Coal Futures Intermarket Spreads: Forecasting Potential through Inter-Exchange Spread Analysis

Calendar spread analysis is an excellent way to spot opportunities in the market and exploit discrepancies in the market for a profit. However, due to the rise of high-frequency trading and quant funds, these opportunities are diminishing by the day.

An excellent way to add some depth to our analysis and increase our analytical horizon is to add inter-exchange spread analysis to our purview. However, you need a good charting platform if you are to construct inter-exchange calendar spreads.

So in this article, I will show you how you can identify profitable opportunities in the coking coal futures market using spreads on two different exchanges, namely, the Dalian Commodity Exchange and Chicago Mercantile Exchange.

The chart illustrates the spread price of ALWZ2017, Australian Coking Coal CME, expiring Dec 2017 and JMF2018, Coking Coal Futures DCE, expiring Jan 2017.

Source: FinChart

We’re already aware of the recent run-up in the price of coking coal. With that in mind, the chart above shows a disproportionally steeper rise in the price of coking coal on the CME exchange.

Source: FinChart

The chart above shows the clear divergence between the prices of coking coal on the US and Chinese markets. Furthermore, you can also see the prices on the two exchanges are reverting back to the mean. There are a number of ways to exploit the divergence in the prices of the two exchanges. The first would be to short-sell coking coal futures on the US markets and go long its equivalent on the Chinese market.

As you can see, there are a number of ways to profits from the markets. Inter-exchange spread analysis is an excellent way to look at the same markets from a different perspective.

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