5/5/09 Q: On the july /nov spread should a person wait for it to narrow at 1.30 or just buy it and hold, or do you think it's all over? Do you think it will get in the $ 2 range?
A: Hello M.,
You know from being a subscriber for several months that I have liked buying this spread, hard to recommend buying here though, $1.41 last trade tonight and up 1/2 cent. $1.50 is last years high, and the situation this year is much more tight, and yes I can see it going to $2.00 or higher on a squeeze. Watch the May/July spread (SK9/SN9) and if the May is gaining on the July, the July should gain on the new crop November. This is what I look at for direction on the old/new, by watching the SK/SN9. The other risk is going into the report on Tuesday, this will propel it much higher, or could cause a setback to $.85 where it was 4/28. If there is less supply than thought, it could fly higher, even $.50 in a day. The only other thing I can say with my 33 years trading this spread, is that you have about 4-5 weeks from now at the most to get the high on this spread, it unwinds after that no matter the carryout. I have not seen a carryout like this except 1 time for sure, and maybe another time, but who knows what the PRC will do, and how long they want to wait to take delivery and get the cheaper Nov. And if they want both the old and new crop, they would be like kids bidding for the last keg of beer on spring break. Bottom line: I have no problem buying the spread instead of an outright future, it will slow down the volatility of an outright future. It is a safer way to play, but it all boils down to what you want to risk, reward if right, and how much heat can you take on a pullback in the futures, the spread should slow it down.
Howard
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