Seasonal spread traders are spread traders that take advantage of

seasonal A season is a division of the year based on changes in weather, ecology, and the number of daylight hours in a given region. On Earth, seasons are the result of the axial parallelism of Earth's axial tilt, tilted orbit around the Sun. In temperat ...

patterns by holding

long Long may refer to: Measurement * Long, characteristic of something of great duration * Long, characteristic of something of great length * Longitude (abbreviation: long.), a geographic coordinate * Longa (music), note value in early music mens ...

and short positions in

futures contract In finance, a futures contract (sometimes called futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The item tr ...

s simultaneously in the same or a related commodity markets based on seasonal patterns. These are traded on

futures exchange A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts defined by the exchange. Futures contracts are derivatives contracts to buy or sell specific quantities of a commodity or ...

s such as the

Chicago Mercantile Exchange The Chicago Mercantile Exchange (CME) (often called "the Chicago Merc", or "the Merc") is an American derivatives marketplace based in Chicago and located at 20 S. Wacker Drive. The CME was founded in 1898 as the Chicago Butter and Egg Board ...

, the New York Mercantile Exchange, or the

London Metal Exchange The London Metal Exchange (LME) is a futures and forwards exchange in London, United Kingdom with the world's largest market in standardised forward contracts, futures contracts and options on base metals. The exchange also offers contracts on ...

among others. The spread is the difference between the simultaneous values of these futures contracts. Traders may use a combination of

fundamental analysis Fundamental analysis, in accounting and finance, is the analysis of a business's financial statements (usually to analyze the business's assets, Liability (financial accounting), liabilities, and earnings); health; Competition, competitors and Ma ...

technical Technical may refer to: * Technical (vehicle), an improvised fighting vehicle * Technical area, an area which a manager, other coaching personnel, and substitutes are allowed to occupy during a football match * Technical advisor, a person who ...

, and historical factors in their analysis. Speculators hope to profit from the relative changes in price between the initial and offsetting positions. Contracts may be spread against different months or different markets using a

calendar effect A calendar effect (or calendar anomaly) is the difference in behavior of a system that is related to the calendar such as the day of the week, time of the month, time of the year, time within the U.S. presidential cycle, or decade within the cent ...

. Position traders may hold positions with less

risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environ ...

using spreads as one position somewhat offsets the other position and the return is the difference between the two.

Analysis

A critical point for this type of trading to work is the quality of the seasonal pattern and whether the trader can advantage of the pattern. Economists say that according to the

efficient-market hypothesis The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted basis ...

such effects may exists but that these anomalies should be already incorporated in the price. Traders are concerned with whether the changes in the difference between the sides of the spread are moving in their favor or not. In order to find the information on seasonal spread, many traders use algorithms retrieving past commodity volatility and performance. Important sources for seasonal traders are institutional reports, such as the COT report, which shows the positions held on commodities by the major market players. Lower

margin Margin may refer to: Physical or graphical edges *Margin (typography), the white space that surrounds the content of a page * Continental margin, the zone of the ocean floor that separates the thin oceanic crust from thick continental crust *Leaf ...

deposits required by commodity exchanges to trade spreads means positions can be leverage up. Spreads may behave smoother than the underlying futures contracts. Effects that may have existed in the past may no longer be true, for example, there was a very good seasonal pattern in gold in the 80s and 90s that no longer exists. The reason is a different demand behavior of gold buyers. Despite the fact that seasonal patterns can change, investing and trading based on seasonal patterns is still popular in the financial industry. Financial institutions have used professional software for this purpose, such as Seasonal Analysis Tools.

References

External links

* ''

Reminiscences of a Stock Operator ''Reminiscences of a Stock Operator'' is a 1923 roman à clef by American author Edwin Lefèvre. It is told in the first person by a character, in the book called Larry Livingston, inspired by the life of stock trader Jesse Livermore up to that p ...

'' by Edwin Lefèvre (best-selling biography of Jesse Livermore) multiple reissues, last in 2004 ({{ISBN, 0-471-67876-7)
Futures Spread Trading
by Steven A. Mitchell
Seasonality at futures market
by SeasonAlgo
Detailed description for futures spread trading
by SeasonAlgo Commodity markets Derivatives (finance)

Analysis

See also

References

External links