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AGEC 420
• Exam 1 – Mon Feb. 25
– Review – 7pm, Thurs 21 Feb, 41 Waters
• Topics today
– Trading
• Wheat position – adjustments ??
• New position ??
– Spreads
– Volume and Open Interest
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Grain Prices; 1990’s
Grain Prices: 1990 -->
800
600
400
200
Corn
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Wheat -Chi
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
Jan-92
Jan-91
Jan-90
0
Wheat -KC
2
Open Long Position - MidAm Wheat
• Fri., Feb 15:
Bot 1 MidAm May Wheat @ 2.82; Sell stop @ 2.74½
Fri., Feb 15
Tue., Feb 19
Wed., Feb 20
Close
$ +/-
2.81 ¾
2.83 ¾
???
-$2.50
+$17.50
Possible Actions
Adjust sell stop; Set profit objective – OTO ??
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Spreads
Simultaneously buying and selling 2 contracts
in different
– Delivery months - most common
• “intra-market” or “inter-delivery” spread
• e.g., Dec corn, March corn
– Commodities
• “inter-commodity” e.g., Crude oil/ Heating Oil & Gasoline
– Exchanges
• “inter-market” e.g., Chicago and KC wheat
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Example
Today
Sep wheat @ 2.90; Dec wheat @ 3.00
Spread is +10, Dec over Sep
You think the spread will narrow
What do you do?
Buy Sep @ 2.90, Sell Dec @ 3.00
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Spread - Example
Buy Sep @ 2.90, Sell Dec @ 3.00
Next week – prices have risen
Sep @ 3.02, Dec @ 3.08
Spread has narrowed to +6
Gain 12c on Sep; lose 8c on Dec
Profit of 4c/bu
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Or
Buy Sep @ 2.90, Sell Dec @ 3.00
Next week – prices have fallen
Sep @ 2.75, Dec @ 2.81
Spread has narrowed to +6
Lose 15c on Sep; Gain 19c on Dec
Profit of 4c/bu
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Spreads
Doesn’t matter whether overall prices rise or fall.
Hedgers:
The hedge is locking in the price differential
Examples
Elevator – locking in a return to storage
Soybean processor – locking in a margin on crushing
Speculator:
The ‘bet’ is on a change in the price differential.
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200
150
100
50
0
-50
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Wheat-Corn Spread
Jan-00
Jul-99
Jan-99
Jul-98
Jan-98
Jul-97
Jan-97
Jul-96
Jan-96
Jul-95
Jan-95
Jul-94
Jan-94
Jul-93
Jan-93
Jul-92
Jan-92
Jul-91
Jan-91
Jul-90
Jan-90
Grain Spreads; 1990’s
Grain Spreads: 1990 -->
KC-Chi Spread
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Terminology
• Bull
– Someone who thinks prices will rise
– Bull market – a period of rising prices
• Bear
– Someone who thinks prices will fall
– Bear market – a period of falling prices
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Spread Terminology
Buy Sep @ 2.90, Sell Dec @ 3.00
– Because you think the differential will narrow
– You think Sep will rise relative to Dec
– This is called a ‘Bull Spread”
• Bull Spread or Bear Spread
– refers to your position in the nearest leg
– Bull: Long the nearby leg, Short the deferred
– Bear: Short the nearby, Long the deferred
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Spread Orders
• Market order
– buy Sep, sell Dec, market
• willing to buy Sep, sell Dec at whatever spread is
available
• Limit order
– buy Sep, sell Dec, Dec 10c or better to Sep
• willing to buy Sep and sell Dec only if she can sell
Dec for at least 10c more than she pays for Sep.
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Volume & Open Interest
• Volume
– Number of contracts traded (i.e., bought or
sold) in a specified period (usually a day)
• Open Interest (OI)
– Total number of contracts that have not been
offset
• Each open position has a buyer and seller – but just
count one side for OI (see example, HW 2)
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What do Volume & Open Interest Indicate?
– Volume Up and Open Interest Down
– traders are exiting the market
– if price is up ==> a “short covering rally”
– Volume Up and Open Interest Up
– traders entering the market
• if price is down ==> bearish signal
• if price is up ==> bullish
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Next topic
• Storage Hedge and Basis
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