Dear Howard,

I just subscribed to your TIF letter and read about the fact that you trade the soybean spread.

Questions: I'd appreciate it very much if you could take a moment to explain to me how the spread works and how to tell my broker that I think the spread will narrow. Does this mean I buy the spread if it is to narrow or do I sell the spread to profit from it going narrow?

Answer A: Generally speaking when you buy a spread you are buying the month with the premium and when you are selling a spread you are selling the month with the premium. Example: July beans settled at $13.40 and November beans settled at $12.70 the difference in price is +$.70 (premium) on the July side. If you were "buying the spread", you are buying the July and selling the November with a premium of $.70 on the buy side (July). You want to see the market "widen" between the two, let's say widen to $.95 so when you sell the spread you profited by $.25 .When you sell the spread first, you want to see the market "narrow" or what we say in the pit "come in", so if you "sell the spread" at $.70, you want to see it narrow to let's say $.50 to profit by $.20. The correct way to buy the spread or sell the spread when placing an order was used in my example.

Answer Aa: In general, buying or selling a spread, options or futures, the spread is quoted where the premium is. If we are talking about the July/November bean spread, the premium is on the July side. July settled at $14.30 and November settled at $$13.60 1/2. The spread settled at 69 1/2 cents. If I was in the trading pit on the trade floor and a floor broker gets an order for this spread he would say "whats here in the July/Nov" and the locals would probably reply 67 ½ bid, 71 ½ offered.  That means they would pay 67 1/2 cents for the July over selling the Nov. and they are also willing to sell the July for 71 1/2 cents over the Nov. No different when you place this order with your broker. Buy the July Nov. at +68 cents on the buy side. I would always be specific giving the exact order until you and your broker know what you are doing. Like using hand signals with an arb clerk, better know what each other is saying.  Example: I want to place a spread order. I want to buy 1 contract of July 08 soybeans and sell 1 November 08 soybeans at a premium of +68 cents on the buy side. After buying you would sell by saying "buy 1 November08 soybean and sell 1 July 08 soybean at a premium of +75 cents on the sell side.

Questions: Also, there was a note under the paragraph about the SH8 / SN8 spread that said that it was a dangerous play and that we should have $50K in the margin account for each contract. Was this notation specifically about the spread?

Answer : Worth repeating. No, sorry it was placed there. It is meant for most futures trading. Here it is: Dangerous market and not for the inexperienced trader. If you trade this market you should have $50,000 for 1 contract minimum. If you look at the action in CBOT Wheat on Monday alone, the move was $5650 per 1 contract from the day's high to low. There are mini contracts 1/5 the size but trades well with price orders. (since this answer MPLS wheat traded $4.75 or $23,750 per 1 contract in 1 day)

Questions: By the way, I only have $5,000 in my account. As a fairly new trader what markets do you think I have the best chance in with this small account? Should I be trading the mini markets or just options? My broker tells me to stay away from the mini grain markets because they are too thin. What do you think? Thanks for your help.  Russ B

Answer : Many markets average trading range is $2500 for 1 day's trade, so you could lose your account in 2 days. In this business like many, you need time and many opportunities to get it right. You have little chance of making money in this volatile market trading markets that move too much for you in 1 day. Mini gold 1/3 the size is very liquid and could be traded with 1 contract with $5000, but still be careful. The first thing you need to do is find an approach that fits your mindset and keeps an eye on your goals. You must answer this question for yourself, not your broker or friend, only you know what your emotions can handle. I will go into this in TIF soon. Then like all traders you must learn to handle time. It is not good to be right the market after all your money is exhausted and your account is closed. $5000 will not be enough to trade full sized contracts that can lose thousands in a day or two. $1000 is a 20 cents stop on 1 full sized grain contract, not much room, but with a mini, $1000 is a $1 stop. You know the mini gold and mini crude as well as the mini S&P are great markets to trade, but unless it is a swing or long term trade, you will be one of the few today trade and make money with $5000, and without a solid plan, almost impossible. The mini grain is thin but with a price order during the open outcry, 1 or 2 cents through your price at the CBOT usually will get you a fill on the mini, 3 or 4 cents at night. Do not use stops; the room the mini gives is worth the edge you pay to get filled. Options are recommended for small accounts, but you need to have knowledge on how to use them. I will be going into details about options in TIF frequently. Options buy you time with a known risk, which is the advantage you need with a small account.

If you want to know more on what Howard Tyllas is thinking, for a limited time you can try Trends in Futures absolutely FREE for two weeks and see for yourself why other traders just like you share and collaborate ideas, concepts, and trading tips with Howard Tyllas.

Subscribe NOW!!!! For daily numbers and trade recommendations in, Grains, Metals, Energies, S&P's, and more.

Visit my website http://www.howardtyllas.com/

May Your Next Trade Be The Best!

Howard Tyllas