Posted by: usset001 | November 29, 2010

Cotton futures and interdelivery spreads

December 2010 Cotton Futures

Over the past few months, commodities and commodity prices have found their way into the headlines often. Possibly first among commodities making the news is cotton (see Cotton Prices Highest Since Civil War).  

The next two charts show how closely the interdelivery cotton spreads (in this case, the Dec’10/Jul’11 spread) have mirrored (led?) the action in flat prices. As Dec’10 cotton prices increased from 75 cents per pound in mid-July  to 150 cents per pound in November, the Dec’10/Jul’11 spread went from a 2 cents carry (Jul’11 cotton trading 2 cents higher than Dec’10 cotton) to a 15 cent inverse.

Dec'10/Jul'11 Cotton Spread

Hence the term “bull spread.” If you believe that a market is about to make a serious move higher, you have several ways to play the hunch. The first is to simply post margin, buy futures and hope you’re right. Another way is to buy nearby futures and sell deferred futures, post a lot less margin and not get creamed if you’re wrong.

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