|  AUG 1989

Trading commodity spreads mechanically by Louis P. Lukac & B. Wade Brorsen

Trading commodity spreads mechanically by Louis P. Lukac & B. Wade Brorsen Using a mechanical rule to trade a futures market is not new—countless mechanical methods exist with the general purpose of creating a profit while eliminating the human factor from trading. One place where mechanical trading rules have received increased attention lately is in spread trading. Spread trading involves taking a long position in one market and a corresponding short position in the same or related market, so the offsetting positions reduce the risk. If a mechanical rule could be developed for spread trading, it could lead to a low-risk portfolio of spreads that provides a superior alternative to a portfolio of outright futures positions. There are several types of spreads, but most can be grouped into three general classes: intramarket, intercommodity and intermarket. An intramarket spread—a long position one month and a corresponding short position in another month in the same commodity—is the most common. An example is long November soybeans/short January soybeans. An intercommodity spread consists of a long position in one market with a corresponding short position in a related market such as long December soybeans/short December soymeal. Finally, an intermarket spread takes a long position in one market on one exchange and a corresponding short position in the same market but on another exchange—long March Chicago wheat/short March Kansas City, for example.

by Louis P. Lukac and B. Wade Brorsen