Correct Spread Ratios

A

AlexxS

Hi

I'm sorry if this has been asked before, but how does one correctly calculate the number of contracts to buy or sell when spreading (futures)?

E.g. if I wanted to buy NQ vs YM, would I have to look at the notional price of each leg:
(current NQ price*20)/(current YM price*5)?

How about GC vs SI (I know there is an exchange traded spread but I'm just curious to know how it is calculated and couldn't find any info on the CME site)?

Thanks!
 
Using notional values takes into account one metric. Then you might want to decide if you need to adjust for the volatility difference between them. The S&P 500 index has a lower vol than NASDAQ 100 and even lower than the Russell 1000 or 2000. A $ Nuetral hedge between each would not correct for the vol difference. That does not mean you have to adjust for it. That might be where your alpha comes from. That is your choice.

Same with the metals. Silver is much more volatile than gold.
 
Robert Morse said:
Using notional values takes into account one metric. Then you might want to decide if you need to adjust for the volatility difference between them. The S&P 500 index has a lower vol than NASDAQ 100 and even lower than the Russell 1000 or 2000. A $ Nuetral hedge between each would not correct for the vol difference. That does not mean you have to adjust for it. That might be where your alpha comes from. That is your choice.

Same with the metals. Silver is much more volatile than gold.
More...

Makes sense, thank you Robert.
Could you help me out with calculating the dollar neutral ratios for metals?
For GC, the contract unit is 100 troy ounces. For SI, it's 5000 ounces.
Is this correct:
Dollar neutral ratio for gold and silver: GC-50*SI

But what about Copper? The contract unit is 25'000 pounds. Is that 400'000 ounces? Surely, the dollar neutral ratio for gold and copper can't be GC-4000HG, can it?
 
I have to be careful here to be quite general. I would use contract size*value of each future's current market price. Like if you were to take delivery of the future, what would it cost. Then if one future were to move 1% up and the other were to move up 1.5%, the .5% would be your profit or loss. I would refer to that as dollar Nuetral.
 
Robert Morse said:
I have to be careful here to be quite general. I would use contract size*value of each future's current market price. Like if you were to take delivery of the future, what would it cost. Then if one future were to move 1% up and the other were to move up 1.5%, the .5% would be your profit or loss. I would refer to that as dollar Nuetral.
More...
Got it, thanks a lot!
 
Robert Morse said:
I have to be careful here to be quite general. I would use contract size*value of each future's current market price. Like if you were to take delivery of the future, what would it cost. Then if one future were to move 1% up and the other were to move up 1.5%, the .5% would be your profit or loss. I would refer to that as dollar Nuetral.
More...

One more question please: I was looking at the CME site Inters/Intex/Supers.

http://www.cmegroup.com/clearing/ma...sector=METALS&clearingCode=CX-GC&pageNumber=1

Am I interpreting this correctly that if I traded the exchange traded spread, it would be a 1:1 ratio?
 

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