Futures spread trading

bone · Jul 11, 2011

oldtime, did the quote board look something like this ?

bone · Jul 11, 2011

Some links to a few spread trading tools:

http://www.orc-group.com/Documents/Products-Services/Orc_Spreader_US.pdf

http://www.tradingtechnologies.com/autospreader-se

http://www.cqg.com/Docs/CQGSpreaderQuickRef.pdf

http://www.tickit.com/automated-spreader.html

p.s. : the proliferation of electronic markets is a modern spread trader's wet dream.

Martinghoul · Jul 12, 2011

Quote from Ghost of Cutten:
What methods do you guys like to use for trading spreads?

I try to wait for a major value opportunity, relative to the historic spread range & ratios, check there isn't some kind of secular change to cause old spread relationships to break down. Then wait for people to puke out their positions, and put on a half position into the capitulation. I then wait for positive momentum back in the direction of convergence, then double my size and place a trailing stop on the 'add'. Then hold until fair value, and exit half. Then wait until the convergence momentum ends, and exit the rest.

I find that there are normally 1 or 2 slam dunk opportunities per year across the futures markets. The win ratio is normally high, although sometimes you have to take a fair bit of heat.

It could be a good idea to compile a list of spread value relationships, and what represents "cheap", "very cheap", "expensive", "very expensive", fair value etc, with a few fundamental drivers.

I average in... A whole lot of variables go into the estimation of "value". If we do this here thread seriously, we can go through some stuff. It would be interesting.

foo · Jul 12, 2011

Quote from Martinghoul:

I average in...

It's funny you should mention because in some spreads (especially wheats) I am more than happy to average in.

You always hear "never add to a loser" but, given the right set-up in some spreads (I will elaborate more if asked) I am more than happy to add to a position. Does it always work? No but if done right it doesn't sting too much or at all when history changes a bit...

One more note....this generally applies only to the bull side.

The bear side is a different animal all together.

Rationalize · Jul 12, 2011

Quote from foo:

It's funny you should mention because in some spreads (especially wheats) I am more than happy to average in.

You always hear "never add to a loser" but, given the right set-up in some spreads (I will elaborate more if asked) I am more than happy to add to a position. Does it always work? No but if done right it doesn't sting too much or at all when history changes a bit...

One more note....this generally applies only to the bull side.

The bear side is a different animal all together.

Not sure I get the idea of bull side / bear side wrt a spread trade .. but ..

could you elaborate further?

Also -- Martinghoul, agreed that it could be interesting to go-through-some-stuff.

bone · Jul 12, 2011

Quote from Rationalize:

Not sure I get the idea of bull side / bear side wrt a spread trade .. but ..

could you elaborate further?

Agreed, almost sounds like a 'Texas Hedge'.

foo · Jul 12, 2011

I mean if you are buying the spread----you are bull spreading---ex. Long Oct Live Cattle/ Short Dec Live Cattle @ -5.00

I am on the buy side (bull side of the spread) and look for these prices to narrow to say -3.00 for an $800 gain

On the bear side or short the spread you are selling this spread and you position would be Short Oct Live Cattle/Long Dec Cattle @-5.00 and you would look for it to widen more to like -6.00 for a $400 gain.

This is just how i see it---long or short the spread---bull or bear spread---same thing.

Anyways, this only pertains to the same commodity but different months (intercommodity)

Intra-commodity is a different story entirely-----they are not quoted in long or short, bull or bear------

oldtime · Jul 12, 2011

ok, maybe we're saying the same things different ways.

According to my info, if you're long CL short RB you're selling the spread.

If you're long RB and short CL you're buying the spread.

bone · Jul 12, 2011

Quote from oldtime:

ok, maybe we're saying the same things different ways.

According to my info, if you're long CL short RB you're selling the spread.

If you're long RB and short CL you're buying the spread.

Nope, energy (at least the way the Nymex and IPE pit brokers quoted spreads) is bassackwards from rates and grains. Another market idiosyncracy (rates and energy are full of them).

But, since the world is now electronic, it's however you want it to be. I just quote the first leg as being long or short for the spread - saves client confusion.

emg · Jul 12, 2011

Quote from foo:

It's funny you should mention because in some spreads (especially wheats) I am more than happy to average in.

You always hear "never add to a loser" but, given the right set-up in some spreads (I will elaborate more if asked) I am more than happy to add to a position. Does it always work? No but if done right it doesn't sting too much or at all when history changes a bit...

One more note....this generally applies only to the bull side.

The bear side is a different animal all together.

u should never ever add when doing commodity spread trading. U add to average in spread, u lose.

Instead of adding, u should be focusing on creating a buttefly/condor if need to.