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HTA vs basis contract vs board...
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khall_12_34
Posted 3/26/2015 12:04 (#4478264 - in reply to #4478127)
Subject: RE: HTA vs basis contract vs board...


Formerly NE North Dakota, now NW MN
Yeah margin calls aren't just a mental thing, they are financial as well. Think thunderdome.

What isn't often talked about is that when mgex exploded basis levels fell into a deep dark well. Basis was like 2.5 of 3 bucks under at some point, which seemed trivial at the time, but if you were hedged in your account instead of on an HTA, that was a very messy affair. Even if you were hedged HTA it had the potential to be very painful.

If you hedge the board in your own account, you need to be mentally, financially (i.e. access to panic cash if need be), and even spiritually able to withstand the storm.

However, if you employ an HTA, the only thing you are really off the hook for is the financial aspect, you still need to be able to sleep at night if the market rallies 1, 2 or 10 dollars against your position. Along with that, not only can do commercials no longer need to "bid" for your grain, if the market decides it wants grain to move, they can and will bid the front month, inverting the spread structure. This happens in the thunderdome all the time, probably once every two years-ish, where they bid the front month and at the same or very soon after the basis drops out because they are shaking out HTAs. In the extreme example of spring '08, (the ultimate in market inversions), people in HTAs w/o basis fixed took very big hits on their final price.

Basis contracts, really, have all the same pitfalls/advantages as an HTA, just everything happens in reverse. Spreads can move against you in uncomfortable fashions that way too, though probably not nearly as extreme.

My elevator manager will let me roll both basis and HTA contracts (not really delivery timeframe, but we can roll the contract finalization to a later month). 1-2 cents is a very good deal to execute that kind of thing. I guess I expect to pay 3 to 5 cents to do that kind of a thing.
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