Another lesson

Very interesting thing happened today. As you know, I'm long lumber for quite some time. Even though it's super-long term trade, I check quotes every second as if it's a day trade. I'm kidding on every second, but I do check open and close.

Lumber expires every two months, 15th of every two months to be exact. I usually don't wait until the final moment to roll over because I do not want to get caught on price manipulation from floor traders. They know who's 'stuck', so since I have no intention of taking delivery 100s of 2X4s... what do I need 2X4s, they know I have to cover. Better yet, my broker will 'kindly' cover for me and he'll push the price down artificially right before forcing my sell.

Anyway, when I rolled over in late Feb, the difference between Mar contract and May was about 15 pts. Rolling over to higher price doesn't mean you're losing money. It's just simply where it's being traded at.

The lumber's limit is 10 pts or $1100 per contract. Today, May lumber went limit up. Great for me since I'm long 4 lots. But then I looked at March contract and it's +16! How is this possible because Lumber's limit is 10! So, I did some research and it seems that the front month's contract doesn't have limit on limit move. If I didn't roll over and just wait until today or tomorrow, I would have made additional 16 points on 4 lots (calculated from the day I rolled over. the spread got smaller and smaller!), which is equivalent to $7040! What a bummer.

I know when markets try to turn, usually front month's contract takes off first and then the next month's contract follows and I think this is what happening with lumber. Sure housing markets are still bad. I don't know about other areas, but where I live, I talked to a builder yesterday to get a quote on a house plan, he said they are building 6 homes simultaneously right now. My co-worker, who's been thinking about buying a house in last 2 years, just bought a house to take advantage of $8K tax credit.

I'm not surprised if lumber limits down, but if we have some sort of up-move, I'll look to add some more on a pull back.