Welcome to SpreadEdge Capital, LLC
SpreadEdge Capital, LLC specializes in seasonal spread trading across a wide variety of commodity markets. In 2010 SpreadEdge finished initial development of this seasonal spread trading strategy that has been continually refined, enhanced, and improved. This trading system has been used for personal accounts and is the basis of all the programs described. Since 2014, SpreadEdge has been offering “Managed Futures Accounts” to the public that leverages this same strategy.
Beginning in mid-2019, SpreadEdge started offering “Subscription Services” that includes a weekly Newsletter and allows subscribers visibility to every trade that is placed the various SpreadEdge programs. This is unique in that it offers 2 different ways to participate in the strategy; one that is managed for you, one that you can mange yourself with the guidance of an experienced spread trader.
Seasonal Spreads are the Best Way to Trade Futures
It is no secret that most commodities have seasonal patterns that are predictable and repeat over time. The best example of seasonality is the temperature. It is obvious that temperatures are higher in the summer and lower in the winter. It is possible that the temperature on a random day in December can be higher than a day in July but, by and large, the average temperature in July is consistently and predictably higher than it is in December. Many commodities have similar seasonality. Below are a few examples. Heating Oil tends to rise between August and November in anticipation of colder temperatures in the winter. Soybean prices are heavily influenced by the harvesting seasons in November-December in the United States and in May-June in Brazil. Treasury bonds tend to rise and fall in an opposite pattern as the stock market. There are many other examples, but the key point is that commodities have seasonal patterns that are easy to spot, are predictable, and repeat consistently. Speculators can use this predictability in their favor.
Why Trade Commodity Spreads Versus the Outright Futures?
One huge advantage to trading spreads versus outrights is the margin required and volatility for spreads is significantly lower. Because spreads have a much lower margin requirement, you can open more spread positions allowing more diversification of commodities. Trading several different commodities (such as Currencies, Energy, Financials, Grains, Meats, Metals, and Softs) allows you to spread risk across a variety of unrelated commodities that have little or no correlation to each other. With outright futures, your margin in concentrated on much fewer trades which lessens the ability to diversify.
Spread traders’ profit from a change in the price differential between two futures contracts. This relationship can change, even when underlying markets do not move. The overall direction of futures prices is not the main consideration. Price direction should be a part of a successful spread analysis, but the prime reason is the direction in the movement of the spread.
In addition, spreads usually trend more often than outright futures, which adds additional predictability to the seasonality. There is also additional opportunity for profit and diversification by combining spreads with different delivery months, spreads with different commodities, and even spreads with similar commodities on different exchanges. Each different combination allows for added opportunities for profit and more importantly, more opportunities for diversification.
The Power of Diversification
One important aspects of the SpreadEdge Diversified Seasonal Spread Trading strategy is the “Diversified” part of the equation. SpreadEdge trades calendar spreads on 4 categories (Energy, Grain, Meat, and Softs) and inter-commodity spreads on 5 categories (Currencies, Energy, Interest, Grains, Meats, and Metals) for 7 categories total. Spreading as evenly as feasible across as many of these categories and as many of the individual commodities has consistently improved overall results.
Trading commodities along with a portfolio of stocks and bonds will increase your “risk adjusted returns”. In its simplest terms, riskadjusted return is an investments return compared to the risk involved in producing the return. If two or more investments have the same return, the investment that had the lowest risk will have the better risk-adjusted return.
For example: Investment A returned 15% last year and had a standard deviation of 10. Investment B returned 12% and had a
standard deviation of 6. Which is the safer investment?
Investment A: 15% / 10 = 1.5 Investment B: 12% / 6 = 2.0
Even though “A” had the higher return, “B” had a higher risk-adjusted return; meaning it gained more per unit of risk than “A”. “B” is therefore a more optimal investment for your portfolio. Obviously, “A” would have been better for this specific year, but “B” would have the highest risk adjusted return over an extended period (if the std dev remained constant).
A recent study analyzed the standard deviation dating back to the 1970’s of stocks alone, commodities alone, and a combination of the two together. Stocks had a standard deviation of 15.07 while commodities weighed in at 19.92. However, the combined portfolio had a std dev of just 12.69 showing that the risk adjusted return is best for the combined portfolio.
I have completed a similar analysis using the results of the SpreadEdge strategy for the past 5 years for intra-commodity (calendar) spreads and have documented a std dev of 15.42 (well below the 19.92 in the above study). As a bonus, combining inter-commodity with calendar spreads lowers the std dev even further to 11.60.
Clearly diversification is a powerful tool both in your overall portfolio (commodities, stock, and bonds), within the various commodities traded, and within commodity spread types (calendar versus inter-commodity).
SpreadEdge Capital offers 2 was to participate in this time tested seasonal spread strategy
Managed Futures Accounts
SpreadEdge Capital, LLC provides managed account programs for the futures market. Our goal is to provide customers with consistent, over-sized returns while keeping losses and drawdowns to a minimum. Investment decisions are based on a proprietary investment program that utilizes historical data to identify seasonal spreads that have shown a propensity to move in the same direction during most of the past years. Trading futures involves substantial risk of loss and is not suitable for all investors.
For the “Do It Yourself” trader, SpreadEdge Capital, LLC offers subscription services that are tailored to your individual risk tolerance and trading capital. Every weekend a Newsletter is published that provides a Watch List of 10-20 trades for the upcoming trading week, charts and commentary on many of the current open trades, and detailed tracking on all trades recommended. Also included is a Trading Journal that provides tips and guidance to improve your spread trading skills.
Darren Carlat is the Managing Director of SpreadEdge Capital, LLC and is responsible for all aspects of the company's operations including market research, trading, customer satisfaction, and operations management.
The program involves “Spread” trades which entails the buying of a futures contract for one month and the simultaneous selling of the same futures contract for a different month. The program leverages 15 years of historical trends combined with current market action to determine the best investment decisions. SpreadEdge makes both long and short investments in a portfolio of domestic commodities.
Markets generally traded include (but are not limited to) crude oil, natural gas, gasoline, gas oil, heating oil, wheat, corn, soybeans, soybean meal, soybean oil, live cattle, feeder cattle, lean hogs, cotton, coffee, sugar, cocoa, euro dollar, and copper.