Hey Mike,

That's great. I actually started putting the educational material together because I write commentary for the Minneapolis Grain Exchange. They have the original wheat futures contract, the Hard Red Spring variety which has been traded there since before the CBOT was around. They have remained a small exchange focused primarily on that product (Not sure they would brag about that... but I'm glad they've survived the CME Borg invasion and stayed afloat and independent). Of course the wheat complex tends to move in the same direction, and after a couple years years of observation I started noticing how consistent the trends were between the relative changes in value.between CBOT and MGEX. The major move in 2008 became a focal point and brought the spotlight to Minneapolis, as Chicago wheat topped around $13 a bushel ( record all-time high) while MGEX wheat shot to over $23 a bushel. That put the spread at $10 over, far and away a record breadth, and of course as a futures trader I had to pencil what that meant in terms of leverage. The margins went up as the rally went on (as is typical), but at the onset of the rally the margin requirement for that spread was less than $700 each. $10 gain x 5,000 bushels was $50,000 on every $700 at risk. Assuming omniscience to make the point, a trader with 20k to lay down could have turned it to over $1 million in less than a year without pyramiding or even adding, or changing the initial position at all. That is awesome stuff, and aside from getting very lucky with a pile of moonshot options, cannot otherwise be done anywhere in the financial markets that I know of. Of course, we are not omniscient, but going to where the opportunity is highest helps us be better guessers!

The risk/reward was entirely skewed at the inception of that move, as MGEX hard red spring wheat is "high-protein" high quality milling wheat and carries an intrinsic premium over the low grade Chicago soft red winter wheat. It is essentially (not literally, but for all practical purposes) impossible for MGEX to trade substantially below CBOT in value for an extended period of time. I daresay it would be impossible for MGEX to trade $10 under CBOT. So the spread as an implicit risk/reward skew to the buy side, another anomaly that is rare in the trading world. There's reasons this doesn't get naturally arbitraged out the way it might in other markets, which I explain in the course (it's too long for this post), but the same is true for Kansas City hard red winter wheat. We bought that a couple weeks ago for the newsletter, as the price of CBOT and KCBT converged at par value. When that happens you throw a dart and buy it, something like seeing a Chevy next to a BMW for the same price on a car lot. You'll probably go with the Beemer, even if it's a lemon you can part it out for twice what the Chevy is worth. This is true for the whole complex, MGEX should be the most expensive, KCBT second, and CBOT last. When those values converge or go inverted you start looking for entries and essentially become an arbitrage player. They have all inverted briefly on occasion, but they always turn around quickly and usually post serious upside gains as value buyers and en-users right the markets. (I'm adding a pic of the KCBT/CBOT spread to the post from our entry point for clarification, see what tends to happen when the spread hits par or goes negative.)

Anyway watching the way the wheat spreads trend is what converted me to a spread trader (I still do futures outright and options too but less so these days). So those remain my favorite vehicles, They trend better then the underlying and reduce the volatility in any case. Also you all but eliminate the black swan scenarios, 99% of the time if you get a limit move against you one one side the other side is going to gain and offset at least partially. Much easier to sleep at night. The gains are slower but they compound at about the same rate given margin discounts. From the wheat complex I expanded to the rest of the grains and then the metals and energy. But all in all I think grains provide the best spreads most of the time.

Look forward to your killer app. The web needs spread tools for sure. I'll link to the latest newsletter as it has a pretty good cross-section at the moment of good spread vehicles and some commentary on what/why we're using them... and questions just holler...