Properly "spreading" with real spreads.

I started another thread in this forum warning about the dangers of using synthetic spread expressions versus the exchange spread symbol. Synthetic spreads will almost always have a falsely exaggerated trading range and volatility as compared to the exchange spread. For intramarket spreads, especially outside the prompt months - the negative effects can be severe.
 
I just wanted to completely dispel this anecdotal notion that a "representative" spread(s) in CL would somehow be wilder and more volatile than the outright flat price CL futures contract. Using exchange spread data - the actual traded spread.

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bone said:
I just wanted to completely dispel this anecdotal notion that a "representative" spread(s) in CL would somehow be wilder and more volatile than the outright flat price CL futures contract. Using exchange spread data - the actual traded spread.

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As I said "anecdotally" :-). In this particular case and going back to Mav's comment of "In my opinion I think flat price is probably read better with charts and momentum type studies while spreads tend to respond to real fundamental concerns. And yes Bone, you are correct in that price has those fundamental views embedded in the chart." In this case, I'd think that the outright CL #F would be easier to trade (however you want to define that) in that it had much cleaner up and down moves though it certainly had much greater price movement per unit of time. In this case, anecdotally.
 
tonysoprano said:
In this case, I'd think that the outright CL #F would be easier to trade (however you want to define that) in that it had much cleaner up and down moves though it certainly had much greater price movement per unit of time. In this case, anecdotally.
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Naw, both macro and the micro structure of the market says otherwise in CL. Compare the market action at this morning's open. Flat price is considerably more choppy and hard to hang on to. If you think CL outright is much cleaner up and down I'd say otherwise - for two hours solid you are chopping around in a 30 tic trading range.

Now, I am swing trading these babies and not day trading them. But in either a micro or a macro context you simply cannot legitimately say that flat price has "cleaner up and down moves" even per unit of time. The raw retracements and heat a trader has to endure with flat price is quite a bit different than most any intra market spread that I'm aware of.

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Even if you're NOT legitimately spreading, knowledge of spread correlations is very powerful. When I stood in the Bond Pit - I watched the S&P, the Cantor Fitzgerald OTR cash, and the Yen. Hells Bells, David Ellis leased a CBOT seat and had a clerk standing in the bond pit with a headset yelling quotes to Dave's clerk in the S&P pit over at the Merc.

How many thousands of real smarty pants CL scalpers are glued to the ES DOM ?

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Didn't Long term capital management blow out because of divergence in bond spreads (along with their insane leverage).

Agree with Maverick here. Convergence divergence trade looks dangerously seductive, when they blow out it is spectacular. It is because structure of the trade is similar to short options. Also to have meaningful $ profit, it has to be levered up lot more. Stops really doesn't help, when there is no liquidity for pure exotic spreads.



Spreads like Crack or NOB spreads which has meaningful economic value and has lot more liquidity are ok, but exotic spreads are different matter altogether.
 
LTCM blew out because of hubris and the ridiculously rare OTC exotic derivative products they had tucked in the bowels of their portfolio. The banks bailed them out essentially because they had taken the other side of those derivatives.

We’re talking exchange supported regulated futures spreads here with bid/ask volumes almost always considerably larger than the outright. With the exchange regulated stuff - I’ve been doing this since the 90’s and have never been in a situation where I couldn’t get out.
 
I'll try to point you in the right direction but more info is needed.[/QUOTE said:
I'd like to trade spreads, but I'm looking for the simplest spread instruments to trade first - sort of learning by doing. I suppose corn futures spreads or something like that, but I don't know - any tips on the easiest ones?

I have traded a lot of options spreads, but, like you say - this is very different.
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