, and the demand for animal-end products on the demand side.
It is important to understand that the spread we are talking about here involves contract months in the same calendar year – December 2007 corn, for instance, spread against July 2007. The reliability factor in this spread is very high. In the 13-year testing period, this spread has been correct 62 percent of the time, earning more than $4,500 in net profit over that period of time. It tends to work in both periods of rising and falling prices – another plus. Because corn prices are typically very low in margin, the percentage gains on invested margin tend to be high.
Buy December Wheat – Sell May Wheat: Buy December wheat and sell May wheat on January 15. Liquidate the spread on May 1.
Another bear spread, like corn, this one tends to expire weak in the nearby month of May. Seventy-five percent correct over the 12-year testing period, this spread earned over $7,200 on a one-contract basis of that period of time – a substantial gain, considering the average wheat spread required just $300 in margin. This spread has earned as much as $2,900 in a single year whereas the largest loss over the 12-year period amounted to just $400.
Buy November Soybeans – Sell July Soybeans: Between September and November, when the July contract has a premium in excess of 35 cents over November, place a bear spread – long November – short July Soybeans. Close out the position on the last trading day in June.
Soybeans have been called the “Cinderella” crop, the brightest part of the US agriculture for 30 years. One of the most exciting commodities you can trade. Soybeans are subject to wide, volatile price swings and are highly sensitive to inflation and the fluctuating value of the dollar. The soybean crop is the second largest in the United States and the leading dollar earner among US exports.
This “new crop-old crop” bear spread has earned profits 86 percent of the time over seven years of trading. Due to the restriction placed on the trade – namely, that July must be selling at a 35-cent premium to November – it is only signaled once every two years, however. Yet, the profits are impressive: over $20,000 in seven years on a one-contract basis. Because there are two different “crop” years here, although both are in the same calendar year, this spread tends to be more volatile than most. As a result, your broker will want more margin for this spread than a normal inter-delivery spread. This is considered a “contra-normal” seasonal spread since the “normal” season pattern is to “buy” July and “sell” November. Unfortunately, this normal seasonal spread tends to have excellent profits every four years or so, but lacks consistency.
Buy July Oats – Sell May Oats: Buy July oats and sell May oats on November 30. Liquidate the spread on May 1.
This is an excellent spread for new traders. Why? Because the margin is low – only a couple of hundred dollars – and the risk is likewise low. In ten years of testing, this spread has never lost more than $250 on a one-contract basis. And the maximum adversity has never been more than $475. On the positive side, the spread has made money eight times out of ten. And the profit is often several hundred dollars. Considering the low margins, the percentage profits are quite good. Please note that this, like most of the others, is a bear spread. You are buying the back month (July) while selling the nearer-term May contract.
Buy May Pork Bellies – Sell February Pork Bellies: Buy May pork bellies and sell February pork bellies on October 15. Liquidate the spread on February 1.
This is one of the best spreads you can trade. This spread has shown consistent profits in each of the 13 years consecutively. Over that period of time, the spread has earned close to $10,000 on a one-contract basis.
February tends to go off the board (expire) weak in terms of its back months. In six out of seven years, February was weakest in terms of May during the month of February. This type of seasonal trend tends to result in excellent profits.