This is a sample entry from Don DeBartolo’s email newsletter, Trade Spotlight: Spreads, published on Thursday, April 27, 2017.
There is a bear futures spread trade opportunity in Cotton. The spread is in a Channel Formation, selling the spread only on a break of a lower trend line. The stop loss will then be placed above the top of the Channel. The Stochastic indicator shows potential downside momentum as it’s hooked sharply. There is a seasonal pattern for this spread to sell-off in this timeframe.
Establishing a bearish position where a front month contract is sold and a deferred month contract is purchased. Anticipating the spread to narrow to zero. Setting up a futures spread will potentially reduce the risk and volatility, as well as reducing the margin requirement.
Sell the July 2017 / Buy the December 2017 Cotton spread at 3.15 using a stop order, GTC.
Initial Margin = $880 Maintenance Margin = $800
Stop loss: Stop loss is 4.90 points, above the Channel Formation, GTC. ($875)
Target: Target is EVEN (0.00), near where the spread was trading last year, GTC. ($1,575)
Cotton Spread Chart
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STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A "LIMIT MOVE", IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.
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