Which Commodity To Trade?

Say you're bullish on Sugar and there are two spread bet markets available, London and New York. Which one should you trade? The sensible answer here is usually the one where there is more liquidity, in this case New York. A quick telephone call to your spread bet broker should answer questions such as this.

But what about trading in commodities where you know there is good volume in both countries, such as crude oil? This normally doesn't matter because both contracts will generally move in tandem. In normal types of markets (no middle eastern wars or conflicts etc) a $1 move in the Brent oil contract in London will be matched by a $1 move, give or take a few cents, in the New York Crude oil price.

Spread Bet Gold Example

• Gold has been moving steadily higher but you think the market is a little bit overstretched
• You ask for a price on the December contract and are quoted 390.10 - 390.90 (1 spread bet point is 0.10)
• If you didn't know which contract month to trade you'd ask your spread bet broker (make sure you check when it expires)
• You sell £2 a point short at 390.10
• The market moves just a little higher in the short term but a few days later it is sold heavily down to around $375
• The broker then quotes you 374.5 - 375.3 and you buy back or cover your short position on the offer price of 375.3
• Total profit on the deal is 390.10-375.3 = 14.8 or 148 points x £2 = £296

What Are Price Limits?

A limit price is a somewhat archaic procedure that operates on some, but not all markets (normally commodities). Because commodities are grown, mined, or drilled, the laws of supply and demand can be exaggerated due to a sudden change in the weather, such as a prolonged drought or sudden unexpected frost.

One of the main jobs of any Exchange is to create an orderly market, and prices that move extremely sharply in a given direction over the short term can create untold problems for the market participants and brokers alike. So a price limit mechanism is often bought into play which basically limits the maximum up or down move that a commodity can move on any day.

• For example, at the time of writing the Wheat contract has a daily limit of 20 cents, meaning if the price of a wheat future closed last night at 362 (or $3.62 per bushel) it is not allowed to trade above or below 382/342 the following day.

This can cause problems for speculators because if short of wheat and it is locked limit up bid, then there is no offer price allowed to buy back or cover the short position. Many people argue that limits are unfair, but the system has been in place for many decades.

Perhaps the safest way to trade a market that does have a limit price band is to recognise a few facts. Firstly, limit markets traditionally only happen at certain times of the year, normally due to the weather, lack of rain or surprise frosts in the critical growing period. Realise when you are in the so-called danger zone and that limit moves may well be likely.

The second sensible rule should be only to trade in an amount where a series of limit moves, perhaps 3-4 on the trot will not completely devastate your account. As ever concentrate far more on potential risks rather than potential rewards when dealing in spread bets.

Finally remember that limit moves are not always evil because you can be on the right side (ie long Coffee when a surprise frost devastates the crop), and that is a great position to be in.