Noob question about spread trading outcome

M

MichalTr

Hello,

I'm testing something on yield spreads (futures, FYT, FOB, NOB) and have some basic question.

In attachment you can find transactions list, there is ICS with price and outright prices corresponding to that ICS. If I look at ICS I can see a profit. Saying it easiest way - selling ~ -0'012 and buying back at -0'017. Even just looking at ICS FYT ladder - selling higher buying back lower. But if I count it by outrights there is loss.

How it works exactly ?

The only thing that comes to my mind is that ets ratio for this (3:2) is not accurate for short time trading.

DV01 for 5y is 46,81$, 10y 79,89$, so we have 140,43 : 159,78.

From the ATR perspective (intraday 5 min) is 5y 4 tick, 10y 4 ticks
4*3*7,8125=93,75 to 4*2*15,625=125,
so 93,75$ (5y) : 125$ (10y).

This is the reason that I can see profit on ICS ladder but in fact I can have loss ?

I will be thankful for info.
 

Attachments

MichalTr said:
Hello,

I'm testing something on yield spreads (futures, FYT, FOB, NOB) and have some basic question.

In attachment you can find transactions list, there is ICS with price and outright prices corresponding to that ICS. If I look at ICS I can see a profit. Saying it easiest way - selling ~ -0'012 and buying back at -0'017. Even just looking at ICS FYT ladder - selling higher buying back lower. But if I count it by outrights there is loss.

How it works exactly ?

The only thing that comes to my mind is that ets ratio for this (3:2) is not accurate for short time trading.

DV01 for 5y is 46,81$, 10y 79,89$, so we have 140,43 : 159,78.

From the ATR perspective (intraday 5 min) is 5y 4 tick, 10y 4 ticks
4*3*7,8125=93,75 to 4*2*15,625=125,
so 93,75$ (5y) : 125$ (10y).

This is the reason that I can see profit on ICS ladder but in fact I can have loss ?

I will be thankful for info.
More...

Your understanding of the tic valuations and relative value is incorrect for the ICS spread. The price quotations are net change from the previous session's settlement (it was quoted this way on the floor as well).

The five year note moves in quarter tic (1/4th of $31.25) increments. The ten year note in 1/2 tic increments. The ICS spread is always quoted at the finest increment tic - so in the case of the FYT it's quoted in quarter tic increments and in the case of the NOB in half tic increments.

If you bought the FYT at 12:37:56 on Sep16 at -0.017 and sold it back at 16:10:22 on Sep16 at -0.007 your profit would be one full tic, or $31.25 x 3 for a 3x2 spread. You should be aware that on the price DOM for ICS spreads a one lot is actually for ten lots of the larger leg. So, for a FYT if you see 50x320 best bid/best offer - it's actually 500 bid by 3200 offered in a 1.5 ratio. So, in ICS, if you bought a 5 lot in the FYT your fill window will show you long 50 ZF(FV) and short 30 ZN(TY) simultaneously. Your clearing statement will reflect the exact quantities and price levels shown in your execution platform fill window.

The ICS is plenty accurate for short term trading.

You will also be receiving a considerable SPAN margin offset credit of 80 percent. See the link below.

https://www.cmegroup.com/trading/in...r=INTEREST+RATES&clearingCode=25&pageNumber=1

What this means is that the margin required to trade a 3x2 FYT is 20 percent of the margin required to trade a 3 lot outright in the Five Year. And which is why spread traders sling around ridiculous size.
 
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Since these are so cheap to margin and they trend so well - we swing trade them. We're looking to hold them and take big chunks of trading range out of them.
 
@bone Thank you for answer.

But to clarify something.
"On the other hand - if you sold the FYT at 12:37:56 on Sep16 at -0.017 and bought it back at 16:10:22 on Sep16 at -0.007 your profit would be one full tic,"

So I sold spread at -0'017 it goes up to -0'007 and I have profit not loss ? (we're in the negative numbers area)

What I mean is on image in attachment.
 

Attachments

  • Zrzut ekranu 2019-09-17 o 20.25.44.png
    Zrzut ekranu 2019-09-17 o 20.25.44.png
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MichalTr said:
@bone Thank you for answer.

But to clarify something.
"On the other hand - if you sold the FYT at 12:37:56 on Sep16 at -0.017 and bought it back at 16:10:22 on Sep16 at -0.007 your profit would be one full tic,"

So I sold spread at -0'017 it goes up to -0'007 and I have profit not loss ? (we're in the negative numbers area)

What I mean is on image in attachment.
More...

Yes, you're correct on that - that's what I get for doing three things at once. I edited my post. Thanks so much for catching that. :thumbsup:
 
Ok, ok but if that's right then:

"If, as you suggest, you sold -0.12 and bought them back at -0.17 you would in fact be losing one-half tic on the trade." - this is incorrect. Selling at minus 0'012 and buying back at -0'017 should be one-half tick profit.

Right ?
 
MichalTr said:
Ok, ok but if that's right then:

"If, as you suggest, you sold -0.12 and bought them back at -0.17 you would in fact be losing one-half tic on the trade." - this is incorrect. Selling at minus 0'012 and buying back at -0'017 should be one-half tick profit.

Right ?
More...

Your assertion that the ICS valuations are incorrect short term is wrong. If you take the individual ZF and ZN leg prices at the exact timestamp for the ICS prices and ratio them - they will correspond to the ICS price based on the previous day's settlement marks. The ICS is simply a ratio'ed net change from the previous day's settlement marks. If you buy weaker and sell stronger you're going to make money. In fact, you won't be able to get a better fill than the ICS internal order matching engine from TT AutoSpreader or CQG Integrated Client spreader.
 
@bone Ok, that I understand.

But I still don't have answer for my question.

If using ICS ets spread ladder I place order to sell -0'012 (minus) and then close it at -0'017 (minus)(so lower).
How is it possible to lose money ?
You know - I need explanation like for a puppy, like for labrador.

I know calendar spreads, and there (using ets) if I sold something higher and buy back lower there was profit and it was just that simple. The only tricky thing when checking progress or position or pnl was the affect of settlement. But it was not for intraday trading.
 
MichalTr said:
@bone Ok, that I understand.

But I still don't have answer for my question.

If using ICS ets spread ladder I place order to sell -0'012 (minus) and then close it at -0'017 (minus)(so lower).
How is it possible to lose money ?
You know - I need explanation like for a puppy, like for labrador.

I know calendar spreads, and there (using ets) if I sold something higher and buy back lower there was profit and it was just that simple. The only tricky thing when checking progress or position or pnl was the affect of settlement. But it was not for intraday trading.
More...

Well, first of all - the official CME ICS Ratios for the Dec 19 FiT are 1.667 (5:3) - NOT 1.5 (3:2) as you are using.
 
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