Execution of butterfly spreads

[xandman]

For the CME, when your Fly comes in line with the implied prices at the exchange, they lock in the price for your fly. There is no leg risk.

However, you may be able to see implied prices better than your fly. Let's say your implied prices show better. This is because of a 1 lot bid. Since you are trying to sell 2 middle leg lots, the exchange can't lock in your spread.

Thanks to @TraDaToR for the primer. More at http://www.cmegroup.com/education/interactive/webinars-archived/implied-price-functionality.html

 

[i960]

For the CME, when your Fly comes in line with the implied prices at the exchange, they lock in the price for your fly. There is no leg risk.

BTW this is product dependent. They do not always cascade the implication from lower order spreads to higher order spreads for all products. You have to check the Globex reference sheet for each product and spread type (eg SP, BF, CF) first for implication availability.

There are basically multiple tiers of this:

1. Has no exchange traded book (can be legged only, not an ETS).
2. Has an exchange traded book but no implication (eg Crude oil flies).
3. Has an exchange traded book and implication (all cals, some STIR flies).
4. Has an exchange traded book and implication not only from outrights but also from lower order spreads (ICE is capable of this but depends on product).

Take a look at exchange traded CL flies for example. The bid/ask spread is garbage compared to trading via the calendars (do the bid/ask math) - this is because you're using an explicit fly book without implication. Why do they do it this way when execution and prices are shittier? Most likely resource/engine related.

 

[xandman]

BTW this is product dependent. They do not always cascade the implication from lower order spreads to higher order spreads for all products. You have to check the Globex reference sheet for each product and spread type (eg SP, BF, CF) first for implication availability.

There are basically multiple tiers of this:

1. Has no exchange traded book (can be legged only, not an ETS).
2. Has an exchange traded book but no implication (eg Crude oil flies).
3. Has an exchange traded book and implication (all cals, some STIR flies).
4. Has an exchange traded book and implication not only from outrights but also from lower order spreads (ICE is capable of this but depends on product).

Take a look at exchange traded CL flies for example. The bid/ask spread is garbage compared to trading via the calendars (do the bid/ask math) - this is because you're using an explicit fly book without implication. Why do they do it this way when execution and prices are shittier? Most likely resource/engine related.

Thank you so much for the resource, Globex reference sheet. I did find BZ and CL currently has implied functionality. But, the strategy column was blank for all products. Additionally, I found this note:

"Note 4: All Contracts months 1 to 24 and June and December months 25 to 36"

 

[i960]

Thank you so much for the resource, Globex reference sheet. I did find BZ and CL currently has implied functionality. But, the strategy column was blank for all products. Additionally, I found this note:

Hmm something's up there. It comes up fine for me on both Excel and Numbers. It should look something like this (you can also scroll to the right to get more fields):

 

[xandman]

I deleted the original. But, another download did produce the information. Sorry for taking up your time. Additionally, not knowing this would have cost money. I owe you a beer.

According to the CME tutorial, it is possible for the implieds to show crossed markets. ie better implied bids/offers than underlying. That's why they don't publish 2nd generation implied and a lone (IMP OUT) middle legs on flies. I am on thin ice with my understanding of the matter.

 

[propwarrior]

This question is regarding the execution of 2 exchange traded calendars combined to make a fly. When you submit the fly to the broker with a limit order, the first side enters on a limit order and the second side enters on a market order.

Does this mean I automatically lose 1 tick entering the fly with a limit order? And if I enter the fly with a market order do I automatically lose 2 ticks (both sides using market orders)? How does it work?

I've also been watching clips of STIRS spread traders working all the legs to get a better price and I wanted to understand it a little better.

Hey Adam

I am answering this from the perspective of trading Energy Futures on CME & ICE, I have traded rates but my knowledge is thin there. It is completely up to you how you execute your fly.

If you execute using an autospreader then software has a ton of configuration options. See here:

TT autospreader options- https://library.tradingtechnologies.com/trade/as-autospreader-configuration-interface.html

CQG https://www.cqg.com/products/cqg-spreader

You question is of course about executing the fly manually. The worst possible fill you can get at any time is by banging market in both legs. An autospreader will leave limit bids and offers in the legs which the algorithm knows if hit a market order exists to complete the spread at the desired price. The autospreader algo is co-located at the exchange so its not a case of fastest finger, usually the spread is completed. Sometimes it is not completed and then you set the autospreader algo to either pay up a tick or wait for a fill.

Here is the kicker though. The autospreader is constantly pulling limit bids and offers and replacing them as price moves in the legs move the orders placed will obviously move. You are therefore constantly losing queue position for fills. You can use queue holder settings but this eats margin, can breach quoting regs and you also can get 'over fills' i.e. you get filled on more quantity than you want.

Now back to manually trading a fly. Lets say we have exchange calendar A & B. We are trying to execute A-B. A is currently trading at 20bid 21offer. B is trading at 10bid 11 offer. You are trying to buy 10s in the spread. As calendars are generally correlated if the market drops and A drops down to 19bid20offer it is likely that B will drop to 9bid10offer. This is where queue position comes in. For example if A is the thicker leg (and it generally will be on a fly as its closer to the front), suppose it has 100 contracts on all bids and offers on the ladder. If you come in with your limit bid order and join the queue on the 20 bid in A. If you are patient you can be near the front of the queue. So for example if you know you are near the front of the queue on A @20 waiting when you get hit, it is likely that you will likely be able to hit a market sell at 10 on B completing your spread for price 10 (20-10) BEFORE B moves down to 9bid10 offer. If you miss it you will get 9s in B so you will buy the spread at 11 which is of course 1 tick worse than buying at 10.

You have to bear in mind that it depends on the volatility of the spread and the timescale of your trade. For example if you are holding for weeks it hardly matter whether you try and save a tick on the execution.

If you are starting out in spreads I would pull up the 2 ladders and practice working out in your head what spread price is available at market at any given moment. It will take you a few days to dial yourself into this. Spread traders often watch the last digit only. Say for example A is bid67offer68 B is bid-32offer-31 (leg B is negative number). If selling the spread they wont be trying to do 67 - (-31) in their head they will be doing 7 - (-1) or 7+1 = 8. They will have in their head the spread is trading at 8 (last digit). It takes a lot of mental agility and when you start adding in multiple spreads, news most people just end up paying for the autospreader!

GL

 

[Adam777]

...

Thank you! Learning this new skill on demo using CL should speed up my learning curve, faster than learning on the slower products. I'm definitely more interested in starting trading on the slower products as I don't want to lose my money too quickly, but everyone discussing spreading CL will help me spread anything, and eventually CL etc as well.

I can definitely see the benefit in the autospreader, but not yet as I'm only starting on exchange traded products with enough volume. Definitely not interested in cutting corners without the autospreader on flys, especially on faster products, but I'm definitely interested in learning manually straight away.

 

[i960]