Grain & cattle spreads:Finding an edge

摘要

Spreads between pairs of futures are possible when the two underlying assets have price movements that are linked in a measurable and predictable way. This was shown to be the case between gold and silver ("Gold & silver: Always good options," May 2011) and also is true with futures and options on agriculture-based assets such as grains and livestock. Pairs trading in the ag market are formally recognized by the CME Group with products that include wheat-corn intercommodity spreads and synthetic soybean-corn price ratio futures. One way to measure relative price movements between two related futures contracts is by observing the differences in daily percentage price changes. Corn futures are used as the benchmark price change related to four other futures on the following charts: "Live cattle minus com," "Lean hogs minus corn," "Soybeans minus corn" and "Wheat minus corn" (see "Influential corn," right). December 2011 futures are used for live cattle, lean hogs and wheat, while corn and soybeans are compared using March 2012 futures.