Thread by @LumberTrading

Shall we revisit my offer to buy lumber swaps at $1,300 for next two years? I think it’s time for a status update.

Here is the original bid I posted:

https://twitter.com/lumbertrading/status/1396897891424247814

Here is where the risk is:

https://twitter.com/LumberTrading/status/1397015345026670596

So. On that day I hedged at $1500 in the July contract. Long lumber swap at $1300.

I’m long lumber at $200 below futures, aka -200.

I need to roll my July short to September as this is a 2 year price lock. Gonna have to keep my hedges on for a while.

I am expert spread trader* so I buy July back and short Sept (bull spread) at the absolute low of +95 Sept over July.

*hypothetical expert spread trader

That Sept premium of $95 I got to sell into just lowered my breakeven to -295, aka $295 below the futures price.

The math behind that would be something like:
Short LBN $1500
Long LBN $490
($1010 gain rolled into long swap position = BE on swap is now $290)

Short LBU $585

The math checks out. I said I now own lumber at 295 below futures. Sept (LBU) Futures at this point are $585. Subtract $295 and you get flat price BE of….$290!

Much easier to just track your cash basis vs futures. But the math behind it should tie it together.

So- print prices are roughly $500 at this point. I’m long at $290! That’s $210 in unrealized profit. Winning!

Put another way, print prices at -85 vs LBU and I’m long at -295. That’s a difference of…you guessed it….$210!

Alright, now I’ve decided to roll my hedges from the Sept contract (LBU) to the Nov contract (LBX). I’ll do that while selling LBX at a +30 premium to LBU. Again, best spread traded so far in the U/X spread. Lucky me!

Now I own lumber at -325 below November futures!

The math on the trades would be something like this:
Short LBU $585
Long LBU $490
(That’s a $95 profit that reduces my BE on the swap to $195!!)

Short LBX $520 moving forward. *remember I shorted this at a 30 premium to LBU. $490 + 30 = $520!

Check ur math: $520-325= BE $195

A market check-in shows print near $430 and LBX $482.

My current BE in flat price terms is now $157.

I get that by taking my cash basis of -325 and pegging against today’s close of $482. 482-325 = $157.

Unrealized gain of $273!

Or: market is -52, I’m at -325 = $273!

Here’s the absolute best part. Because it’s free. It’s better than free. It’s negative free.

I’m being paid by the market to roll my hedges and carry my lumber in storage. I was paid $95 to carry my lumber from July to Sept. And paid again to store it from Sept to Nov for $30.

BUT WAIT, there’s more. I don’t have any real lumber to carry in storage. I just have a long OTC swap position on a piece of paper I carry in the C-Drive.

So if I’d normally pay $ X/mbf to carry lumber (physical storage costs, interest, insurance) ….I actually have $0.00 costs!

That’s all for now. My flight got delayed 3hrs and now leaves at 12am MST. I’ll respond to questions on this for a while.

(At this point I’m long 15 cars after 5 cars a month w $273 unrealized profit in them).