Double Butterfly spread

[bone]

When I look at many of these charts, for example CL Z17M18Z18M19 DF, it appears to be much more volatile, i.e. ragged, than the underlying outright CL so why trade this as opposed to the outright as with this volatility your stops would have to be quite wide.

I get what you're saying, but your concerns are easily addressed by solid spread construction technique. For example, here's the front month continuous Daily chart for the CL contract, which on a 14 period study will have an average true trading range of 141 tics, and a maintenance margin of $2,900:

And while not a "double butterfly" per se, here is a Condor CL spread, which on a 14 period study will have an average true trading range of 7 tics, and a maintenance margin of $420:

 

[cdcaveman]

When I look at many of these charts, for example CL Z17M18Z18M19 DF, it appears to be much more volatile, i.e. ragged, than the underlying outright CL so why trade this as opposed to the outright as with this volatility your stops would have to be quite wide.

completely off.. spreads are exponentially less volatile then outright

 

[tonysoprano]

completely off.. spreads are exponentially less volatile then outright

My observation was based on eye balling the charts shown earlier in this post. What objective measure would you use when comparing the volatility of two instruments - spreads vs outrights? Spreads may very well be exponentially less volatile than an outright but my curiosity is piqued and I'd like to put some data in a spreadsheet and see if this is indeed the case ... as it may well be.

 

[tonysoprano]

I get what you're saying, but your concerns are easily addressed by solid spread construction technique. For example, here's the front month continuous Daily chart for the CL contract, which on a 14 period study will have an average true trading range of 141 tics, and a maintenance margin of $2,900:

And while not a "double butterfly" per se, here is a Condor CL spread, which on a 14 period study will have an average true trading range of 7 tics, and a maintenance margin of $420:

Interesting ... from an ATR(14) measure it would seem that that spread, per unit of volatility, is actually way more expensive to margin that the outright ... not that that's terribly important ... just an observation.

 

[bone]

When I look at many of these charts, for example CL Z17M18Z18M19 DF, it appears to be much more volatile, i.e. ragged, than the underlying outright CL so why trade this as opposed to the outright as with this volatility your stops would have to be quite wide.

I am just not seeing what you are seeing. My clients are generally speaking so happy to be trading an instrument where their stomach lining can remain intact and they can actually hold a position...

Flat price outright crude oil futures, 10 minute chart:

A simple June-Dec 17 Crude Oil calendar spread, 10 minute chart:

Also, the market as I type this for the June-Dec 17 Crude Oil Calendar Spread is 85 bid for at -105 and 60 offered at -104.

 

[bone]

Interesting ... from an ATR(14) measure it would seem that that spread, per unit of volatility, is actually way more expensive to margin that the outright ... not that that's terribly important ... just an observation.

Well, actually, margin is terribly important and the exchange-recognized intramarket spreads are always only a small fraction of the margin compared to the flat price outright futures contract. See for yourself:

http://www.cmegroup.com/trading/ene...CL&sector=CRUDE+OIL&exchange=NYM&pageNumber=1

And there are thousands more combinations not listed there that if done on an intramarket basis the CME SPAN scanning program will automatically calculate your margin offset credit for you and your evening statement from your FCM will reflect that.

I've got clients carrying several of these different spreads across many different markets at once (swing trading) with very modestly capitalized accounts. In fact, we are very heavy on the butterflies and condors and light on the calendar spread pairs.

 

[tonysoprano]

I am just not seeing what you are seeing. My clients are generally speaking so happy to be trading an instrument where their stomach lining can remain intact and they can actually hold a position...

Flat price outright crude oil futures, 10 minute chart:
I guess it is just when I eyeball the CL Z17M18Z18M19 DF spread or the others shown earlier in this post and compare with a 1y daily chart of CLZ17 that the daily CLZ17 appear to have much cleaner up and down swings. Again just my eyeballs though I'd think that some/many people would look at the CL Z17M18Z18M19 DF from earlier and think that it looks pretty hairy.

A simple June-Dec 17 Crude Oil calendar spread, 10 minute chart:

Also, the market as I type this for the June-Dec 17 Crude Oil Calendar Spread is 85 bid for at -105 and 60 offered at -104.

 

[tonysoprano]

Well, actually, margin is terribly important and the exchange-recognized intramarket spreads are always only a small fraction of the margin compared to the flat price outright futures contract. See for yourself:

http://www.cmegroup.com/trading/ene...CL&sector=CRUDE+OIL&exchange=NYM&pageNumber=1

And there are thousands more combinations not listed there that if done on an intramarket basis the CME SPAN scanning program will automatically calculate your margin offset credit for you and your evening statement from your FCM will reflect that.

I've got clients carrying several of these different spreads across many different markets at once (swing trading) with very modestly capitalized accounts. In fact, we are very heavy on the butterflies and condors and light on the calendar spread pairs.

Was just making the observation that the margin per tic of the ATR(14) was quite a bit higher for the spread. Obviously there are lots of things taken into account in a margin calculation with volatility being one of them ... was just surprised to see the spread with a higher margin if you're only using ATR(14) ... which of course you're not.

 

[i960]

And while not a "double butterfly" per se, here is a Condor CL spread, which on a 14 period study will have an average true trading range of 7 tics, and a maintenance margin of $420:

Was just making the observation that the margin per tic of the ATR(14) was quite a bit higher for the spread. Obviously there are lots of things taken into account in a margin calculation with volatility being one of them ... was just surprised to see the spread with a higher margin if you're only using ATR(14) ... which of course you're not.

It should also be noted that the numbers compared were for the outright and that condor example. I'm not sure if the margin shown for the condor was based on what an execution platform showed or what the CME website shows but I would like to point out that that CL HJ+KM additive "condor" is basically a CL HM calendar spread anyway. CME isn't going to margin that as a condor it's going to margin it as two independent calendar spreads because that's what it is when you add and not subtract them from each other. If there's any doubt on this just look at the chart for CL HJ-KM and then look at a chart for CL HJ+KM. The latter will look almost identical to CL HM because that's really what it is (minus a small 1 month gap where the center JK spread isn't in play, meaning CL HJ+KM is really CL HM-JK). Additionally CL HJ+KM and CL HM are both correlated to the front month by nearly 85-95% whereas CL HJ-KM is only around 20-30%. If CME provided the same margin for both it'd be a surprise to me given that they're totally different from each other.

CL HJ-KM:

which looks nothing like these:

CL HJ+KM:

CL HM-JK:

CL HM:

 

[cdcaveman]

i'm not sure alot of the guys posting here spread trade, or even know why you would or what the advantage might be.. going off on a margin/vol tangent isn't important.. you can make money trading spreads with just 20% of your account on margin.. and the variance if you are picking the right hedge ratios and spreads will be low.. by all means if you think the outright is better to trade, there is a thread for you..