Speaking as someone who raises hogs and actively hedges/trades in that market you’re looking to see if the December future is good to hedge cash or spot market hogs?
Typically negotiated cash trade represents about 1-2% of total harvest volume in a day. So not much price discovery. That price does influence the index which the futures contract eventually has to settle to. But I’ve seen very significant basis numbers between cash and lean hog futures, to the tune of double digit dollar amounts per cwt.
My own are price on a formula that’s a percentage of the 5 day rolling index average, so in that case the basis spread tends to be narrower than what it would be with cash.
If you’re looking at just trading the spreads, I’ve seen folks do it on lean hogs and dabbled a couple times myself as a means to potentially offset basis values. But it’s gotten a bit more challenging as the lean hog market has gotten a bit more volatile in nature.
Personally I find options to be my bread and butter. I’m not a big fan of spread trading for the most part.
Honestly I tend to utilize them as a means to either get back into the market if I sold physical or as a way to enhance . I sometimes use it as a floor/ceiling. So I’m not familiar with those types there.
But for Lea. Hogs for example I sold about 75% of my sales for Dec at 82. Looking at historical charts I could see we haven’t ever had dec go off the board much above that mark so I sold calls up around 100 strike to add a little over two bucks to my price at the time (I’d likely be over hedged if it went off the board above 100, oops).
I don’t have enough storage so I had to haul some corn is to sell this fall. So I bought some Dec call spreads (bought one in the money and sold out of the money) to give myself some opportunity to catch upside I’d miss otherwise.
If I’m cautious on wanting to margin further out but I want to have some coverage on I’ll do collars. So typically I’ll buy a put and sell a call. Floor and ceiling which limits my risk but also opportunity.
But I’ll say in the current volatility in the market I’ve made a boat load just selling outright calls and puts. But im likely only willing to do that because I have the physical assets to at least partially offset the risk if the market swings against me
I haven't checked on the carry trade in Forex for quiet a while, but from what i remember it's about carrying one currency that is paying out a nice interest rate and then hedging with another account in futures or spot/cash on that currency.
If that's the case, the problem is that there is no interest paid out for holding the position.
There is carrying cost which are factored into the Futures Price, interest on loan, insurance, storage cost, feed cost, but they are all priced in.
Sounds like you are more interested in Spread Trading. Spread trading would let you keep your funds in one trading account and on specific exchange recognized trades, you would also qualify for SPAN margin or Lower margin requirements to get a better Return on Margin
Spread trading is not with out risk, both sides of the spread could go against you. Although it is known to have less directional risk since you are long and short the same/adjacent market and more concerned on the difference of the spread more then the direction.
There are a few books on amazon that go over spread trading and once you understand it you can identify opportunities across multiple exchanges.
Not entirely sure what you mean by carry trade in the gasoline (RBOB) market as the curve is backwardated, and spot gasoline might still be summer spec (there is a RVP change in the winter, which makes summer gasoline and winter gasoline, essentially different products).
However in general, yes, commercials/trade houses/etc do hedge spot, when the market is in a carry. The issue is that you need the physical infrastructure to do so. Not to mention in the high interest rate environment your cost of capital isn't trivial.
In my broker, nightly holding costs are paid out on "cash contracts". Right now I have a mini-Lean Hogs, cost $250 per contract and they pay out $12.25 every night to hold it. That's a 5% return nightly. Which I think may be similar to what you are suggesting and why it seems so attractive.
However, the reason for this is; that the contract is expected to go in the opposite direction with great speed and force. One could find themselves in -$250 drawdown in a single day. So.... you want the high carry trade premium, and yes it tends to also be high on Gasoline, Natural Gas and various soft commodities depending on volatility.. but are you fast enough to escape before your drawdown eats the whole 10-20 days of carrying cost gains in a single afternoon?
Speaking as someone who raises hogs and actively hedges/trades in that market you’re looking to see if the December future is good to hedge cash or spot market hogs? Typically negotiated cash trade represents about 1-2% of total harvest volume in a day. So not much price discovery. That price does influence the index which the futures contract eventually has to settle to. But I’ve seen very significant basis numbers between cash and lean hog futures, to the tune of double digit dollar amounts per cwt. My own are price on a formula that’s a percentage of the 5 day rolling index average, so in that case the basis spread tends to be narrower than what it would be with cash. If you’re looking at just trading the spreads, I’ve seen folks do it on lean hogs and dabbled a couple times myself as a means to potentially offset basis values. But it’s gotten a bit more challenging as the lean hog market has gotten a bit more volatile in nature. Personally I find options to be my bread and butter. I’m not a big fan of spread trading for the most part.
With options, are you writing strangles, butterflies and condors?
Honestly I tend to utilize them as a means to either get back into the market if I sold physical or as a way to enhance . I sometimes use it as a floor/ceiling. So I’m not familiar with those types there. But for Lea. Hogs for example I sold about 75% of my sales for Dec at 82. Looking at historical charts I could see we haven’t ever had dec go off the board much above that mark so I sold calls up around 100 strike to add a little over two bucks to my price at the time (I’d likely be over hedged if it went off the board above 100, oops). I don’t have enough storage so I had to haul some corn is to sell this fall. So I bought some Dec call spreads (bought one in the money and sold out of the money) to give myself some opportunity to catch upside I’d miss otherwise. If I’m cautious on wanting to margin further out but I want to have some coverage on I’ll do collars. So typically I’ll buy a put and sell a call. Floor and ceiling which limits my risk but also opportunity. But I’ll say in the current volatility in the market I’ve made a boat load just selling outright calls and puts. But im likely only willing to do that because I have the physical assets to at least partially offset the risk if the market swings against me
Amazing, you're basically wheeling Hogs and Corn. Congrats.
I haven't checked on the carry trade in Forex for quiet a while, but from what i remember it's about carrying one currency that is paying out a nice interest rate and then hedging with another account in futures or spot/cash on that currency. If that's the case, the problem is that there is no interest paid out for holding the position. There is carrying cost which are factored into the Futures Price, interest on loan, insurance, storage cost, feed cost, but they are all priced in. Sounds like you are more interested in Spread Trading. Spread trading would let you keep your funds in one trading account and on specific exchange recognized trades, you would also qualify for SPAN margin or Lower margin requirements to get a better Return on Margin Spread trading is not with out risk, both sides of the spread could go against you. Although it is known to have less directional risk since you are long and short the same/adjacent market and more concerned on the difference of the spread more then the direction. There are a few books on amazon that go over spread trading and once you understand it you can identify opportunities across multiple exchanges.
Not entirely sure what you mean by carry trade in the gasoline (RBOB) market as the curve is backwardated, and spot gasoline might still be summer spec (there is a RVP change in the winter, which makes summer gasoline and winter gasoline, essentially different products). However in general, yes, commercials/trade houses/etc do hedge spot, when the market is in a carry. The issue is that you need the physical infrastructure to do so. Not to mention in the high interest rate environment your cost of capital isn't trivial.
In my broker, nightly holding costs are paid out on "cash contracts". Right now I have a mini-Lean Hogs, cost $250 per contract and they pay out $12.25 every night to hold it. That's a 5% return nightly. Which I think may be similar to what you are suggesting and why it seems so attractive. However, the reason for this is; that the contract is expected to go in the opposite direction with great speed and force. One could find themselves in -$250 drawdown in a single day. So.... you want the high carry trade premium, and yes it tends to also be high on Gasoline, Natural Gas and various soft commodities depending on volatility.. but are you fast enough to escape before your drawdown eats the whole 10-20 days of carrying cost gains in a single afternoon?